Lines out of order on the French Connection
Polish equity investors have begun to question Telekomunikacja Polska's (TPSA) business practices amid fears about the company's future strategy and ownership. Their concerns run deeper than the problems of the firm's principal strategic investor, the debt-laden French telecoms monopoly France Telecom (FT), which has now embarked on a struggle for survival. They are now circling the corporate governance of the company, allegations over a lack of transparency in dealings with shareholders and the circumstances around the departure of finance director George Storożyński, a high flyer in Warsaw corporate finance. He played a key role as an adviser in negotiating the sale of TPSA's strategic stake to France Telecom.
Paris is otherwise engaged in mounting the biggest corporate rescue in French history. The arrival of Thierry Breton at the helm of France Telecom has left Polish investors even more uncertain about their equity positions in TPSA, the most heavily traded stock on Warsaw Stock Exchange (WSE) and the largest telecom in Central and Eastern Europe.
"I think that it was quite cloudy, and it's still not very transparent," said Michał Szymański, an investment manager at ING Towarzystwo Funduszy Inwestycyjnych.
Portfolio managers and analysts marked disturbing factors, including the vacillation of France Telecom on meeting the year-end deadline to purchase a further 2.5%-plus-one-share stake of TPSA, which would give the French and their Polish partner Kulczyk Holding control. A market specialist close to the sector declared France Telecom was now "virtually certain" to pass up the option as new chief executive Breton was left with little alternative but to squeeze the €70 billion debt load crushing the company.
"It's a remarkable rerun of Swissair and LOT Polish Airlines, two extraordinary coincidences involving major foreign strategic investors in Poland in the same year."
Anything is possible
Rumors that France Telecom would move to unload all or most of its debt in TPSA drew little backing from market watchers who pointed to the depressed state of world telecoms and the difficulty, exacerbated by the global economic turndown, of finding a buyer at a sensible price.
However, some investors say that anything is possible at TPSA.
"Its transparency is not as high as other companies in the region," said a Warsaw-based portfolio manager, who asked not to be named. "It's not as transparent as it should be because it's tied up with the government and France Telecom, which is only concerned with itself."
In addition, the jury is still out on exactly why TPSA's supervisory board dismissed chief financial officer George Storożyński in January after a three-month tenure in the job. Storożyński, formerly a top investment banker at ING Barings and French bank Societe Generale, has been in the lead flight of Warsaw corporate bankers and a major dealmaker in the city for much of the last decade. TPSA said that it let him go due to strategic differences, but many in finance circles, still shocked by the move, question the validity of that claim. Storożyński himself was unavailable for comment.
"As for the base of the change, clearly something went wrong, but what was precisely wrong was not clear," Szymański said. "We are talking about quite a significant post."
What's more, investors have not ceased to question TPSA's motives over Storożyński's dismissal. "I would like to see something concrete," Szymański said.
He declined to say if his investment exposure to TPSA would change, should any damaging news come to light, but he added: "Negative facts, negative reaction."
TPSA shares under pressure
Besides managerial troubles, there are also concerns over a possible share overhang, a large chunk of shares which if dumped on the market would exert further downward pressure on the share price, investors and analysts pointed out. Analysts detect a further threat from the Polish Treasury Ministry and state-owned banks who between them own a 21.6% stake. The government has transferred 54 million shares to Bank Gospodarstwa Krajowego (BGK) (40 million) and Bank Gospodarki Żywnociowej (BGŻ) (14 million) worth roughly $160 million, to use as collateral for loans. The move has shrunk the government's position in TPSA to 17.7%.
"The problem is they have a share overhang with BGŻ and BGK," said Anna Bossong, a London-based analyst at CA IB Securities. "It's quite a lot of stock."
Bossong added that she had been told that the government has indicated that it would like to see these shares sold by the middle of next year, but also said that she had heard rumors among equity traders that most of the stock would enter the WSE this year.
"The decision is up to the government," she said.
Investors concerned with their equity positions reported increasing concern that TPSA is not given enough say in operations, as is customary in other more Westernized companies that make better use of the corporate machinery of the shareholders meeting.
"To tell you the truth, I think that I am out of this game," said a Warsaw-based fund manager. "I don't have any influence on this company. Financially ... we don't have any influence ... We feel like an outsider. TPSA's biggest problem is that it's not investor friendly."
The irony is that most of FT's and TPSA's harshest critics are also its most active investors.
This underlines two factors traditionally dear to the hearts of equity investors. First, TPSA remains virtually a monopoly and, therefore, has an almost guaranteed fixed revenue streams, which in turn gives it a mighty punch on the WSE. Second, the exchange is ranked by all investors as being short on offering enough enticing investment opportunities. Managers and brokers find it difficult to skirt a stock that so effectively dominates the exchange.
Eggs in one basket
"I wish I had more companies on the stock market," one portfolio manager said. "Many portfolio managers are virtually compelled to invest in TPSA. There are only three companies to invest in on the WSE: TPSA, Polski Koncern Naftowy Orlen (PKN Orlen) and Bank Pekao."
To offer telecom equity exposure to clients, Polish money managers, who have been restricted in placing foreign equity investments, must put all their eggs in a single basket.
"It's difficult to pass up (TPSA) because of its size and its liquidity, and it practically has a monopoly in fixed line." said ING's Szymański, of the stock. For Polish consumers, who have a negative perception of TPSA's service and quality instincts, monopoly status hardly qualifies for the advantage which investors see. Sharing many of the critical views of the company, Wojciech Rostworowski, an investment director at SEB 3 Open-end Equity Investment Fund, dwelled on the positives, not least of which is 10 million fixed-line customers.
Shake up for telecom monopoly
But the monopoly is eroding - and can be painful. The Office of Telecommunications and Post Regulation (URTiP) has just fined TPSA zł.1 million ($241 million) for anticompetitive practices. Portfolio managers are also looking to TPSA to start making good on promises that it would cut its payroll by 11,000 this year as well as restructure some of its more dated businesses.
Market optimists, including CA IB's Bossong, have flagged TPSA shares as a "buy," while Andrzej Kasperek, an analyst at Bank Handlowy, said the firm was making "good progress." But with guardian angel France Telecom awash with debt seven times its market value and itself fighting to survive, few expect the French to exercise dominant boardroom influence over the affairs of TPSA in the coming months.
"We have no idea at this stage what their plans are," said a TPSA spokesman. Kulczyk Holding refused to comment.
Meanwhile, Thierry Breton is expected to receive a package equal to the €1.26 million he was making at Thomson Multimedia.
