Elektrim, Netia jockeying for dominance in telecoms
Elektrim, which has been on a telecom buying spree since March, again shocked the market when it announced plans to increase its stake in mobile operator Polska Telefonia Cyfrowa (Era GSM) to 51%.
Private, fixed-line operator Netia followed with talks later in the week with KGHM Polska Miedz on possible cooperation that would involve the copper company's 19.25% holding in mobile operator Polkomtel (Plus GSM) and 50% stake in Telefonia Lokalna, a local fixed-line provider in the southwest.
The moves put the two companies in a race to be the No. 2 telecom company in the market and the primary challenger to Telekomunikacja Polska (TPSA).
Officials at both Netia and KGHM said it was too early to talk about details regarding their possible cooperation. But Netia spokeswoman Jolanta Ciesielska admitted the talks could be seen as a response to Elektrim's aggressive push in the sector. "It's natural that Netia wants to be able to offer a complex range of services including mobile phone telephony, which is in line with the strategy of (Netia shareholder) Telia," she added.
One possible outcome of the talks could be a merger between Netia and Telefonia Lokalna, with Netia gaining access to Polkomtel's network, said Marek Podhorecki, an independent corporate telecom analyst. "All will be decided at the shareholders meeting of KGHM on June 18," he added.
This would not necessarily be enough to counter Elektrim, however. So another Polkomtel shareholder, the Polish Power Grid (PSE), could also be brought into the deal. PSE controls Tel-Energo, a company with a national fiber-optic network that is seen as a leading contender for a domestic, long-distance license.
"If there is a group created that would include Netia, Polkomtel and Tel-Energo, it would come before Elektrim is in the race," said an analyst at a London-based investment bank who did not wish to be named. "Elektrim does not have a network that could be used for long-distance and would have to use TPSA's."
The lack of a long-distance license could hinder Elektrim's plan to become the main challenger to TPSA. Other hurdles could emerge as well.
While the analyst did not doubt Elektrim would secure funding for its numerous recently announced acquisitions, there could be problems with financing such a large amount of debt.
"Elektrim can get funds - $450 million in convertible bonds and $1 billion through a credit line from a consortium of banks, which should be enough for the next 12 months," the analyst said. "The cost of interest will eat it up however. The company needs a strategic partner."
Other analysts echoed fears that Elektrim might be biting off more than it can chew.
"The debt-to-equity ratio, which has already exceeded a sensible value of 150% in 1998, will be further increased," said Rafal Gebicki, head analyst at Raiffeissen Capital & Investment Polska. "Together with the previous issue of convertibles, the new issue will cause almost 50% dilution. But the debt will increase manifold. The situation is difficult and I do not know if they would be able to generate profit at all."
Elektrim has said it plans to issue $300 million-$400 million in convertible bonds. The move is to be voted on at the company's upcoming annual shareholders meeting on May 28.
However, analysts said the company would still need to raise at least $1 billion either through bank loans or from operational cash flow. Over the next three to four years, the company will have capital requirements of $2 billion-$3 billion.
Elektrim's acquisition spree, involving four companies over the past two months, is part of an effort to beef the company up while simultaneously making it more rational. Barbara Lundberg, who was installed as president in February, has said the changes will transform Elektrim's presence on the telecom and energy stages. She added that the company, which currently has a market capitalization of about zl. 3 billion ($770 million) will become a large firm by Western European standards.
According to the company's new policy of concentrating on its core businesses, Elektrim purchased a 20% stake in Poland's second largest power plant PAK, a lignite-fueled plant based in central Poland producing 11% of the country's electricity, for $87.9 million. Elektrim plans to spend another $100 million within 12 months to raise the stake to 38.5%. Under its agreement with the Treasury Ministry, Elektrim is to invest $1 billion over the next 10 years in PAK.
"It is a good decision to acquire PAK," said Artur Jusinski, head of the equity adviser department at BM BGZ brokerage house. "Elektrim is strong in the power industry, which may be very profitable."
Jusinski added that in the long term it will bring profit if Elektrim can manage to finance such large projects.
But power is not the key to the company's success, other analysts said.
"In the long run, Elektrim will have to concentrate on telecommunications," said Michal Buczynski, an analyst at COK Banku Handlowego. "In the next few years, 80% of its revenue will come from this sector."
The company's investments in the telecommunications sector include the purchase of 100% of Pilicka Telefonia, a local telephone operator that has licenses in three regions in Central Poland with 10,000 subscribers.
Elektrim has also signed a letter of intent to buy another local telephone operator, Poland Telecom Operators (PTO), which covers a large area of Eastern Poland, with about 70,000 subscribers.
Together with its subsidiary telecom operators (which include El-Net, Elektrim TV-Tel, and two other small operators) as well as with Telefonia Polska-Zachod (TPZ), which Elektrim acquired with the purchase of Bresnan, the company has a chance to control local operators in an area inhabited by nearly half of Poland.
"The important thing is that there is a large accumulation of expenditures," said Piotr Wozniak, an analyst at CDM Pekao Securities. "The company will spend $480 million for Bresnan and Pilicka, while the price it will have to pay for PTO I is estimate at $600 million-$650 million.
"Then there will be costs of building actual infrastructure to connect subscribers," he added.
Elektrim also purchased 16% of Era GSM, in which it already had 34%. "The price of 1% of Era should be about $23.5 million," Gebicki said. "Elektrim is going to pay $43 million, which is a much too high price."
And even if it does manage to finance the acquisitions, Elektrim may still need outside help.
Jerzy Kalinowski, a telecom analyst at PricewaterhouseCoopers, said the company needs a strategic partner for consolidation. "By 2003 there will be only three large investors on the market," he added. "Its recent activities are targeted at two things: to show that the company is reliable and to consolidate the market."
Private, fixed-line operator Netia followed with talks later in the week with KGHM Polska Miedz on possible cooperation that would involve the copper company's 19.25% holding in mobile operator Polkomtel (Plus GSM) and 50% stake in Telefonia Lokalna, a local fixed-line provider in the southwest.
The moves put the two companies in a race to be the No. 2 telecom company in the market and the primary challenger to Telekomunikacja Polska (TPSA).
Officials at both Netia and KGHM said it was too early to talk about details regarding their possible cooperation. But Netia spokeswoman Jolanta Ciesielska admitted the talks could be seen as a response to Elektrim's aggressive push in the sector. "It's natural that Netia wants to be able to offer a complex range of services including mobile phone telephony, which is in line with the strategy of (Netia shareholder) Telia," she added.
One possible outcome of the talks could be a merger between Netia and Telefonia Lokalna, with Netia gaining access to Polkomtel's network, said Marek Podhorecki, an independent corporate telecom analyst. "All will be decided at the shareholders meeting of KGHM on June 18," he added.
This would not necessarily be enough to counter Elektrim, however. So another Polkomtel shareholder, the Polish Power Grid (PSE), could also be brought into the deal. PSE controls Tel-Energo, a company with a national fiber-optic network that is seen as a leading contender for a domestic, long-distance license.
"If there is a group created that would include Netia, Polkomtel and Tel-Energo, it would come before Elektrim is in the race," said an analyst at a London-based investment bank who did not wish to be named. "Elektrim does not have a network that could be used for long-distance and would have to use TPSA's."
The lack of a long-distance license could hinder Elektrim's plan to become the main challenger to TPSA. Other hurdles could emerge as well.
While the analyst did not doubt Elektrim would secure funding for its numerous recently announced acquisitions, there could be problems with financing such a large amount of debt.
"Elektrim can get funds - $450 million in convertible bonds and $1 billion through a credit line from a consortium of banks, which should be enough for the next 12 months," the analyst said. "The cost of interest will eat it up however. The company needs a strategic partner."
Other analysts echoed fears that Elektrim might be biting off more than it can chew.
"The debt-to-equity ratio, which has already exceeded a sensible value of 150% in 1998, will be further increased," said Rafal Gebicki, head analyst at Raiffeissen Capital & Investment Polska. "Together with the previous issue of convertibles, the new issue will cause almost 50% dilution. But the debt will increase manifold. The situation is difficult and I do not know if they would be able to generate profit at all."
Elektrim has said it plans to issue $300 million-$400 million in convertible bonds. The move is to be voted on at the company's upcoming annual shareholders meeting on May 28.
However, analysts said the company would still need to raise at least $1 billion either through bank loans or from operational cash flow. Over the next three to four years, the company will have capital requirements of $2 billion-$3 billion.
Elektrim's acquisition spree, involving four companies over the past two months, is part of an effort to beef the company up while simultaneously making it more rational. Barbara Lundberg, who was installed as president in February, has said the changes will transform Elektrim's presence on the telecom and energy stages. She added that the company, which currently has a market capitalization of about zl. 3 billion ($770 million) will become a large firm by Western European standards.
According to the company's new policy of concentrating on its core businesses, Elektrim purchased a 20% stake in Poland's second largest power plant PAK, a lignite-fueled plant based in central Poland producing 11% of the country's electricity, for $87.9 million. Elektrim plans to spend another $100 million within 12 months to raise the stake to 38.5%. Under its agreement with the Treasury Ministry, Elektrim is to invest $1 billion over the next 10 years in PAK.
"It is a good decision to acquire PAK," said Artur Jusinski, head of the equity adviser department at BM BGZ brokerage house. "Elektrim is strong in the power industry, which may be very profitable."
Jusinski added that in the long term it will bring profit if Elektrim can manage to finance such large projects.
But power is not the key to the company's success, other analysts said.
"In the long run, Elektrim will have to concentrate on telecommunications," said Michal Buczynski, an analyst at COK Banku Handlowego. "In the next few years, 80% of its revenue will come from this sector."
The company's investments in the telecommunications sector include the purchase of 100% of Pilicka Telefonia, a local telephone operator that has licenses in three regions in Central Poland with 10,000 subscribers.
Elektrim has also signed a letter of intent to buy another local telephone operator, Poland Telecom Operators (PTO), which covers a large area of Eastern Poland, with about 70,000 subscribers.
Together with its subsidiary telecom operators (which include El-Net, Elektrim TV-Tel, and two other small operators) as well as with Telefonia Polska-Zachod (TPZ), which Elektrim acquired with the purchase of Bresnan, the company has a chance to control local operators in an area inhabited by nearly half of Poland.
"The important thing is that there is a large accumulation of expenditures," said Piotr Wozniak, an analyst at CDM Pekao Securities. "The company will spend $480 million for Bresnan and Pilicka, while the price it will have to pay for PTO I is estimate at $600 million-$650 million.
"Then there will be costs of building actual infrastructure to connect subscribers," he added.
Elektrim also purchased 16% of Era GSM, in which it already had 34%. "The price of 1% of Era should be about $23.5 million," Gebicki said. "Elektrim is going to pay $43 million, which is a much too high price."
And even if it does manage to finance the acquisitions, Elektrim may still need outside help.
Jerzy Kalinowski, a telecom analyst at PricewaterhouseCoopers, said the company needs a strategic partner for consolidation. "By 2003 there will be only three large investors on the market," he added. "Its recent activities are targeted at two things: to show that the company is reliable and to consolidate the market."
