Government appears to be indecisive over telecoms sale
At a time of rising competition in the Greek telecommunications market, the government appears to be indecisive on an important issue, the privatization of OTE. The government has given the impression it does not really know what to do with OTE, the state-controlled incumbent, although a placement of OTE shares appears to the likely scenario in our view. Still, the sooner it clears this issue, the better for itself and OTE. The government’s decision last week to extend the deadline given to its advisers to search for a foreign strategic investor for OTE until the end of March was widely interpreted as a sign of progress. According to a number of analysts, journalists and others, the decision was made with an eye on a possible deal with Spanish telecoms giant Telefonica. They may be right but we dare not subscribe to this view based on our sources. Although the Greek government has hired UBS, Credit Suisse and EFG Eurobank to search for a strategic partner for OTE from among the large Western European telecoms operators, this search has yet to produce any tangible results. As a matter of fact, it is only Telekom Austria that has expressed publicly interest in buying a 20 percent stake in OTE. However, the top management of OTE, as well as other government officials, seem to be lukewarm, to say the least, toward the idea of selling a sizable stake to Telekom Austria, which has a market capitalization similar to that of OTE. A merger of equals between OTE and Telekom Austria could have been pursued but Greek officials say in private it may lead to problems down the road, starting with issues like who will be running the new entity, where its headquarters will be based and others. Nevertheless, the Austrian government, Telekom’s major shareholder, has signaled it is open to negotiations about a potential link-up of the two telecoms operators. Nothing has come so far from other large European operators such as Telefonica, Deutsche Telekom and France Telecom which would fit the government’s definition of a strategic partner, although they have been contacted. People who are familiar with the entire process and the contacts say this is due to two factors. First, the situation each one of the three operators is facing in its home market or the foreign markets in which they have operations. Second is the vagueness of the Greek side’s proposals. Although both factors merit consideration, we think the second factor is more important because the Greek side has left the impression it does not really know what to do with OTE. This stance can be interpreted in a number of ways. One is that the government may not be willing to show all its cards at this stage, hoping to extract the maximum possible concessions before a deal is struck. This naturally creates the impression that it is not determined to go ahead with such an agreement. Another interpretation sees the government as unwilling to make a deal with a large European telecoms operator because it is fully aware that such a deal would involve concessions which that would bring considerable political costs even among the ranks of its supporters. We find the latter interpretation more reasonable, given the weight put on political ramifications a few months or quarters ahead of the next general elections. It should be considered certain that its advisers have notified the government of the positions of the large European telecoms operators on OTE and therefore the government knows where they stand and want from such a deal. If the government officials believe, as we reckon, that it would be unwise to sell a 20 percent stake or so to a large European operator, accepting politically dangerous terms before the elections, it has basically two options. First, it has the option of dragging its feet on the issue, hoping elections will come early, preferably before the end of June. Secondly, it could proceed with an accelerated book building of 10 to 15 percent of OTE’s outstanding shares. The best time to do so would be after the organization announces its 2006 financial results and while speculation about finding a foreign strategic investor is still alive, keeping OTE’s share price elevated. This is especially true if OTE’s 2006 financial results come out better than expected and the management’s guidance about 2007 is upbeat. We should remember that markets expect a 7.5 percent rise in the organization’s revenues to 5,885 million euros and its after-tax earnings at 793 million euros compared to losses of 216 million a year ago due to the cost of the voluntary retirement program. Improved profit margins in its domestic fixed-line operations on the heels of cutting one-third of its personnel costs due to the voluntary retirement program and strong performance by its mobile operations are expected to underpin OTE Group’s 2006 financial results. The government should proceed with the placement of OTE shares via an accelerated book building for two reasons. First, it will collect more than 1 billion euros from the sale to reduce the country’s public debt and show that this year’s privatization program is on the track. Second, it would avoid any political problems ahead of the next general elections and third, it will still leave the door open for the future privatization of OTE. After all, it will still control some 23.7 percent of OTE’s share capital, following the placement, which it will still be able to sell to a strategic investor after the next elections, provided it wins, and claim it privatized Greece’s telecoms incumbent. Undoubtedly, OTE is a hot business and political potato and the state as its major shareholder has every right to examine all its options and decide when is the best time to execute the best one. Given the circumstances, a placement of OTE shares may indeed be the best option from its point of view. However, it has to move fast to get this issue out of the way and not distract the management of OTE from combating rising competition on its home turf.
