Golden share’s pitfalls

The government decided last week to set in motion the process of privatizing the Hellenic Telecommunications Organization (OTE), the country’s state-controlled telecoms operator, but it may have to rethink its strategy of selling a considerable equity stake while maintaining the right of veto over critical matters in the organization via a special shareholding agreement with OTE’s prospective strategic partner. The relevant ministerial committee gave the green light for the hiring of one or more investment houses to advise it on the privatization of OTE. The announcement of OTE’s privatization did not surprise anyone but the timing of the decision caught many observers off guard. Some interpreted it as a means of preparing the ground for the premier’s much-awaited pro-reform speech on the economy at the Thessaloniki International Fair, while others paid more attention to the political cycle. With municipal elections less than a month and a half away, the move signaled the government’s confidence that this move would help it rather than hurt its candidates at the ballot in October. It was also read by some as increasing the likelihood that general elections will be held in 2007 instead of the scheduled spring of 2008. According to these observers, the government will complete this major privatization along with some minor ones in the first half of 2007 and seek re-election at any time by riding on its pro-reform image during a period when it cannot afford to follow an expansionary fiscal policy. The first step in the process, that is, the selection of the adviser(s), is expected to be completed in the next few weeks and as expected all major international investment banks active in Greece, such as Credit Suisse, Merrill Lynch, Morgan Stanley and Deutsche Bank, among others, are expected to express interest in the job. The financial draw may be an important one – the total fee may exceed 10 million euros – but so is the prestige and the elevation in the rankings of M&A table leagues. Table leagues are compiled by entities such as Thomson Financial on debt, equity, M&A and other categories, with the purpose of ranking investment banks in terms of the dollar value of deals done throughout a year. Investment banks are very much interested in these deals because they can use them as a pitch to clients to land new deals. A more critical point in the entire privatization process will come later, perhaps in November or late October, when the Greek state, which controls about 38 percent of OTE, will publish the terms of the international tender. At this point, it is not clear what the government really wants to do other than find a strategic partner for OTE, preferably a Western European telecoms operator, as it is sending somewhat confusing signals. Finance Minister Giorgos Alogoskoufis, who is clearly the most pro-reformist minister in the Cabinet, has invoked the successful paradigm of the sale of Emporiki Bank for other privatizations, including OTE. However, the only similarities that can be found between the two privatizations is the two-phase approach rather than anything else. Credit Agricole acquired a minority equity stake in Emporiki Bank in 2000 and proceeded with a public offer for a 100 percent of Emporiki shares, which caught most people by surprise, in June 2006, to finally secure control of more than 70 percent of Emporiki shares. Since the prospective strategic partner of OTE cannot proceed with a public offer, the two-stage approach means one thing: The strategic investor will first acquire a considerable minority stake from the Greek state along with some other rights, i.e. partial management control, the right of first refusal should the state sell the rest of its participation later and move to boost its equity stake and grab full control of the telecoms organization in the future. The Greek state controls directly 38.7 percent of OTE, one of the highest state shareholdings in Western Europe. The German state owns about 30 percent of Deutsche Telecom as the government participates with 13.9 percent and KFW with 15.8 percent. The French state controls 32.45 percent of France Telecom and the Swiss government 62.50 percent of Swisscom. However, in the last few days, government officials have let it be known that the government may sell more than the widely expected 10 to 15 percent stake in OTE, bringing its participation to below the 20 percent threshold thought to secure minority interests under the country’s new major law on corporations. The threshold is 33.3 percent under a current law dating back to 1921. At the same time, they point out that the government will seek to sign a shareholding agreement with any prospective strategic partner in OTE to retain veto power over some important matters. It sounds like a «golden share,» the popular instrument used by governments in the 1980s to maintain control of privatized companies. This allows governments to change management decisions and block business moves by the privatized firm deemed detrimental to national security or the economy. Golden shares were particularly popular in Britain under Thatcher because they allowed the state to privatize while keeping political opposition at bay. However, we are not living in the 1980s and the European Commission is known to oppose these special shareholding agreements and has taken some countries to court despite the fact they have no authority over them. The EU Commission is also known to have investigated cases of abuse of golden shares in countries such as France, Germany, Spain and Belgium. And to make things more alarming, the European Court of Justice has issued verdicts against golden shares in Britain and other European countries, voiding them. Although the government’s final stance on the privatization of OTE will be shaped after the appointment of its adviser(s) on the issue, it is quite disturbing to hear «ideas» that could bring Greece head to head with the EU authorities later on. So, given the EU authorities’ tough stance on the issue of special shareholdings, it would be unwise for the government to follow the «golden share» route in the case of OTE and other state-controlled companies slated for privatization next year.