Andrzej Arendarski:
State-controlled telecom Tel-Energo is set to spearhead the creation of a new national telecom company - Krajowa Grupa Telekomunikacyjna (KGT) - to meld the government's scattered telecom holdings and possibly attract smaller independent firms. The project's purpose is to create a worthy rival to telecom kingpin Telekomunikacja Polska (TPSA) to give smaller, indebted operators a chance to survive on the market. But before the Polish Power Grid (PSE), the majority owner of Tel-Energo, can start its consolidation plan, it must complete Tel-Energo's merger with Niezależny Operator Miźdzystrefowy (NOM), a domestic long-distance service operator owned by PSE, Tel-Energo and the state oil company Polski Koncern Naftowy Orlen (PKN Orlen). Andrzej Arendarski, 52, who was appointed president of both Tel-Energo and NOM at the beginning of the year, recently talked with the WBJ's Roseanne Gerin about the merger of the two companies and the new entity's role in KGT. The following is an edited version of their conversation.
Q: What is the status of the merger between Tel-Energo and NOM? A: We will complete the merger (by) the end of this year. For it to be legal, it is necessary to evaluate both companies and have the agreement of shareholders.
Q: When do you expect to get their approval? A: We have closed the most important cases where NOM is concerned - the (recent) agreement with TPSA (ending their dispute over domestic long-distance services and the billing of NOM's clients). And because of that, it is possible to evaluate the company. The same process is going on in Tel-Energo, and I suppose that just after the summer holidays we will start the legal processes to merge the companies.
Q: How will the companies be evaluated? A: We will hire a special company for a description of the total value of the companies. In a few weeks (the process will be completed).
Q: You've said before that when Tel-Energo and NOM merge they would have 40% of the data transmission market. Is it your intention to focus on this area? A: Absolutely. This 40% is my hope for the future, not now. This is the general direction of our future - carrier business and data transmission.
Q: When do you expect to have 40%? A: It's difficult to say because that will depend on the competition, the general financial position of TPSA and the general development of IT in the Polish economy.
Q: Will there be any job cuts after the merger? A: I suppose we may observe the opposite process. It is not necessary to have double positions in marketing and trade or in finance, but we have to construct something that doesn't exist - the interface between the company and clients. We are attracting young and very energetic people, and some of them have been employed during the past few days. We have to build our sales department. It's very difficult to say (how many people we will hire). It's according to market development.
Q: How much will the merger cost? A: It's difficult to say, but not (that much). There are (legal) costs that are not very high and the costs of some restructuring of appointments if we (make) some agreements with our employees to pay them for a long period.
Q: What will the new company be called? A: It will be called Tel-Energo, but NOM is a very good brand and we will keep it as a trademark.
Q: Treasury Minister Wiesław Kaczmarek has said Tel-Energo could serve as the new national telecom company KGT's hub. Is this your intention as well? A: Yes, I share this opinion because Tel-Energo has a good capacity to do it. Because of our network in Poland and skilled labor force, we may play this role as the center of the consolidation of different state-owned (telecom) assets.
Q: Will the merger of Tel-Energo and NOM be completed before the combined company becomes the center of KGT or will the two processes occur simultaneously? A: There are two parallel net processes. The first one we call the small consolidation. It means the consolidation of the telecom assets of PSE - Tel-Energo, NOM and PSE Info, an IT company 100% owned by PSE, and some smaller assets. We are discussing with PSE to have at least partial ownership of the network. This is very important because it gives us a very good financial standing to develop the second, big consolidation. Also, we have bought shares in Pro Futuro, the provider of telecommunication services for corporations (via voice-over-Internet protocol). So this is a small consolidation, and the success of this process will ... influence this big consolidation.
Q: Will the larger consolidation take place before the end of this year? A: No, this year we would like to prepare the business plan or legal documents. I suppose next year will be the time to complete this big consolidation.
Q: The Infrastructure Ministry said the government would know the plan for KGT by the end of June. Since it's PSE's intention to make Tel-Energo the main company in this project, will you present a plan to the government before then? A: We presented our (general) plan to Kaczmarek on April 15, and (by) the middle of the year we will be ready to present some advanced plan after some discussions with government officials. If they accept these proposed directions, we will be ready in a few months to complete some commercial data concerning this consolidation - for example, the level of necessary investments (and) some proposals on how to resolve the financing for the (project). We have to get some acceptance of our program from the Treasury Ministry and the Infrastructure Ministry.
Q: Analysts said the new national telecom company would likely drain the hub company's financial resources as this firm would have to support the other smaller indebted telecoms that join the group. Will Tel-Energo have to finance these companies' debts to clear their balance sheets? A: No, the companies have their owners and (they) must pay. Tel-Energo has no means to finance the process of (ridding them of their debts).
Q: But if other companies join the national telecom, how will their debt problems be resolved? A: It is necessary to repair the financial situation. It's impossible to take a company that has, for example, zł. 1.8 billion ($450 million) of debt because it would kill this initiative. So, first it's necessary to introduce some cures - financial restructuring. For example, converting debt to shares as in the case of (alternative telecom) Netia. This is a very good way for (indebted state-owned operator) Telefonia Dialog to follow.
Q: What are some of the risks involved with the larger telecom consolidation project and what measures can be taken to avoid them? A: There is a risk like everywhere in every kind of business because we can only estimate what will occur here in the next five to 10 years. In general, there is one main truth: If all the companies (remain) separate, they have a very low chance of survival. If they merge into one bigger company (that) introduces some savings, better organization and bigger potential, they (will) have a real chance to survive and win on this competitive market.
Q: Will KGT need a mobile operator? A: I don't think so. Some of them may join us, but this is not necessary. Of course, with the participation of one of the mobiles, the scale of the project would be much bigger but this is not a necessary condition to develop our field. Now we (are) not starting any talks with mobile (firms).
Q: What affect would the creation of KGT have on the telecoms market in Poland and how would it affect subscribers? A: Such a company is necessary to introduce a normal telecom market to Poland. If you compare the prices for telecom services, especially Internet access, in Poland and in other countries there are big differences that are not in our favor. We will have a similar situation as we have on the mobile market with three big competitors with very flat prices and the big development of the market. I (expect) to see the same (thing) in the rest of the telecom market in Poland after it grows.
Q: Has Tel-Energo started discussions with Telefonia Dialog about including it in KGT? A: We have had some contact, but not very intensive. We are waiting for some proposals about how to introduce a more rational financial situation in this company.
Q: What about non-state owned telecoms like Netia and (regional operator) El-Net? A: I suppose in the future we will consist of one group but it's very difficult to say when that will occur. (For) Netia, Dialog, El-Net and a lot of smaller operators in Poland, there is one logical way to merge into one bigger company and join us in the group. We have some contacts (with them) but they (have been) provisional.
Q: Why did Tel-Energo recently buy a stake in Pro Futuro? A: Because this is a very good company showing good development and has good corporate clients, and because we decided not to develop our last-mile access (the last few meters of the public telephone network controlled by TPSA that links residential clients to the local phone network). We have to look for such intermediaries. We sell some of our services to Pro Futuro and Pro Futuro is selling them to our clients.
Q: Why did your company decide not to develop your own last mile? A: Because we don't have enough money to do everything. (Pro Futuro) has a long history and experience, and from our point of view it's more effective to invest some money and to leave them as our seller.
