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State likely to opt for 670 million euro share swap

  • 2006-12-20
  • By TBT staff

RENATIONALIZE IT? If the government takes 100 percent control over the land-line operator Lattelecom, it is unlikely to be an effective manager for long.

RIGA - Latvia is on the verge of its own "deal of the century," as the government met on Dec. 19 to discuss the fate of two of the nation's most lucrative corporations 's Latvijas Mobilais Telefons (LMT) and Lattelecom. According to reports, three probable scenarios were on the table, though it is likely that the government will choose a massive share swap with TeliaSonera, the Scandinavian telecommunications company that owns stakes in both local operators.

The other two 's sticking to the status quo and privatizing the lot in favor of TeliaSonera 's are unlikely to be supported by a majority of ministers.

For years consecutive governments have been unable to agree upon a holistic scheme that would bring strategic clarity to the country's two telecommunications majors, as a result of which the state was nearly bogged down in a bitter legal dispute with TeliaSonera.

The Scandinavians have made it clear they would like to eventually control both LMT and Lattelecom, but government ministers fear that TeliaSonera would become too powerful if it were allowed to dominate in both the land-line and mobile ends of the telecommunications business.

Under the share-swap scenario, the state would relinquish its control over 51 percent of LMT to TeliaSonera, and the latter will give back its 49 percent stake in Lattelecom to the state. Given the higher value of the LMT interest, the Scandinavian concern would also front up to 200 million lats (285 million euros) in cash.

How much cash is certain to be one of the sticking points in negotiations.
Both sides agreed that, before negotiating a deal, the assets needed to be appraised. The state hired its auditor (Ernst & Young, one of the Big Four accounting firms), and the investor its own (Carnegie). The estimates, which were not made public but were subsequently leaked, generally reflect the starting position of each side (see table below).
Ernst & Young appraised Lattelecom significantly lower 's nearly 20 percent 's than did auditors from Carnegie, which is beneficial to the state, while Carnegie's lower range on LMT, which TeliaSonera wants to take over, is lower than what Ernst & Young pegged on the mobile operator.

Curiously, both accounting firms were close on the upper range value of LMT.
The swap, if it were to take place, would on average affect 340 million lats in LMT equity and 130 million lats in Lattelecom stock, for a total value of 470 million lats (670 million euros).

Thus with cash included, the total value of the deal could reach 900 million euros.
To be sure, it is unclear how much cash the state would ultimately see. Directly the government only owns 5 percent of LMT, while Lattelecom itself and the state-owned Latvian State Radio and Television Center both possess 23 percent stakes.
LMT is Latvia's most profitable enterprise, and no doubt some government ministers will be reluctant to part with the high-performing asset. Last year the company's revenues amounted to 168 million lats, while earnings reached a staggering 56.4 million lats.

LMT's phenomenal margins will no doubt come down to earth in 2006 now that Bite, the third GSM operator, is up and running, but the company will remain the dominant player on the mobile phone market.
By contrast, in 2005 Lattelecom posted sales of 134 million lats, while earnings were 34.7 million.

But the number of land-line users is falling. In November Lattelecom announced that in the first nine months of the year it had lost approximately 1 percent of its subscriber base, a trend that has been ongoing for several years in a row.
On the bright side, the rate of decline was significantly higher in the past. In 2003, for instance, the number of phone lines sank 6.7 percent. As more users opt for mobile phones, Lattelecom is attempting to fill vacant lines with broadband Internet connections.

Ultimately the government would privatize Lattelecom if it were to assume 100 percent control. It is only a matter of time. A state-owned company will be unable to compete in the dynamic telecommunications market, where demand for new services and technology is ever-changing.