Bidders, gov't knock heads on TPSA price
Disputes between bidders and the Treasury Ministry over the price for a 25-35% stake in TPSA could be the final undoing for any immediate sale of the telephone monopolist, the Business Journal has learned.
Bidders France Telecom and SBC Communications are taking issue with the steep roughly 40% premium the Treasury Ministry is asking for the TPSA stake, a source close to the deal said last week. The bidders contend that unsolved regulatory issues plus unanswered questions about how the telecom market will introduce competitors cast too much doubt on TPSA's future market position, the source said. For that reason, bidders are unwilling to match the minimum $3.4 billion the Treasury Ministry wants for 35%.
"The problem is that the state treasury somehow got used to TPSA's valuation of $14 billion," the source said. "That was true several years ago. At present, TPSA's value is on a downward trend."
In its initial bid, France Telecom offered more than zl. 11.3 billion ($2.8 billion) for 35% of TPSA, while the second short-listed investor, the U.S.'s SBC Communications, offered zl. 8.8 billion ($2.2 billion), according to telecom and banking sources. The Treasury Ministry initially had refused to accept anything less than $4.9 billion for a 35% stake, but now has notched down its expectations to zl. 13.7 billion ($3.4 billion)-zl. 14.7 billion ($3.6 billion). That translates into a per share price of zl. 28-zl. 30 a share, a 40% premium to TPSA's current price of around zl. 21.
While the investors are unable to go lower than their initial bids, the source said they were balking at the idea of raising them. Analysts last week agreed that regulatory questions made the Treasury Ministry's price expectation unrealistic.
"There is decreasing interest in national telecoms in general," said Michal Buczynski, a telecom analyst with Centrum Operacji Kapitalowych Banku Handlowego. "They are losing market share to mobile operators and the internet, and TPSA is no exception."
If a strategic investor were to come into TPSA and restructure the company, though, investors could find the stock much more attractive in the long term, he said.
"That's why the state treasury should complete the privatization as soon as possible and accept France Telecom's offer," he said.
Rafal Gebicki, head analyst at Raiffeisen Capital & Investment Polska, said that the 40% premium the Treasury Ministry was looking for is particularly steep considering that investors have largely figured the future presence of a strategic investor into TPSA's stock price and that the current zl. 21 per share reflects that.
"It's not the question of the premium itself, which is not that high," Gebicki said. "But the problem is there are too many unknowns related to the deal."
Gebicki also pointed out that a premium even twice as large would be acceptable, providing that an investor was getting a controlling stake in the company and that it was operating in a transparent regulatory environment. But bidders are unsure at this stage what will happen to the rest of TPSA's shares.
The company was partially privatized last year when the government sold 15% through an initial public offering (IPO) on the Warsaw Stock Exchange (WSE) and to international investors through global depository receipts (GDRs). After the sale, the Treasury Ministry still holds 35% of TPSA's shares, and the fate of the remaining 30% is undecided. The Treasury Ministry will retain at least 5% of the shares to go toward a restitution fund.
"The investors at least would like to have some guarantees that they will be able to increase the stake in the future," Gebicki said.
The Treasury Ministry, however, has not given bidders any assurances as to what will happen to those shares, the source said.
Gebicki pointed out that there are a number of additional issues that are potentially impacting the sale negotiations. One area is the heavy investment and restructuring that TPSA needs, which includes slashing its 70,000 employees. Those reductions may prove difficult to push through TPSA's strong unions, he said.
In terms of the unsolved regulatory issues facing the telephone monopolist, bidders have become increasingly concerned over two key issues: how much independent operators will have to pay to connect to TPSA's network and how long its monopoly on international long-distance calls will last. Right now, TPSA sets its own rates for competitors accessing its network, but that is going to change in the near future as the market deregulates and the Communications Ministry or another body sets those rates. Whatever rate is introduced will affect TPSA's revenue and profit.
The bidders also still have not received answers from the Communications Ministry on how long TPSA will maintain its monopoly on international calls, analysts said. The monopoly on domestic long-distance service ends next year, and the Communications Ministry has already issued a tender for three of such licenses.
In 1998, TPSA generated net profit of zl. 774 million ($221 million) under International Accounting Standards. This year, TPSA's revenue is expected to hike 24% to zl. 12.6 billion ($3.15 billion), while analysts expect net profit to rise by nearly 9%, to zl. 1.1 billion ($275 million).
