Krzysztof Heller:

Many of Poland's alternative telecom providers, stranded in financial quagmires, stand little chance against dominant incumbent Telekomunikacja Polska (TPSA), even after the country's telecom market is fully liberalized next January. To pitch them a lifeline in hopes of sustaining its survival and fostering a truly competitive telecom market, the government is pushing a project to create a new national telecom company comprising state-controlled holdings, privately owned firms and public companies to rival TPSA. But whichever way the project pans out, it is likely to stir controversy about the companies' roles in the consolidated entity, especially with one company or consortium likely bearing the financial burden of whipping the other heavily indebted firms into shape. Krzysztof Heller, the Infrastructure Ministry's undersecretary of state in charge of telecommunications, recently talked to the WBJ's Roseanne Gerin about the new national telecom project. The following is an edited version of their conversation.

Q: There's a lot being said about the creation of this new national telecom company. Where is the project now? A: Let me tell you first what is the top priority or main goal of this exercise. The main goal - this is something that was expressed many times before - is to initiate consolidation in the independent telecom sector as opposed to the incumbent (operator). We believe that in addition to taking all kinds of regulatory and legal steps you cannot just achieve the proper competition and a more or less balanced market as a result of a decrease in service prices, increase in quality and increase in penetration, by only acting as a regulator from an administrative perspective without having a strong player also performing on the market, in addition to the incumbent. What we have currently is only a scattered group of relatively small companies - small with respect to the incumbent. Therefore, they are not able to compete as strongly as if they were somehow consolidated. This is a trend that can be seen worldwide. It's not only a Polish invention. This impulse for consolidation may come from private companies or companies where the state has a significant stake, and both legs are progressing in parallel. It's a complicated issue. Consolidating companies first requires the restructuring of their debts.

Most of the telecoms have fairly large debts, and this doesn't necessarily improve their ability to develop and compete unless as in the case of (alternative operator) Netia - and as we now observe in the case of the Elektrim Group. This is taking place, which is a good sign. We are now doing everything we can to assist that and somehow put (out) additional incentives for consolidation. We (the Infrastructure Ministry) cannot (get involved in the new telecom company project) other than creating certain incentives or a certain regulatory environment. We will not directly influence private companies. But in cases where the state has certain stakes and equity (in telecom companies), we may be more influential. This is where we want to send more impulse to restructure and consolidate. The main goal is to have something that is economically sensible and not to create something that is artificial. And therefore, the project is now in the analysis phase. The announcements in the press were a little premature in the sense that they indicated more than was actually behind it, because there were some concepts. But now a serious financial analysis is being undertaken because at the end of the day you too have a good financial foundation for this. I would expect that within the second half of this month we would have the results of those analyses. Comparably, the private (telecoms) are also moving ahead. They are also looking at the state-owned or partially state-owned enterprises as potential objects or partners for consolidation. We will see some sort of master plans this half of the year, (but) execution will be much more difficult because it is a formal legal procedure that takes a number of steps and is something that takes a few months. Then again, I don't believe we will reach the stage where everybody will know what to do. There will be some leaders who will take the first step or two and the others will make up their minds later. So we observe the biggest three players - Netia, Telefonia Lokalna (Dialog) and the Elektrim Group - and the group around National Grid - Tel-Energo and NOM. There are also some fiber-optic telecom assets in the hands of the power companies.

Q: Are you personally directing the efforts to create this new company? A: We are not directing so much as we are leaving the business to the business people. We are leading this in the sense of setting some policies and guidelines in facilitating the process, but we are not dictating to the companies what to do. Our role as a ministry is to have a concept for the telecom market and as I am responsible for communications this falls under my responsibility. Now from the ownership point of view, the Treasury Ministry represents the state, so all decisions have to be taken jointly. The (Treasury Ministry) will (determine) how to execute its shareholders' rights. (The Infrastructure Ministry) is responsible for the strategy of the market. Let's say it's a little bit of a shared responsibility.

Q: So the Treasury Ministry is directly involved in this? A: It has the ownership role, so at the end of the day it is making decisions. But it is not assembling a team of analysts to do the analysis. The analyses are being performed by the management of the companies. They are coming (up) with some sort of proposal, and then their owners will say yes or no and will set directions and strategic guidelines. This is more or less like a normal company - the board is running the company, and the board proposes steps and the shareholders approve them or not. We set the directions and the priorities, and they are trying to come up with a complete plan. There will be more than one (plan) to have some sort of variance and alternatives. Once we have them on the table, we will be able to decide (whether) to modify the (plans) or whatever. But we are not doing somebody else's work. The companies have their responsible board appointed by shareholders - in some cases the state and some cases other shareholders - who are responsible for the benefit of the company.

Q: Whose idea was it to create a national telecom? A: This is not a new idea. It was discussed two or three years ago that the fragmented independent telecom market should be consolidated. But at that time there was no climate for this because everyone was riding the wave of big telecom growth and everybody expected that they would buy out the rest. So everybody looked at the others as potential acquisition targets rather than as a partnership in the sense of mergers. Now (with) the downturn in telecoms, money is not so easily available from the financial markets. People need to be more realistic, and there is a more pragmatic approach to this. So there is really a good chance that this will lead to some good results. I had my own ideas about how to do this, and some others had ideas as to how this should be done. This is not like someone woke up one night with some bright idea. It was something that came into being gradually. I believe I know what it will be and I already said what I believe will work and what will not. But it doesn't mean this is what will happen. At the end of the day there will be some joint decisions by shareholders of different companies to merge, to (sell) shares or to buy someone else's shares.

Q: When the financial analyses for this project have been completed, will details be released? A: It depends. I don't think everything will be released because of commercial confidentiality. Some things will have to be announced because some companies taking part in this are listed companies. But (an announcement will be made) the moment some decisions are (made), and not just some speculation. There was a flurry of speculation in the press because it was an interesting topic. But it was a bit premature because there wasn't that much to say. If I were in control of all the information I would have announced it in April or May when there was something of substance.

Q: When do you envision this telecom company could be created? A: It is a process. But you may start this process even as early as the middle of this year (at) the holiday time. It starts with signing MOUs (memorandums of understanding) or letters of intent or some indicators of decision. Then there is the quite formal and lengthy process of issuing shares, acquiring those shares, registering, and going through the general assembly of shareholders and approving the deals. However, it doesn't mean that the benefits of this (project) will not be seen earlier because once the companies decide to merge, they may almost immediately, assuming goodwill from both sides, sign certain agreements whereby they can conduct marketing campaigns or some technical studies about how to utilize the network. This could bring effects much earlier than formal mergers or acquisitions.

Q: Which telecom companies do you envision will form this new company? A: There are many uncertainties at the moment, but there will probably be two consolidation centers. I agree with Treasury Minister (Wiesław) Kaczmarek that the Polish Power Grid (PSE) must do a smaller consolidation within its own domain with (its telecom arm) Tel-Energo, NOM (independent telecom Niezależny Operator Miźdzystrefowy in which PSE owns a 50% stake) and the power companies (whose) fiber-optic assets may be either acquired or swapped for shares in this new company. In addition it is also talking to Pro Futuro, the radio-access (telecom) company. The second (consolidation) center is around private companies Netia and the Elektrim Group. They are also very likely candidates, especially now that Netia is free after converting (debt) to equity, which really frees them from these internal struggles. And then there's Telefonia Lokalna, (owned by copper miner) KGHM Polska Miedź. It needs to make up its mind which way to go. And there are other smaller companies that would probably either follow or not, depending on whether they would see it as a benefit for them. (Companies such as) Poland Telecom Operators (PTO) group, Pilicka Telefonia and Szeptel will not play a dominant role but would rather center themselves around one or the other half. Then eventually those two halves can get together. Then there are other potential players like Telbank, which are looking for investors. The railways also have their fiber-optic assets, (but) in (their) case the ownership situation is a little more complicated so they would not be immediately available from the equity point of view, but their assets very well might be. Energis Polska looks like (it) needs to solve its own problems now (as) its mother company in the U.K. is in a serious situation and must decide what it wants to do (with) the Polish operation. In general, I don't believe that it would be a good idea to merge any of the mobile operators with a fixed-line (telecoms) group. Strategically, they may very well have nice strong and mutually beneficial frame agreements (which define conditions for the purchase and servicing of telecom equipment) - strategic partnerships unleashing their synergies - but I don't think that it would be beneficial for either side to have an actual merger creating just one organization or one company.

Q: Why? A: Because I believe there would be negative synergy rather than positive synergy. If you look at (mobile operator) Polkomtel, it is competing head to head with two others. So if there was an additional burden upon it to prop up a fixed-line (operator) it would not be as competitive on the mobile market because it would have to use part of its resources. Maybe this was possible two years ago, but I don't believe this is sensible now because it would damage the company (by) lowering its value. On the other hand if the mobiles just sucked everything out of the fixed companies then it would be against their concept of creating a strong competition to the fixed incumbent. If those two companies (had) a Chinese wall and two (different) profit centers, then what would be the point in actually merging them? Let them stay as separate companies. They have a number of marketing and technical advantages in working very closely together, but to work together you may well be in the same group with the same shareholders but you don't need to be physically one organization, one company.

Q: With the issue of Polkomtel, some of its state-controlled shareholders want it to become part of the new telecom company, but the two foreign shareholders (Danish telecom TDC and British telecom Vodafone) oppose it. How could this situation play out? A: They need to somehow resolve this difference of opinion.

Q: Would you step into this situation? A: No, because this is a typical shareholders' rights (situation). If anything, it's for Kaczmarek and the treasury. I may be involved and usually am involved whenever it comes to market relationships where somebody's rights as an operator are restricted, but this is a different thing. I may provide my opinion on (it), but I definitely would not step into the discussions among shareholders. This is not my role. Unless there is a situation when I am asked for an opinion or involvement then I would think it over, but I would not actively step into it.

Q: Has Kaczmarek given you any indication about his feelings regarding Polkomtel's inclusion in the new telecom company? A: We are in touch. We are waiting for those analyses to be presented because we don't want to base our decisions on feelings, but on the solid numbers. Of course, there were some concepts being discussed, but unless we have some numbers to look at (we) cannot really make a serious decision.

Q: Will there likely be only one company that provides most of the funding to prop up the smaller telecoms that become part of the new telecom company? A: That's possible. (But) look at it from the shareholders' perspective (as) one source. It doesn't mean a single shareholder like in the case of Netia, where you've got all the bondholders — which are many institutions — working as one organization. There would be some sort of consortium rather than a single entity, but I believe that from a shareholders' perspective there will be one main driver being the consortium entity behind all this, propping up, trying to restructure debts and providing funding capital for further development.

Q: But isn't the risk then that this project would be a financial drain on that one company or consortium? A: Well, it's one way or the other. Of course, I don't know what the limitations on their funding would be. What I'm looking for is more like financial investors, because strategic investors have their own set of problems. They need to work first to restructure their own positions to be financially stable and strong - and at the moment their debt levels are very high and they are very much focused on reducing debt. So this is an ideal time now, a two-or-three-year time slot, for financial investors who are sitting on piles of money and want to invest in a sensible project to come and help those companies and build value. (Through) consolidation, and synergizing the whole group, you can build additional value and then exit with some nice upside and let the so-called strategic investors in. And they may well form a consortium to do that because they may have better funding possibilities. I don't believe you have this limited pool of funding and that we have to spread it somehow. I believe that with the current state of the financial markets, it's possible to approach those markets and (tell them that) we have those projects that are sensible and provide good return on investment with good exit options, and (that) this is the amount of funding we need - providing this is a sound project and not another Internet bubble.

Q: Apart from financial investors, you said there's a prospect of finding strategic investors. Is this the only option? A: No, because the companies may very well continue with the financial investors as well, but I believe because of the global trend towards consolidation eventually this will happen two to four years from now. I expect the big players like Deutsche Telekom or British Telecom, or some others, to get their acts together and resolve their own high debt level problems and their own financial situations within that time frame. By (then) we will also know how successful UMTS is, so this will be yet another question mark answered. And in the meantime the financial investors can provide the necessary financing level that can gradually build value in those companies.