Elektrim's vagueness scuppers share issue for the moment
Despite the blow investors dealt Elektrim when they voted down a huge new share issue on June 30, the power and telecom group could get a seal of approval for a second new share issue later this year or in 2001, analysts said last week.
But before Elektrim launches another possible new share issue, it must provide more details about its expenditure plans for the buildup of its core telecom business as well as show investors some initial results from its telecom project, they said.
"When Elektrim explains in many details its financial and capital expenditure plans, shareholders will approve (them) because most investors understand the company's needs," said Andrzej Kasperek, a telecom analyst at Erste Securities Polska.
Elektrim announced at the beginning of June that it would ask shareholders to approve a massive new issue of up to 45 million shares at its annual shareholders meeting on June 30 an increase of more than 50% of the firm's current 83.6 million shares outstanding. Pre-vote grumbling from stockholders prompted the company to reduce the amount to 25.2 million new shares prior to the meeting. Yet investors were still resentful about the company's vague spending plans as well as its intention to issue the new shares ex-rights, which would have considerably diluted the value of their own stakes.
Elektrim said that the money from the share issue would be used to finance the build out of its fixed-line telephone network and for other projects. But its failure to justify the huge issue with detailed spending plans put off institutional investors, who voted down most of the new shares. Investors approved only 3.1 million new shares to pay for Elektrim's acquisition of stakes in two internet-related firms, but defeated proposals to issue 17 million new shares as global depository receipts (GDRs) on the London stock exchange and 5.1 million shares for an employee stock-option program. The 17 million shares would have yielded about $250 million.
After the meeting, U.S.-based Franklin Templeton Investments which holds about 5% of Elektrim's shares called for the resignation of some of the firm's seven supervisory board members, accusing them of losing touch with investors' needs, news reports said. Elektrim offered a terse reply to Templeton, saying that its supervisory board had been elected for a three-year term in 1999 by a landslide vote from shareholders.
"Templeton agreed with Elektrim's strategy, but did not agree with how it announced the new issue to the market," said Michal Marczak, a telecom analyst at BRE Bank Securities.
But as the smoke continued to clear last week, analysts were optimistic that Elektrim could win approval for a new share issue through improved communication and openness. "The company badly needs to improve its reporting system and its relationship with investors," Kasperek said. "(Elektrim) must work harder to keep investors informed not notify them only one month before the meeting (about the proposed new share issue). The company should have given them more time to think over the new share issue and talk about it. That's what the company failed to do."
Elektrim has not yet decided whether it will renew the motion for a capital increase, said Ewa Bojar, Elektrim's spokeswoman, in a written statement prepared for the Business Journal. She added that the company would not change its telecom strategy and that its plans would be financed by other means. The shareholders' rejection of part of the share issue that would fund telecom projects "will not influence or limit Elektrim's fixed-line and internet strategy in the near future," Bojar said. "The shareholders have not questioned this strategy."
She added that the firm is considering selling its holdings in Elektrim Kable, part of its shares in power generator Patnow Adamow Konin, and some of the company's real estate assets, all of which are expected to yield about $300 million. In lieu of the defeated GDR offering, Elektrim is considering a high-yield bond offering for $150 million, she said.
But analysts pointed out that Elektrim will need additional cash to pay for a third-generation mobile license for Polska Telefonia Cyfrowa (Era GSM), Poland's largest mobile phone operator, of which Elektrim owns 51%. Marczak estimated the cost of one Universal Mobile Telecommunications Systems (UMTS) license would be $400 million-$500 million.
Analysts also stressed that Elektrim needed to show investors some initial results of their grand plan before receiving approval for a second possible new share issue. "Investors are still waiting for the results of the strategy in the fixed-line business," Marczak said. "If El-Net happens to get 15,000 new subscribers by the end of the year, this is the kind of result that (Elektrim) can present to shareholders."
Elektrim wants to build out its network and offer a bundled package of telephony, cable television, internet access and data transmission services to its customers in Warsaw and other major cities. Elektrim's telecom subsidiary El-Net, which holds a fixed-line operating license for the lucrative Warsaw market, has so far connected only 500 corporate subscribers in Warsaw more than a year after receiving its concession.
On a different note, Marczak pointed out that the first step in Elektrim's attempt to get back on track with defining and implementing the initial stages of its network rollout came the same day its shareholders rejected most of the new share issue. On June 30, Elektrim dropped the lawsuit it had brought against the Communications Ministry for issuing a second tender for a fixed-line operating license for Warsaw. After El-Net won the first tender in December 1998, Elektrim protested the decision to award a second license, arguing that it had an agreement with the ministry that El-Net would be the only independent operator in the Warsaw area. Elektrim dropped the suit after signing a deal with the ministry to reduce its license fee from the original price of E245 million to E140 million, analysts said.
