Lattelecom managers given three months to prepare 410 million euro privatization

RIGA - Lattelecom's management announced on June 13, a day after it received preliminary approval from the government to take over a 100 percent stake in the company, that it would announce a tender for the rights to fund the transaction, worth over half a billion dollars, within a month.
TeliaSonera, which owns a 49 percent stake in Lattelecom, said on June 14 that it was prepared to discuss the deal, which would allow the Scandinavia-owned telecom company to fully acquire LMT, Latvia's leading mobile phone operator, in exchange for relinquishing its interest in Lattelecom, a land-line operator.
Still, TeliaSonera, which had held out hopes to take over both companies, expressed reservations about the government's plan.

"The proposed privatization model is not very favorable for us because our goal was to purchase 100 percent of shares in LMT and Lattelecom," Niklas Henriksson, a spokesman for TeliaSonera, told the Leta agency.
"But seeing that a deal like this is not possible, we are ready to begin discussions with the government on the proposed model," he added.
The government on June 12 gave its preliminary approval to the privatization/share swap, which would finalize ownership of two of the most lucrative companies in the Baltic state's telecommunication sector. The Cabinet of Ministers gave Lattelecom three months to prepare a complete plan.
Lattelecom CEO Nils Melngailis said that, if the government is satisfied with the plan, the management/employee buy   out could be completed in the fall.

Managers offered 290 million lats (412.6 million euros) for the 100 percent stake, which is equal to the highest appraisal set last year, Melngailis said.
"Initially we offered 250 million lats 's it was the median price. The government, for its part, said that if we offer the highest price it would be ready to discuss our proposals," he said.
But to pull off the complicated deal, several things have to happen first, the CEO stressed.
"The first step is to organize a tender for banks that might provide the loan, to establish how much of the total sum might be covered by the loan and how much we will have to raise from investors in addition to our own capital," he told the Baltic News Service.

"For instance, if the loan is 75 percent of 400 million euros, it means that we are borrowing 300 million euros and will need 100 million euros from our own capital," Melngailis explained.
The next step would be to pick the best investors for both the deal and the initial distribution of shares. Initially executives and employees of the company will own a minority stake in Lattelecom, while a majority of Lattelecom shares would belong to the investor, but an option to buy the shares out later would be part of the deal, Melngailis said.
"Obviously, neither we nor the employees will have enough money at the beginning to acquire a large stake. But we are confident that we will manage to negotiate such terms that will ensure us a controlling stake in the future," he said.

Potential investors have already promised to grant the management and employees of Lattelecom greater voting rights than their expected stake in the company, he said.
"It is also important to the government that the management and employees have considerable say in decision-making. Maybe we will not own much in percentage terms initially, but the voting rights might be bigger than the initial number of shares," he said.
Melngailis said managers and employees would have the right to buy out the shares over time. "These are the key questions the government is interested in before taking the final decision. Before we have organized the tender these questions cannot be answered," he said.

Melngailis dismissed concerns that an offshore firm might be picked as the financial investor. "This is absolutely out of question," he said, adding that the buyout agreement would also contain a condition that the company cannot be sold for three years if the government does not agree to the deal.
The Lattelecom management, he said, has already held talks with more than a dozen foreign banks and equity funds on their readiness to fund the buyout deal.
Lattelecom employees will be able to obtain shares in three ways 's during the deal, afterwards, and as bonuses if the company meets or surpasses its targets.
Executives who will acquire stock include not only board members but subsidiary managers and employees vital to the company's development.
The state currently owns 51 percent in Lattelecom and controls a majority (51 percent stake) in LMT.