RIGA - Private equity investor The Blackstone Group and telecoms firm Lattelecom, led by board director Nils Melngailis, await the Latvian government's final decision, expected Nov. 6, deciding whether to approve the 426.9 million euro buyout of the company.
The Blackstone Group, a US-based investment company with over $90 billion under management, was in September chosen as Lattelecom's strategic partner in the management and employee-led leveraged buyout of the state-owned telecoms company.
Melngailis considers that Blackstone is a good fit, ready to support Lattelecom's strategy of expansion into neighboring countries, as well as pursue continued investments into broadband development in Latvia.
Not everyone's happy about the deal. Latvia's nationalist party For Fatherland and Freedom/LNNK wants the government to postpone the sell-off and to carry out a 'technical and economic analysis' of the company; it is also concerned that Blackstone is not committed to the telecom's long term development, reports new agency BNS.
The buy-out is priced at about 426.9 million euros, of which 285.3 million euros will be borrowed from a consortium of four banks, and the remaining 141.6 million euros will come from the two investors. Blackstone is to put in 92.5 percent of the cash, or 132.1 million euros and receive 92.5 percent of the equity, but take 50.01 percent of the voting shares in the new firm; the Lattelecom people will pay, over a period of time, the 7.5 percent balance, or 9.5 million euros, and receive 49.99 percent of the voting rights. One share in the new organization equals about 1.4 euros.
In terms of transparency, there's a fog hanging over this sell-off, with some calling it a 'shady deal', especially considering this is a state-owned company. Experts have described this privatization scheme as 'tangled' and 'complicated'.
LETA reports that all shares of Lattelecom are to be acquired by a newly formed company BID Co, owned by Blackstone and Riga Capital. Riga Capital, with share capital of 1,428,500 euros, is registered as wholly-owned by Melngailis.
Four additional companies have been registered, one based in Luxembourg, to facilitate the buy-out process.
The allocation of voting rights gets complicated. Of the 141.6 million euros paid in by the buyers, 128.5 million euros, or 90 percent, will carry no voting rights. The balance, 10 percent, or 14.2 million euros will be split four ways: Blackstone and Melngailis will each represent 3.6 million euros, with 50.01 percent and 49.99 percent voting rights, respectively. Employees will be given 1.4 million euros of shares with no voting rights and the balance of 5.6 million euros will be set aside for additional employee share purchases.
Blackstone, lead equity financier, has not taken the initiative or responsibility to clearly inform the public of its intentions. Eurodeal Advisory Services board chairman Kelvin Hooke says that "in the UK a very high profile review is underway to form a set of guidelines on transparency and disclosure" in the private equity industry.
"The onus is on the private equity firm to highlight why the deal is good for them, and also why it is good for the Latvian government, for Lattelecom's employees, and for current and future customers." He asks why "a formal press release hasn't already been released to the market?"
Private equity groups are notorious for wanting to avoid the public auction process, says Hooke, and "whilst these can potentially lead to higher sales prices for the sellers, negotiating with a single or preferred bidder from the outset of a deal is not an unheard of approach, and can even lead to a deeper negotiation process."
With just one week to go before a final decision, there should be no remaining unanswered questions. All details and contracts should be finalized and on the table for all stakeholders to see, the government, the buy-out group and the public, says Hooke.
Melngailis mentions that selling the company in a few years' time through a public IPO is being considered.
Critics argue that the government would do better by taking their chances in selling company in an open auction to the highest bidder.
Lattelecom Group's 2006 revenues were 205.2 million euros, up 7.7 percent from a year earlier; earnings reached 55.7 million euros, 12.8 percent over previous year figures. Lattelecom is 51 percent owned by the Latvian government and 49 percent owned by Sweden's TeliaSonera.nt owned by Sweden's TeliaSonera.