RIGA - In a striking reversal of decisions, Prime Minister Ivars Godmanis walked away from a 290 million lat ($600 million) management and employee buyout of Lattelecom that would have been the largest privatization in Latvia's history.
Godmanis, who took over the government a month ago, was opaque as to why he was rejecting the buyout offer 's which represents over 3 percent of GDP 's which was put together by Lattelecom CEO Nils Melngailis.
The previous government coalition, which had the same four parties, had given its preliminary approval to the deal last June. Several ministers had even begun to speculate on how to spend the revenue.
Now Godmanis is suggesting that TeliaSonera, a Swedish-Finnish telecom operator, sell its 49 percent stake in Lattelecom to a European investor and then the government its 51 percent interest at an open auction if TeliaSonera gave its approval.
He also did not rule out the possibility that the government would hold onto its stake for an indefinite period of time.
Various theories have circulated as to why Godmanis torpedoed the lucrative deal. For Fatherland and Freedom, a junior coalition partner, and Andris Skele, a former prime minister and dominant force behind the People's Party, have spoken out against the deal.
Godmanis said the government would start negotiating with TeliaSonera on Jan. 24.
For its part, TeliaSonera has made no secret of its wish to wholly own both Lattelecom, the dominant land-line operator with a growing Internet and digital TV business, and LMT, a mobile phone operator. Currently it owns 49 percent in each company.
On Jan. 17 TeliaSonera sent a letter to the government reiterating its ambition to control both companies.
According to Melngailis' proposal, TeliaSonera would have relinquished its 49 percent stake in return for 100 percent ownership of LMT.
For a while at least, the previous government of Aigars Kalvitis was satisfied with this proposal since it feared that the telecom industry would be deprived of its competitiveness should TeliaSonera own both Lattelecom and LMT.
In the past two years, telecommunications is the one sphere where prices have fallen in Latvia.
Godmanis did say that the government would sell its 51 percent interest in LMT to TeliaSonera.
As to the majority stake in Lattelecom, the prime minister suggested it could be sold at an open auction, a method that, though open to all, is certain to garner less income for the prized asset than attracting a strategic investor such as the U.S.-based Blackstone Group, which had signed on to finance the management-employee buyout deal.
Melngailis did not hide his disappointment. "I am not convinced that they [the government] have considered all the commercial issues facing the company," he told reporters after the press conference on Jan. 17.
He said Lattelecom management had "to have certainty about what's going to happen" in order to fulfill plans and attract finance. "But we'll keep working on it," he said.
In October Melngailis said he would resign if the government rejected his plan.
Under his leadership, Lattelecom has managed to pull off some impressive financials. In 2006 sales grew 7.7 percent to 143.7 million lats, while earnings jumped 12.6 percent to 39 million lats.
The number of Internet subscribers increased 55 percent in 2006, while its share of the fixed-line market was 87 percent.
In accordance to Melngailis' proposal, company executives would have held 2.49 percent of the stock, employees 5 percent and the Blackstone Group 92.51 percent. Over time Lattelecom managers and employees would have increased their stakes by buying shares from Blackstone using company profits.
Conducting an auction in the current international investment environment 's when banks are hesitant to take on risks 's is far more risky than entrusting the asset to a reputable strategic investor.