Lattelecom future in a muddle

First, sorry for the silence on this blog, I was in the US (Boston and Las Vegas, the IBM Information on Demand conference in the latter) and had little time to attend to this. With the uproar surrounding the Latvian government, it now looks like all options for the future ownership of Lattelecom will simply be put off and muddled away (how do you translate the wonderful Latvian expression nomuļļāts?).
As I wrote in my Latvian language blog, the current proposal for the MBO is threatened by ignorance, muddle(by the government, been at it since 2003 or so on these issues) and hounding (as close a translation of noriešana -- literally, to bark to death). At the moment, it looks like muddle will trump all other cards. However, the hounding has already started (several articles expressing suspicion, questioning the motives of the Blackstone Group, etc.).
One of the strongest critics has been Latvian MEP (member of the European Parliament)Inese Vaidere, allegedly representing right of center nationalist party, but proposing, instead of the MBO, a dirigist arrangement where Lattelecom remains majority owned by the state and is governed by a special law. Vaidere points out that the value of future dividends to the state is, in her opinion, higher than the LVL 300 million that will be paid for the company through the MBO. By this argument, some enterprises should be nationalized to provide revenues for the state instead of paying taxes. Classic socialism.
In a worst case scenario (though not "worst"for those who think a government that finds excuses for firing the head of the anti-corruption agency for minor violations should be dismissed along with the parliament backing it), the Saeima (Latvia's parliament) could be dissolved and new elections called following a referendum on the dissolution. This could drag well into 2008. At present, the government is in disarray, there is no Minister of Economics and even without the president dissolving parliament, the government may yet fall. Deciding the future of Lattelecom is the least of the government's worries.

So what will happen? The muddle will drag on to where the terms of the deal may have to be changed because of unstable financial markets globally and in Latvia (the inevitable crash of the real estate market must come soon). Then the possibly weakened or reshuffled (or caretaker) government will have to decide again. The clamor for a public auction of Lattelecom will increase, but such an event, I believe, will simply lead to it being purchased by TeliaSonera on the open market.

The MBO is not a bad idea, it has been tested with mixed, generally positive results in Europe and the USA, but don't hold your breath that it will go through in Latvia for Lattelecom.

Nils Melngailis (Lattelecom) on financing the MBO

Lattelecom CEO Nils Melngailis describes the financing that has been arranged hitherto for the management/staff buyout. The US based Blackstone Group (private equity) will provide LVL 90 million in equity financing (taking 51 % of Lattelecom) with a four bank consortium (Unicredit, Nordea, DnB and Parex) providing LVL 200 million as a loan (maturity -- around 7 years). Disbursement of a first packet of shares will start in Q1 2008 if all goes smoothly. More in this video:

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Endgame for the half-mother

A delegation from TeliaSonera, the half-mother of Lattelecom, will meet with the Latvian government on July 26 to, in all likelihood, start working out the details of the management/staff buyout of the Latvian fixed-network operator.
The delegation will be headed by Kenneth Karlberg, currently head of TeliaSonera's Mobility business area, but formerly (before the switch from regional to services-based organization) in charge of business in the Baltics. For Kenneth, it will be the beginning of the end of a seemingly neverending story that started in 2003, when TeliaSonera first declared its interest in buying all of Lattelecom and Latvian Mobile Telephone (LMT). Now, as a corollary to the Lattelecom MBO, Kenneth will be getting 100 % of LMT. LMT will be integrated into TeliaSonera's regional mobile strategy, but there are some things to learn from the Latvian subsidiary, which was first to launch HSDPA mobile broadband, something even Telia Mobil still doesn't offer (?).
The July 26 meeting, presumably, will be to discuss the choreography of how each partner will waive first refusal rights on the other's holdings in Lattelecom and LMT, as well as on how to divest the 23 % of LMT formally owned by Lattelecom.
At the same time, people from Lazard Freres are busily doing due diligence at Lattelecom so as to present the company to potential financiers of the MBO. CEO Nils Melngailis is in London talking to banks and private equity companies.
Look for Lattelecom to strengthen its senior staff in the next few weeks as the company prepares to become a small independent player, without the backing of its ex-half mother. I will mourn having to discard that favorite bizarre term:).

Government supports Lattelecom MBO

The Latvian government has approved a management buy-out of the fixed network operator Lattelecom, in which it holds a 51 % stake. 49 % of Lattelecom is owned by Sweden's TeliaSonera.
The MBO will net the government around LVL 290 million.
Lattelecom's management proposed the MBO to break a deadlock in privatization talks between the Latvian state and the Swedish telecommunications group. TeliaSonera initially wanted to buy 100 % in both Lattelecom and Latvian Mobile Telephone(LMT), but the government said last year it would not sell Lattelecom to the Swedes. Valuations were then made of both Lattelecom and LMT in the hopes of a deal where TeliaSonera would swap its 49 % share of Lattelecom plus cash for 100 % of LMT. It currently controls just over 60 % of the mobile operator. That would have left the government holding 100 % of Lattelecom, but the proposed deal stalled.
Unbelievable, but the government --so says my Lattelecom source, this ain't on the wires yet -- has finally made a decision.

Lattelecom privatization may be decided June 12

The issue of Lattelecom's privatization may be decided at the regular meeting of the Latvian government on June 12. Nothing has appeared on the agenda, as yet (evening, June 11), but there appear to be three choices before the Cabinet of Ministers.

1) To approve the management/staff buy-out proposed by Lattelecom's management and, apparently, having the tacit approval of the half-mother, TeliaSonera.

2) to hold a closed auction (by invitation) to sell Lattelecom to a major international telco (assuming any show up) in the hopes of getting the maximum price.

3) to sell both Lattelecom and Latvian Mobile Telephone (LMT) to TeliaSonera after all, reversing the government's previous position that Lattelecom would never be sold to the Swedes.

Right now, the government is said to favor 2), the closed auction, claiming that the management buy-out (MBO) would contravene Latvian law. Strange, where was that law when the a government commission tentatively approved the MBO idea some weeks ago. One wonders...

Things to watch for while I am gone

I'm off to the US via Sweden. After stopping off in Stockholm overnight, I will be flying to Boston on May 19 and back again on May 27 (I'll be in Riga again May 29). In the meantime, there are some things to look for in Latvia. The half-mother (TeliaSonera) was due to officially respond to the management/staff buy-out proposal from Lattelecom. Unofficially, they have said OK some weeks ago. Nobody else is seriously looking to buy the half-mother's 49 %.
The only stumbling block is, to my mind, a bizarre demand by TeliaSonera that Lattelecom refrain from entering the mobile services market for two years (this, according to unofficial sources). The strange thing is, that if this is intended to protect TeliaSonera's forthcoming 100 % holding in Latvian Mobile Telephone (LMT), it is aimed at the wrong threat. Tele2 and, to a lesser extent, Bite (as well as Triatel with its "out of the box" wireless services) are more of a challenge to LMT than a hypothetical and, most likely, virtual Bite-based mobile service launched by Lattelecom at some point in the future. Tele2, especially, is aggressively pursuing business customers. To ban Lattelecom from going mobile is sort of like getting a chastity pledge from wolves so that their unborn cub won't come hunting while at the same time, a crocodile (Tele2) is chewing on one of your legs. End this craziness, TeliaSonera, and let's get on with the deal...L

Baltcom's Pēteris tosses a little wrench into the works

Pēteris Šmidre, in his capacity as board chairman of Alīna, the holding company that owns the Baltcom electronic communications group (internet, cable/digital TV and fixed telecoms), has tossed a wrench into the works of plans for a management/staff buyout of Lattelecom.
Alīna has sent a letter to the Latvian government expressing interest in acquiring a piece of Lattelecom. One reason, according to the news agency LETA, is that Lattelecom should be held to its committment to provide services to unprofitable customers. Otherwise, there are few details as to what Alīna would do as an investor in Lattelecom. Certainly, it is doubtful that Šmidre could buy the whole company (at LVL 290 million if its 23 % share in Latvian Mobile Telephone/LMT is discounted, otherwise LVL 450 million) alone, and saying that you are buying a company that you intend to force into unprofitable businesses is not the best way to get co-investors.
But that is not the problem. Pēteris is pounding on an open door on this issue, since the Latvian regulatory authority has always insisted that Lattelecom, as a market dominant operator, has a duty to provide universal service. Currently a government working group is studying how to fund universal service provision and who should be eligible. Raimonds Bergmanis, the head of the Communications Department of the Ministry of Transport, is inclined to favor a system of open regional tenders for utilizing the fund, that is, allowing all service providers to bid for providing subsidized universal service. More likely than not, the fastest and cheapest solution will be wireless. So Lattelecom is unlikely to be deeply involved in any of this.
So why all this? One simple theory is the bad blood between Baltcom and Lattelecom. Šmidre has always maintained that Lattelecom did everything to delay competition on fixed line telephony by dragging out interconnect negotiations and asking for, to his mind, unreasonable fees after the fixed telecoms monopoly was lifted in 2003. Since then, Lattelecom has implemented what amounts to fixed-fee domestic telephony (but feels like unlimited free calling) as part of its Mājas komplekts (Home Package) of DSL internet and phone service (with IPTV tacked on recently).
As Šmidre sees it, Baltcom (now facing cut-throat competition on foreign calls, with Skype looming over everything) was screwed out of a couple of good years building up its fixed telephony business and is now paying back the villain, Lattelecom, by tossing a wrench into the works. The government may well have to treat the Alīna letter as a legitimate request to privatize, complicating any decision on the Lattelecom management/staff buy-out proposal.
On this issue, the Latvian government is officially sending TeliaSonera the proposal and will decide what to do based on the half-mother's response. But as far as I know, that is pretty much a done deal. Lattelecom CEO Nils Melngailis, in Stockholm for a conference a couple of weeks ago, strolled 300 meters to TeliaSonera headquarters where he got an informal, but definite nod of approval from the half-mother. Who else is going to get TeliaSonera out of a 49 % no-future holding in Lattelecom that also holds the whole Latvian company hostage to uncertainty?
The logic of much of this has not deterred my former employer, Dienas bizness, from publishing some bizarro interpretations of what is going on, but that is another story. My Latvian readers know what I am talking about.
I should be writing more on this blog, but my usual evening writing hours have been ruined by the Latvian premier of the TV series Jericho. No, there is not an episode every night. There are informal sources for the original US series, almost all of it, so I am watching several episodes a night :).

Government OKs Lattelecom management/staff buy-out

A Latvian government working group approved the proposed management/staff buyout of Lattelecom for a sum around LVL 290 million (USD 580 million). Since TeliaSonera, which owns 49 % of the Latvian fixed-line operator, has unofficially given the nod to the deal, it appears that Lattelecom management and staff can get serious with international banks that have expressed interest in financing the deal and move ahead to a due diligence.

More on this later.

Management/staff offers LVL 290 million for Lattelecom

One of the pitfalls of speedblogging is errors. They stand corrected, including the headline.

Lattelecom's management and staff are offering TeliaSonera (the half-mother) and the government a total of LVL 290 million (around USD 580 million) for all of the fixed line operator, my one-time rival Baiba Rulle reports in Diena, the national daily.
The sum is around LVL 40 million above valuations for the company and apparently doesn't include the 23 % of Latvian Mobile Telephone (LMT) held by Lattelecom. A new legal entity will be formed to hold the Lattelecom participation on behalf of the management and staff with the whole deal financed by "international banks". Including the LMT holding, the amount paid for Lattelecom would be around LVL 450 million or USD 900 million, with around LVL 160 million to be recovered by selling 23 % of LMT to TeliaSonera.
To firm up the tentative committment to the buy-out by financial institutions, Lattelecom needs the government's go-ahead for the management/staff buyout. This would allow the financiers of the deal to do a complete due diligence on the company, Lattelecom CEO Nils Melngailis told this blogger recently.
The news comes shortly after Lattelecom top executives apparently got the go-ahead for the buy-out from TeliaSonera, who sees this as a way out of its endless halfmotherhood. A proposal to swap the 49 % Lattelecom holding plus cash for the remaining part of LMT has been on the table for nearly a year with no clear response by the Latvian government.
For Lattelecom, some deal, any deal is necessary to set a medium and long-term direction for the company. While Lattelecom has chafed somewhat having to deal with the half-mother, falling 100 % into state ownership is seen as the worst possible outcome.

Rumors & Whispers at Global Forum

I have been in Stockholm at the Global Forum, a big business conference sponsored, among others, by Lattelecom. Naturally, there was opportunity to catch some rumors about what may be happening next.

1) It appears the half-mother (TeliaSonera) would be ready to go along with Lattelecom's staff and management buy-out proposal. This is rather logical, because it would bail the half-mother out of what is beginning to look like a stranded investment. So far, the Latvian government has made only one decision-- that it will not sell both Lattelecom and Latvian Moble Telephone (LMT) to TeliaSonera. It is willing to sell just LMT, but the government has made no decision in nearly a year about whether it will finalize a deal swapping its remaining holdings in LMT for TeliaSonera's 49 % stake in Lattelecom plus a cash payment. Independent appraisals have been made of both companies, it should be a matter of quick negotiation to seal the deal, but the Latvian government continues to waffle and waver.
The management buy-out proposal is a means of pressuring the government to do something, to make a decision soon, but at the same time, it is not a bluff. Lattelecom has its ducks...sorry, banks lined up and if the deal were to go through, TeliaSonera could cash out of an investment in which it would be bought out anyway by the Latvian government, only God only knows when.
As things look, Lattelecom top execs got the nod on their idea from the half-mother while here in Sweden.

2) Look for Lattelecom and the Latvian social networking website draugiem.lv to strike a businessm-to-business networking deal, something along the line of people in the same company or "fans"(customers) of a certain product forming subgroups in draugiem and companies setting up shops and internet sales points on draugiem. Lauris Liberts, the founder of draugiem.lv and Lattelecom officials talked openly of this idea. Liberts also said he expects draugiem.lv to pass 1 million users in the foreseeable future.

3) Finally, look for Lattelecom to launch an alternative, private sector e-signature that can be used on a mobile phone. Details are sketchy, but if the software gadget is cheaper to obtain and easier to use than the state and Latvian Postal Service sponsored official e-signature, then it could take off. Rumor has it that the number of e-signatures actually bought by private sector businesses and private citizens is perhaps a couple of thousand.

Also ran into some dumb-ass behavior characteristic of broomstick-up-the-ass stereotype robot Germans when a Swedish immigrant taxi driver refused to detour on a fixed price trip from Arlanda airport to some hotel downtown and let me off where I was staying in Kista, just off the main highway from the airport. Had to pay the fucker an extra SEK 50. Unbelievable. Just a few years ago, I was in the same situation, sharing a cab after missing the airport bus, and it was absolutely no problemo, the guy let me off along the way, I paid the other passangers my share and that was it.

Management/staff buyout proposed for Lattelecom

Lattelecom's management has proposed a management/staff buyout of the company as an alternative to the long, drawn out negotiations with the half-mother TeliaSonera on a resolution of the privatization of Latvian Mobile Telephone (LMT).
The plan was reported by Baiba Rulle, a most capable reporter at Diena, and confirmed by Lattelecom CEO Nils Melngailis, who declined to disclose any details, citing confidentiality until the government (which has not exactly been falling over itself to talk to TeliaSonera) examines and decides on the proposal.
With Lattelecom (minus the 23 % of LMT it holds) valued at at least 260 million lats, this is probably a bit more than the company's executives and staff can afford out of pocket. So in all likelihood, the proposal has lined up some kind of deal with either a bank, a banking consortium or private equity investor.
My guess is that some people in the government may see this as a "back door" for evil foreign (Western) financial interests trying to prevent them from running Lattelecom as a 100 % state-owned company that can be politically influenced to make commercially dubious investments or to simply operate as a Ministry of Telecommunications rather than an enterprise.
This is exactly what management is trying to head off -- the (as the Germans would say) Bock zum Gaertner (Billygoat as a gardner :) ? ) scenario of state ownership. At the same time, Lattelecom' s management sees the half-mother as a little slow on some important decisions and would, perhaps, not mind having TeliaSonera out of the picture.