TL's well is running dry

Copper and silver giant KGHM Polska Miedź, which owns Wrocław-based Telefonia Lokalna (TL), is unlikely to pump more money into its loss-making telecom unit this year but still hopes to find an investor willing to do so, a KGHM official said last week. Wojciecj Marcinak, KGHM's director of investor relations, said his firm was not going to pay any part of the zł. 200 million ($48.8 million) funding it promised last year to give TL by March 31, 2002. Instead, KGHM has extended the investment commitment to the end of the year, although actual payment is "doubtful," he said. "We are looking more carefully at the investment program at TL and we ourselves also have quite a different situation," Marciniak said. "We are an indebted company with some financial problems." KGHM suffered a loss of zł. 190 million ($46 million) in 2001, largely due to TL's own loss of zł. 413 million ($101 million) in 2001. KGHM is sole owner of TL, the second-largest alternative telecom in Poland, which operates under the brand name Dialog. Katarzyna Muszkat, who was appointed TL's president last December, declined to comment.

As a result of KGHM's lack of investment this year, TL will likely be forced to scale down its ambitious growth plans. Muszkat was counting on zł. 400 million-zł. 500 million ($97.6 million-$122 million) from KGHM and another financial backer to increase TL's subscriber lines from 300,000 at the beginning of this year to 700,000 by year-end, according to a local press report issued in January. KGHM expects TL to have 388,000 subscribers by the end of 2002. The concern also said it is forecasting TL's loss to drop to zł. 143.9 million ($35.1 million) in 2002 and that the telecom would operate in the black in 2003. While KGHM is unlikely to pour cash into TL this year, it is continuing to search for an investor, a process started more than a year ago. But chances of finding a company interested in developing TL are slim because of protracted negative sentiment toward telecom enterprises and TL's losses and debt load, analysts said. "No company is interested in buying a small local operator that is heavily indebted," said Rafał Jankowski, a KGHM analyst at CDM Pekao Securities, referring to a long-term zł. 1.1 billion ($268.3 million) loan agreement signed with Powszechna Kasa Oszczędności Bank Polski (PKO BP) last November for restructuring TL's debt. Although the debt was moved to KGHM's books, TL must repay its owner, Marciniak said. Marciniak also did not rule out the possibility of TL becoming part of Krajowa Grupa Telekomunikacyjna (KGT), a new national telecom group advocated by the government that would pool telecom assets owned by various state-controlled companies and some private telecoms to rival dominant telecom Telekomunikacja Polska (TPSA). The idea is under discussion by a few operators, although no concrete plans have been made about its creation. The state owns 44.3% of KGHM.

"This is one of the ideas but whether it is going to materialize now, we have no information at this stage," Marciniak said. "If we could contribute to a broader entity in the communications sector it would be some sort of solution to not have to finance (TL)." He declined to comment on whether KGHM was holding discussions on making TL a part of KGT, but added that KGHM intends to get rid of the telecom. Joining the national telecom group, however, would not automatically allay TL's funding dilemma for its ambitious plans. "It's a solution how to get rid of problems concerned with TL but definitely not a solution itself unless the new national telecom company has some additional sources of funding," said Flawiusz Pawluk, an equities analyst at CA IB Securities in Warsaw. He added that such a telecom would need one company with a strong financial standing to fund a collection of smaller firms, such as TL. Pawluk valuates TL at a negative zł. 560 million ($136.6 million).