Cosmote is OTE’s shield against an aggressive takeover by MIG

The clash between the government and OTE on the one side and Marfin Investment Group (MIG) on the other is culminating for the control of the country’s telecommunications giant. The move to acquire minority stakes at leading cellphone network Cosmote on Friday created a barrier to the threat of an aggressive takeover attempt, but the corporation is going to get burdened with a new debt of -2.9 billion. This will be the cost of the acquisition of 33 percent of Cosmote (about 110 million shares) by its parent company. The move was not at all popular with MIG. This was evident by the visit of the group’s vice president, Andreas Vgenopoulos, on Friday afternoon (2.30 p.m.) to the office of the chairman and CEO of OTE, Panagis Vourloumis. Vgenopoulos aggressively asked the OTE head to call off the meeting of the governing board of OTE which was going to start 90 minutes later, with the issue of the acquisition of minority stakes of Cosmote as the main subject. Vourloumis, however, did not accept Vgenopoulos’s demand and on Friday afternoon the board members decided to acquire all Cosmote shares that did not already belong to the corporation through a public offering. OTE will pay 26.25 percent per Cosmote share. Shares are priced at a premium of 5 percent of the closing price on Thursday on the Athens Exchange. Toward this end, OTE will proceed with the issuance of a loan jointly organized by four foreign banks, including Merrill Lynch and Morgan Stanley. According to Vourloumis, the new borrowing by his company is not expected to hurt its credit rating. He informed the board that the ratio of borrowed to equity capital of the company will rise to 1.9 from 1.2 today. This, the OTE head suggested, is tolerable for a corporation the size of OTE’s. No absorption Vourloumis also informed the board members that Cosmote will not be absorbed by OTE. He believes that the cellphone company would be better off if it stayed outside its parent firm, as it has reached a particularly satisfactory level of business operations and efficiency, which might be threatened in the case of an absorption attempt by the parent firm. The same attitude, more or less, was followed by Deputy CEO Michalis Tsamaz when speaking on Friday to analysts on the occasion of the publishing of the nine-month results of Cosmote. He said that a closer relationship between the parent and subsidiary firm will allow the group to compete better with its multinational rivals, Vodafone and Wind. The Vourloumis proposals on the Cosmote minorities were voted for by all board members except for Theodoros Veniamis, the member of the investment committee of MIG. He argued that such an issue should have been discussed at the extraordinary general meeting of OTE that had taken place two days earlier and not in the meeting of the board. Yet the acquisition of the Cosmote minority stakes is a barrier to the threat of an acquisition move by OTE itself. The telecom shows low borrowing and as a result a candidate buyer would need to spend -2.5 billion to -3 billion to buy it out. As soon the buyers do that, they could then make OTE borrow money to give them their money back ( in a leveraged buyout). This is exactly what happened in 2006 with TIM Hellas, which was over-indebted with 3 billion euros with the main purpose being the offering of capital gains to its shareholders, who reaped them through capital returns. However, the new borrowing to which OTE is resorting may now render it less attractive for such an acquisition. Yet this is not the only reason why OTE is spending -2.9 billion: The corporation’s administration was forced to make this decision as Economy and Finance Minister Giorgos Alogoskoufis had rejected the plan of acquiring the minority stakes of Cosmote through an OTE share exchange. In such a case, the stake that the state would have in OTE would become less (from 28 percent to about 24 percent), which is something the government is not prepared to discuss. OTE as MIG subsidiary One of the chapters in the book of international financial reporting standards (IFRS) that defines the meaning of «associate business entity» was under scrutiny by OTE legal advisers in the last few days, as it almost describes the company’s relation to MIG. The IFRS say that «a business entity is considered associate if the investor has significant influence on it even if it is not a subsidiary or part of a common business platform.» So how is «significant influence» defined? According to IFRS, this applies when the investor owns 20 percent of voting rights. There is, however, an alternative definition: «The investment may be smaller than 20 percent, as long as this influence can be clearly proven.» Slowly, the situation becomes clearer as it is obvious that this can happen in more than one way: either by representation on the governing board or a similar administrative entity, or by participation in policymaking procedures. This in effect also means participation on the governing board. This is the way OTE managers interpreted the persistence by MIG to acquire representation on the corporation’s board. In this fashion MIG could acquire «significant influence,» characterize OTE as its associate business entity and include it in its financial report. At least that is the interpretation given by OTE. They would therefore have to deal with a stakeholder who would control more than 15 percent of their share capital and at the same time participate on the board and its key decisions, so as to exercise significant influence and proceed with an economic merging. What would this mean? Simply, that MIG could incorporate OTE into its single financial report, add the corporation profits or capiralization to its own. Effectively, OTE would be like a subsidiary of MIG, which would cause great alarm at OTE headquarters. That is what drove the OTE board to its decisions on Friday.