Thursday, November 01, 2007

Lattelecom MBO prospects darken

With the Latvian government falling apart for reasons unrelated to the Lattelecom MBO proposal, and with the remains of the government apparently split on whether to approve the deal on November 6, I see the prospects for the deal going through darkening.
It now looks like the government may disintegrate without deciding, or put off a decision beyond its own rapidly diminishing shelf-life. I was on a very popular TV talk show here with a number of people speaking out on what would be Latvia's largest privatization deal hitherto, including Lattelecom CEO Nils Melngailis and two persons who were actually three government ministers (Ina Gudele as herself, the Special Assignments Minister for E-government and Gaidis Berzins, Minister of Justice and acting Minister of Economics). Ina clearly signaled that she was leaning toward approving the deal, while the two-in one Berzins tilted toward reservations and hesitation. Ina said she had not read the latest government documentation on the MBO and Berzins said it was confidential, but basically dealt with "principles" rather than a yes or no to the current proposal.
Aivars Tabuns, a mildly suborbital sociologist then mocked the confidentiality as if we were addressing a terrorism case, not a business deal and I could largely agree. But then Tabuns insisted that the price of Lattelecom had to be calculated on all the money spent on network investments (more that LVL 500 million) and the market value of all the real estate owned by Lattelecom (as if we were preparing for an asset strip, not a privatization). Peteris Smidre of arch-rival Baltkom, a cable TV and telecommunications group that has clashed with Lattelecom in the past on interconnect and other issues, also said that the only business case he could see at the time is an MBO. Smidre had also indicated his interest in a Lattelecom privatization. In terms of getting a substantial part of the company, were that option open, Baltkom would also have to go to the banks and to private equity, perhaps for a "management buy-in"(if Peteris wanted to exercise some board/managerial control in the deal).
Latvian speakers might be able to watch the show through this link.
A couple of additional considerations have come to my attention:

--The Blackstone Group probably won't wait more than three months, six maximum, for the deal to be approved. Then it will walk away.
--Should the deal fall through, Nils Melngailis will resign as Lattelecom CEO. If it is delayed beyond November 6, Nils will hang on to the bitter end or close to it, but the word is that some of his key staff may be handing in resignations and seeking other work as early as next week if the MBO isn't approved. However, one doesn't know how much job churn there would be anyway.

--according to a valuation of Lattelecom made for the magazine Kapitāls (I write for them as part of my job at LETA) , the company is worth around LVL 300 million as it is now (with a 23 % stake in Latvian Mobile Telephone/LMT), but only around LVL 175 million when the stake is taken out. Although Lattelecom is not traded and all valuations are educated guesses, Nils said on TV that he believed the value of the company had declined somewhat since the MBO proposal was made in the spring.

It looks to me like the muddle scenario is the most likely one. If Nils goes, then I see TeliaSonera getting Lattelecom at the end of a long and rocky road ahead (perhaps a desperately organized public auction in mid-2009) and getting it, probably, on the cheap. This is not the worst case scenario, but neither is it the best. As I think I said on TV, the whole process has been dictated by the government's clear decision not to sell Lattelecom to the Swedes and subsequent refusal (by delay) to do a deal that would have given them 100 % of Lattelecom plus cash for 100 % of LMT ending up in Swedish hands.


Verslo tinklas said...

"Lattelecom MBO prospects darken"

or how to get rid of mafia, not an easy task really..

JK said...

I really hope that the original plan to sell to one bidder will be canceled, and instead an open tender process where anyone can participate will be started. I would call this lightening up - the closed internal discussions that have taken place now between Lattelecom and government, without participation from other competitors and potential interested parties has been grey, if not dark. That is the only way for Latvian government to get the best price and conditions.

Juris Kaža said...

I don't see significant international interest in Lattelecom (610 000 customers) other than TeliaSonera.
It would also take around 18 months to organize an open public tender (I believe, including making Lattelecom a joint stock corporation or a/s). The defacto owners'deadlock would continue until then, affecting the value of the company.