Another wake-up call for OTE

The sale of Greece’s third-largest mobile phone carrier TIM Hellas to Weather Investments SpA, owned by Egyptian businessman Naguib Sawiris, was interpreted as a dire threat to Greece’s incumbent telecoms operator OTE. This may be partly true, although OTE was bound to face stiffer competition from other alternate operators and mobile companies, regardless. Even though OTE’s top management should have its hands full dealing with the new landscape, the Greek authorities may have to start thinking more seriously about something else. Is EU Commissioner Viviane Reding right when she calls for the breakup of former telecoms monopolies? The sale of TIM Hellas by funds advised by private equity firms Apax Partners and Texas Pacific Group to Weather Investments, the owner of Italy’s Wind telecommunications company, made headlines in the local and international press for good reason. First, it represents a very profitable investment by two well-known international private equity funds, the first of its kind in the local market, to a well-known businessman from the Middle East, the Egyptian businessman Sawiris. The sale price is also considerable – a total of -3.4 billion, including -500 million in equity and -2.9 billion in net debt at the end of 2006. Second, the acquisition makes it possible for Sawiris to obtain a more noticeable footprint in a second European market after Italy. By acquiring a mobile asset in Greece, Sawiris can take the second step of merging TIM Hellas with Tellas, the fixed-line and Internet carrier, in which he owns 50 percent plus one share to create the country’s second-largest telecommunications company after OTE. This on its own would be an alarming development for OTE. The fact that the deal is coming at a time the government has dispatched its advisers, namely Credit Suisse and UBS, to look for a strategic investor for OTE in the European telecommunications sector does not make things any better for it. After all, more competition may mean lower prices and better services for consumers in Greece, which is politically and economically desirable, but makes it more difficult for the strategic investor to accept its conditions and price for the sale of a 20 percent equity stake in OTE. Moreover, the TIM-Weather Investments deal may make it more difficult for OTE to go ahead and buy its 67 percent subsidiary, CosmOTE’s, minorities because of valuations. The TIM deal was concluded at a much lower EBITDA (earnings before interest, tax, depreciation and amortization) multiple than CosmOTE commands at this point. So, the theory goes that if OTE launches a tender offer to acquire CosmOTE’s remaining shares, it will have to pay relatively more. Of course, OTE could have offered stocks instead of cash to CosmOTE’s shareholders but this would have led to a bigger dilution of its existing shareholders, including the government. Even if one puts aside the new threat posed by the potential creation of Greece’s second-largest telecommunications company, assuming TIM Hellas and Tellas, which is also 50 percent minus one share owned by electrical utility Public Power Corporation (PPC), merge and plays down the issue of OTE’s buying out CosmOTE’s minority shareholders, OTE has to face a new reality. Alternative carriers offering attractive packages of voice at unlimited duration, high-speed Internet and video to Greek consumers at monthly prices, would be competing with the fixed amount OTE charges every month. The battle is going to become more fierce as mobile operators such as Vodafone and TIM Hellas join in and other operators start offering similar packages. Hard choice Like other European incumbents, OTE knows it has a hard choice to make. Either accept a bigger loss in market share in voice telephony and high-speed Internet or join the battle and offer similar packages. In the latter case, OTE knows it has to cannibalize on its fixed-line client base. Analysts and investment bankers point out OTE can still count on the inertia that characterizes the average Greek consumer, who usually responds relatively slowly to changes. OTE has a about two years to come up with an effective strategy if the theory of inertia proves true once again but this is no solution. Hiring qualified professionals from the local and the international markets to improve its strategic decision-making and increase the effectiveness and efficiency of its commercial policies, especially in terms of products, is deemed necessary. The fact that OTE’s Chairman and CEO Panayis Vourloumis succeeded in convincing the government to pass a law, changing the organization’s past rigid working rules by adopting CosmOTE’s more flexible framework, will prove indispensable. OTE’s top management can now hire managers and other highly qualified personnel from the market without restrictions. Yet, some investment bankers and others think the time may have come for Greece to take a second and more careful look into the proposals put forward by Viviane Reding, the European commissioner in charge of telecoms. Reding has proposed that Europe’s former telecommunications monopolies be split up or at least impose Chinese walls within them to prevent them from stifling competition. The proposals have generated an angry response from officials of former monopolies who say its will reduce investments and hamper competitiveness. Reding wants the structural separation of networks and services and apparently some industry analysts and Greek investment bankers who know the sector well appear to be on her side. «There is no point in every company digging up the streets of Athens or other cities to put down its own cable. This a waste of money and leads to a misallocation of resources. There is too much underutilized capacity in Greece. Only 5 percent to 10 percent of the existing capacity is utilized in fiber optics. It does not make sense to add more,» an investment banker working for a private bank said. «All companies should be given access to networks and compete on equal terms after separating the infrastructure from the services and this requires the breakup of OTE.» There is no doubt others, including OTE officials, will disagree with this assessment. Nevertheless, it is something worth looking into even though OTE can look to more competition in high-speed Internet and voice from old and new rivals, including Sawiris’s TIM Hellas and Vodafone, in the months ahead.