Elektrim picks financial health over long-distance license
Elektrim's decision last week not to bid for one of the three long-distance telephone licenses will delay, but not necessarily derail, the conglomerate's move to become a telecom heavyweight, analysts said.
The boards of Elektrim and its large French creditor Vivendi issued a joint statement last Wednesday saying their decision was founded on the belief that "the long-distance license will not generate right returns" and that "participation in the tender would be economically unjustified."
"(Elektrim's decision) implies that without a great degree of certainty that there will be sizable traffic; the economics (of the long-distance licenses) look questionable," agreed Stephen Pettyfer, an analyst at Merrill Lynch in London.
Elektrim, which posted a loss of zl. 209.4 million ($49.86 million) for the first nine months of 1999, is stumbling under a mountain of debt and is currently trying to renegotiate some of its loans with banks. For that reason, analysts said that the company's decision to back out of the license and the subsequent millions of dollars of required build-out costs is a good one.
"Given Elektrim's financial standing, this is a good decision," said Andrzej Kasperek, a telecom analyst at Centrum Operacji Kapitalowych Banku Handlowego.
In their statement last week, Elektrim and Vivendi also said that they didn't see any point in pursuing the license considering the relatively small time advantage in entering the market that license winners have. Polish telecoms are slated for full liberalization from January 2001, and the license holders won't begin operations until June 2000, giving them only a six-month head start on other entrants.
"It's a calculation on Elektrim's part is it better to spend the E 23 million and benefit from a six-month head start, or start in 2001 with a lower capital expenditure," Kasperek said.
Analysts also said that the government delay in issuing the licenses brought down their worth and in the end resulted in only three bidders. For a period of six months or more, the government continually kept putting off issuing the long-distance tender. While that means that the government will not see high fees for the licenses each bidder will pay the minimum price of E 23 million the fact that three licenses were awarded bodes well for future competition, and ultimately for consumers, they said.
"We are seeing a distinction between governments that charge high fees for operators and those that don't," said Sean Murphy, an analyst with Nomura Research Institute in London. "Those that do would be well advised that those license fees can become a substantial barrier" to market liberalization.
The consortiums that won the licenses include Netia 1, which groups Netia, BRE Bank and Powszechna Kasa Oszczednosci Bank Panstwowy (PKO BP), electricity distributor Stoen and telecom firm Telia of Sweden; Independent Long Distance Operator (NOM), which groups Telenergo, the telecom arm of the Polish Power Grid (PSE), and Polski Koncern Naftowy (PKN); and NG KolejeTelecom Polska, which groups Polish State Railways (PKP), British energy and telecoms concern the National Grid Group and Poland Telecom Operators Group.
As required by the telecom law, the Polish partners in Netia 1 will hold a 51% stake. Telia will have 11%, with the remaining 38% divided among several of Netia's subsidiaries, including Netia Networks and Netia Holdings.
Companies that had expressed interest in bidding but in the end declined included Deutsche Telekom and copper firm KGHM Polska Miedz, in addition to Elektrim.
The winning bidders will carve up the rapidly growing market for long-distance telephone services, which in 1998 were estimated to be worth zl. 2 billion-2.5 billion ($571 million-$714 million). That estimate stems from the 15% of Telekomunikacja Polska's (TPSA) 1998 revenue of zl. 13.9 billion ($3.97 billion) that long-distance services accounted for.
Elektrim's absence from the list of long-distance license holders "won't have a big impact" on the competitive landscape, said Meir Srebernik, president of Netia Holdings. "There are now three competitors plus TPSA, and the most successful will be the one that offers the largest bundle of services," Srebernik said.
Netia plans to spend $40 million in the first phase of its build out, Srebernik said.
Elektrim's decision to pull out may not have crushed the company's telecom hopes, but the move doesn't exactly strengthen its market position, analysts said. In the end, they said, the company's difficult financial position meant that it had little choice but to pull out.
"While (the decision) is slightly disappointing from an operational point of view, it is reasonable given that Elektrim is fully extended on existing obligations," said Nomura's Murphy.
The decision may also be a sign of Vivendi's skepticism toward further entanglement with its problematic partner, analysts also said. "This was really a Vivendi decision," Kasperek said. "Elektrim doesn't have the money, so it was up to Vivendi."
Vivendi at one point was supposed to take a 30% stake in Elektrim Telekomunikacja, Elektrim's telecom subsidiary, but instead turned its investment into a $618 million loan. Elektrim's resignation from the long-distance tender is a sign that "Vivendi apparently is afraid to get more involved," Kasperek said.
