Rumors surface on telecom merger

  • 2013-08-30
  • From wire report

 RIGA - Latvia’s telecommunications companies Latvijas Mobilais telefons (LMT) and Lattelecom could be merged next year, magazine Ir reported this month, referring to a secret report submitted to the government, reports The government is set to review the report in the near future.
According to the document, LMT’s value has been constantly dropping since 2008 and could amount to 149 million lats (212.8 million euros) by the end of 2013. Lattelecom’s value, however, has been stable and could reach 238 million lats this year. These figures were arrived at by multiplying the companies’ EBITDA by five and deducting the companies’ debt to credit institutions from the result.

However, according to the Economy Ministry, an LMT and Lattelecom privatization is currently not being discussed, though potential management models are being evaluated to ensure increases in both companies’ values, protect assets, reduce administrative costs and improve customer service.
Initial expert conclusions indicate that LMT’s and Lattelecom’s long-term development and value increases are hindered now by restrictions set in their founding agreements, which do not allow the companies to come up with development strategies matching the latest trends in electronic communications and telecommunications technology. This poses the threat of a decrease in LMT and Lattelecom value in the long term, says the Economy Ministry.

Publicly available information and open discussion will help understand what it is meant by potential LMT and Lattelecom synergy, leading one to predict an increase, or the contrary, a decrease in the value of both companies, LMT President Juris Binde said in an interview with Telecommunications affect all residents, he said. Therefore, Binde calls for making all viewpoints about the Lattelecom privatization offer available to the public for the assessment of telecommunications associations and experts.

Binde emphasizes that the value of LMT on the telecommunications market remains very high and will continue to increase in the future, because LMT is “the driving force behind the development of future technologies, a modern and progressive company that constantly develops and introduces new technologies and services needed by Latvian residents and the business environment.”
Telecommunications market participants differ on the consequences of a possible merger, but all say that this would not be the best solution for the sector.

Izzi board member Sandra Kraujina told that a merger of two leading companies would mean the beginning of the end to competition in the telecommunications industry. “In fact, in just a few years the Utilities Commission and Competition Council will simply not have anything to regulate and supervise, because there will be one huge company without rivals,” stressed Kraujina.

To customers, this will most probably mean higher prices for telecommunications services. Competition is the instrument that regulates market prices. “Thanks to this, people have access to the latest telecommunications services at low prices, as compared to elsewhere in Europe, which includes some of the highest data transmission speeds in the world, which, undeniably, is also advantageous to Latvian companies, as data transmission nowadays has become an important part of business infrastructure,” emphasized Kraujina.

Baltcom board member Gints Kirsteins believes that it is not size and availability of resources but speed, ability to adapt and create something new that determines competition in the telecommunications sector. Therefore, the merger will not change much in the sector. Also, the merger would mean chaos at both companies, he believes. “Most probably both companies have staffs that are too large, which means that a number of employees will have to be laid off. I suspect that market share will also be lost during this chaos,” explained Kirsteins.

From the shareholders’ viewpoint, the global experience must be taken into consideration.
Usually when two large companies merge, their total share value decreases, adds Kirsteins. The shareholders want to create a monster, but if trouble begins at the company, it may have to be bailed out, just like Liepajas metalurgs.
The merger of LMT and Lattelecom must not be allowed because it will result in a super-monopoly in the telecommunications industry, Telecommunications Association of Latvia CEO Janis Lelis said in an interview with Even though the parties involved will claim that the merger will not result in a monopoly, everyone else realizes that the merger will lead to a super-monopoly in the telecommunications industry. Other companies will have slim chances of competing with it, emphasizes Lelis.

If LMT and Lattelecom merge, they will dictate market prices, as opposed to competition. The company will do as it pleases. At the moment, there is fierce competition in Latvia and companies operate in competitive environment. Nevertheless, this can change quickly, and the merger of LMT, which focuses on mobile telecommunications, and Lattelecom, which operates in the fixed line sector, must not be allowed, says Lelis.
If the situation requires changes, it is necessary to privatize all Lattelecom shares. However, LMT or Telia Sonera must not participate in the Lattelecom privatization. Both companies must belong to different owners. It is important for these investors to be independent and compete with each other. The state will not gain a single santime from the merger, adds Lelis.

“I am neutral,” says Binde on the merger possibility. A thorough analysis must be performed first to establish the possible gains and losses, before any documents are given the go-ahead.
The document about the possible merger that has been circulated by the mass media contains “many mistakes, tendentious statements, strange assumptions that portray LMT in a not very good light,” emphasizes Binde.
The reasons for a fall in the telecommunications company’s turnover are explained erroneously, noted Binde, emphasizing that LMT profitability is sound. Likewise, it is not true that LMT will not be able to pay out dividends, whereas the assumption that LMT has too many loans to pay is debatable, because the company’s credit rating is the same as that of Latvia.

Media write that the possible amount which LMT and Lattelecom could save on aggregate as a result of the merger is 88 million lats - which is equal to each of these companies’ approximate annual spending, notes Binde. It is perplexing how this figure was arrived at, he says.
The media’s estimates of the companies’ values are also primitive and erroneous because company value is not calculated the way the media did so. Likewise, the statements that LMT and Lattelecom are causing each other losses are unfounded. “LMT has huge potential for future operations,” says Binde.

Binde also finds it baffling why the merger report was drafted at all, but judging from media reports, Lattelecom’s management was the initiator. LMT representatives have not participated in any merger talks and the company only found out about the possible merger from the media, emphasizes Binde.
He says he does not want to comment on the talks that are possibly taking place between the company’s owners, the state of Latvia and TeliaSonera, adding that it is no secret that TeliaSonera has been willing to acquire controlling interest in both LMT and Lattelecom for years.

The state of Latvia has a 51 percent share of Lattelecom and TeliaSonera the remaining 49 percent. LMT, in turn, belongs to TeliaSonera (49 percent), state-owned Latvijas Valsts radio un televizijas centrs (Latvian State Radio and Television Center, 23 percent), Lattelecom (23 percent) and the state of Latvia (5 percent).
Lattelecom group turnover in 2012 was 147.1 million lats, 11.3 million lats more than in 2011, whereas the company’s profit was 22 million lats, 1.2 million lats more than in 2011. LMT group turnover last year was 129.2 million lats, or 6.3 million lats less than in 2011, and profit was 26.4 million lats, 2.4 million lats less than in 2011.