Investors ask DT to come to Elektrim's aid
Frustrated minority shareholders holding 20% of Elektrim last week decided to take matters at the beleaguered Polish conglomerate into their own hands by asking Deutsche Telekom to become a strategic investor in the company, sources close to the shareholders said.
Faced with deflated shares and nine-month losses at the company, the shareholders have lost confidence in Elektrim's management ability to find a way out of the tight financial predicament that rapid expansion in the telecom sector has caused, sources said. Elektrim needs an estimated $562 million in the next six months to meet its debt obligations, according to a Nov. 9 report by investment bank ING Barings. Many see a strategic investor as the most likely source of those funds.
Deutsche Telekom, however, has said that it was only willing to take a stake in the company if Elektrim CEO Barbara Lundberg steps down. Lundberg refused to comment for this article.
Elektrim's supervisory board is scheduled to discuss the company's future strategy Nov. 29. While a review of Lundberg's position is not on the schedule, one source said that it would likely be a topic of conversation. "Of course, the agenda doesn't mention a vote of no-confidence," said the source. "But we can imagine what will happen if the supervisory board finds the strategy unsatisfactory."
Elektrim spokeswoman, Ewa Bojar, confirmed that the company's supervisory board was scheduled to meet Nov. 29, but said that the gathering was not extraordinary. She said the board meets almost every week now. "There is nothing unusual about it," Bojar said.
She refused to comment on the possibility of Lundberg being removed.
While the sources refused to disclose exactly which of Elektrim's minority shareholders were pushing to bring Deutsche Telekom on, they did say that one group backing the proposal was Capital International and Capital Alliance investment funds, which are not listed among shareholders with more than 5%.
Elektrim has a fairly dispersed shareholding structure, with a number of funds holding less than 5% of the company. At the end of September, the company's largest shareholders were institutional investors whose accounts were handled by Merrill Lynch & Co. with 5.2%, Bank Austria with 8.32%, Emerging Markets Growth Fund with 6.92% and Schroder Investment Management fund with 5.05%.
While a number of entities from the Netherland's United Pan-Europe Communications (UPC) to France's Vivendi have been floated in recent weeks as a possible strategic investor, analysts last week said that Deutsche Telekom was the best fit. Elektrim had chosen Vivendi to become a 30% shareholder in its telecom subsidiary, Elektrim Telekomunikacja, through a $615 million investment. That partnership, however, is not sitting well with shareholders, an analyst said.
"I fully understand the expectations of the investors" in terms of choosing Deutsche Telekom, said Zbigniew Lapinski, an analyst with Deutsche Bank. "It is a strong signal for the management that shareholders and the market negatively evaluate the presence of Vivendi, and they want a well-defined strategic investor."
Elektrim's shareholders are frustrated at the company's inability to move forward on its aggressive telecom strategy, sources said. The company had vowed almost a year ago to become a major player in Poland's telecom arena, and has made many costly acquisitions in terms of companies as well as licenses necessary to build a presence in the sector. That quest, however, has left Elektrim with a debt load that it is now having difficulty supporting.
Servicing that debt pushed the company into the red for the first nine months of 1999. Elektrim reported a zl. 209.4 million ($52.35 million) loss for that period. That loss is expected to widen to zl. 340 million ($85 million) by the end of the year, compared to 1998's loss of zl. 330 million ($75 million).
Last spring, analysts and investors reacted warmly to Elektrim's plans to move stealthily into telecoms. The company's share price hit a high of zl. 56 in May, but has recently been trading at about half of that as investors realized the company would not see any short-term gains from those investments. Elektrim rebounded last week, however, to close at zl. 32.9 a share.
After the losses were announced, "investors were disoriented and started to sell large packages of shares," Lapinski said. "Right now, the situation is still unclear and nothing has changed with the fundamentals, but the market is looking for equilibrium."
Much bad blood exists between Deutsche Telekom and Elektrim's management. The two groups knocked heads a month ago when Deutsche Telekom objected to Elektrim buying up shares in mobile telephone firm Polska Telefonia Cyfrowa (Era GSM). Elektrim bought shares from insurer Warta and BRE Bank, bringing its stake in Era up to more than 50%. Deutsche protested those share sales, however, saying that it had a right of first refusal that was not acknowledged.
The companies went at it again when Elektrim tried to transfer its ownership in Era to its telecom subsidiary, with the idea of having Vivendi take a 30% stake in that entity in exchange for $615 million. Deutsche Telekom blocked that move, however, which caused Elektrim and Vivendi's agreement to fall apart. The shareholders are now discussing the possibility of Deutsche Telekom paying off Vivendi and taking the stake it Elektrim Telekomunikacja itself.
Until a definite strategic investor is brought on, Elektrim's management is trying to keep things afloat by swapping some of its short-term debt with longer-term obligations. Bojar said the company was in the midst of talking with lenders about its debt restructuring. In the next six months, Elektrim must make more than $190 million in loan and interest payments, according to an ING Barings' report.
In the first nine months of this year, Elektrim had long-term debts of zl. 1.1 billion ($275 million) plus convertible bonds of zl. 1.6 billion ($400 million). Vivendi's planned investment of $615 million has also now been turned into a loan.
The company has short-term debt of zl. 1.64 billion ($410 million).
