OTE situation getting ever more pressing following MIG’s move

The privatization of telecoms incumbent OTE was supposed to be the flagship of the government’s program but it increasingly looks more and more complicated following the acquisition of a 12 percent equity stake in the telecoms incumbent by listed MIG (Marfin Investment Group). Unless the government convinces MIG to sell, it has no choice but to choose whether it wants a Western European telecoms operator for OTE’s foreign strategic partner, or MIG and its allies. It should have been different for the government but in the globalization era things sometimes do not turn out the way one wishes. Last November, the government instructed its advisers on the privatization of OTE, namely Credit Suisse, UBS and EFG Eurobank, to contact Western European telecoms operators to inquire whether there was any interest in becoming OTE’s strategic investor. According to statements by Finance Minister Giorgos Alogoskoufis at the time, the government was willing to sell up to 20 percent of its direct equity stake in OTE and concede some management rights to a qualified Western telecoms operator but keep the management. In this context, the government was willing to sign a shareholders agreement with the strategic investor to protect some national interests linked to the country’s defense and the management. The three advisers were asked to report back by the end of January 2007 but before the deadline expired the interministerial committee extended its mandate to the end of March, although some of the advisers let it be known that more time was needed. The process did not produce fruit and the state proceeded with a private placement of a 10 percent stake this past summer, reducing its direct stake in OTE’s share capital to about 28 percent. This may fall to 24 percent plus the voting rights for the 4 percent stake to be transferred to the pension fund of OTE’s employees. Although the private placement was deemed satisfactory at the time since the state netted close to -1 billion with the selling price set at -22 per OTE share, it is clear by now that this constituted a major mistake. It is no coincidence that a high-level official admitted in a conversation that the government would have bought back enough OTE shares to bring its stake back to above 33.33 percent to secure control, but it now does not have the money. This is partly true. After all, the government could have borrowed the necessary funds. However, by buying OTE shares it had sold at -22 a few months ago, it would have incurred a loss, since shares now trade above -26. Moreover, that would have sent a negative message to the markets because it would appear to buck the trend toward privatization. So, by selling the 10 percent stake, the state essentially lost control of OTE, making it easier for others, in this case MIG, to gradually build up a considerable stake and entertain the aim of becoming OTE’s strategic partner. Still, the government has a lot of clout over organizations such as OTE. Moreover, history teaches that no company or private equity fund can go ahead and gain control of a major enterprise against the wishes of the state, even in Western Europe. The state has many means at its disposal to make it very painful for any purchaser should it wish to via regulation and other means. Problem On the other hand, there is no doubt that the new development has deprived the government of one of its options with regard to OTE’s future. It cannot adopt the so-called National Bank of Greece model in which the state’s equity stake is nil but there is some indirect influence via state-controlled pension funds and the management acts with the goal of maximizing shareholder value. MIG has already acquired some 12 percent of OTE’s outstanding shares and enough liquidity to raise its stake higher, according to bankers and analysts who also suspect that it may have more allies in OTE’s shareholding. This means it would become OTE’s major shareholder should the government choose to reduce its stake to 5 or 10 percent, as envisaged a few weeks ago. So, the National Bank model is gone. Consequently, the government is basically left with two other options: Leave things the way they are or choose OTE’s strategic partner. According to analysts, the first option appears to favor MIG’s plan to become OTE’s strategic partner because it can continue to increase its stake and gain more leverage in the company unless the government can convince it to sell its stake in OTE, pocket the capital gains and walk away. Of course, this could turn out to be a protracted face-off where both sides do not do much but even this is bound to end at some point. The second option available to the government is to once again try to find a strategic investor among large Western European telecoms operators, such as Spain’s Telefonica, mindful that it will be even harder this time around because of MIG’s significant stake in OTE and the government’s inability to sell a controlling stake. Bankers and analysts agree the only way for the government this time to lure in a large Western European telecoms operator would be to drop many of its previous objections with regard to management. Undoubtedly, this makes it a tougher sell in the Greek political arena but is regarded by many as the only way out under this scenario. At this point, it looks as if the government has decided to put off a decision over OTE’s future for a few months. Whether this is just a tactic to avoid the wide publicity its previous effort to find a strategic investor for OTE received in the local press remains to be seen. The reality is the government is facing a much more complex situation at OTE than it had imagined a few weeks or months ago which has limited its choice in choosing a strategic investor for OTE. The government may be sincere when it says it still prefers a Western European telecoms operator but it may have to give up more to make OTE attractive to them, making it a political land mine.