Tuesday, February 26, 2008

Lattelecom honcho quits -- it's official

Nils Melngailis, the Latvian-American CEO of Lattelecom, has resigned his position effective April 1.
The resignation comes on the heels of a drawn-out attempt to organize a management buy-out of Lattelecom that was rejected by the government in January. 
His departure also puts and end to a "Plan B" under which The Blackstone Group, one of the major investors in the proposed and rejected MBO, offered to buy out TeliaSonera's 49 % holding in Lattelecom.
The Latvian government has also rejected a bid by TeliaSonera valued at more than USD 1 billion to gain control of both Lattelecom and mobile operator LMT (said to be the true jewel in the crown, the most profitable of all of the Swedish group's mobile holdings with over 1 million subscribers).
The Latvian government has been signaling Melngailis that he was not wanted since failing to support his re-election as chairman of the board of Lattelecom last December. Melngailis was also an uncomfortable figure for TeliaSonera because of his plans to independently develop Lattelecom as a regional player in both telecommunications and related services, such as outsourcing and IT systems integration. However, the Swedes had no grounds to criticize the financial performance of the company and approved the first MBO proposal that would have seen Lattelecom purchased by its management and staff  with financing from a consortium that included  Blackstone and four banks. TeliaSonera had already been told in 2006 that it would not be permitted to acquire all of Lattelecom and, although it has persisted in making offers for both companies, it was apparently resigned to getting only LMT.  The MBO offered it a way to get out of its ownership of Lattelecom and get 49%  of around LVL 290 million in the process.
What happens now is that the Latvian government, unless it changes its mind about TeliaSonera, has no buyer for the Swedish company's stake in Lattelecom and few prospects of selling its own 51 % to anyone other than TeliaSonera. It has also lost a well-qualified, internationally experienced and connected CEO and will have a very hard time finding an equivalent replacement in view of the politicized climate in which Melngailis was driven to resign.
Another negative consequence is that the "gentle hounding" of Melngailis from his post also drives away one of the world's largest international investors, the Blackstone Group, which was willing to risk buying 49 % of Lattelecom with Melngailis at the helm (and covenants ensuring management control). Privately, Blackstone officials will see Latvia as a banana republic unable to see its own best interests (unless they are some kind of special interests) and will probably advise the international investment community to steer clear. This may be the most serious consequence of Melngailis' resignation.

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