Decision -- on April Fool's Day ??:)

It now looks like a government decision on the privatization or nationalization or continued muddlization of Lattelecom will take place at a government meeting on April 1, not March 18, as previously thought.
The government may have been blindsided by Minister of Transport Ainars Slesers sudden announcement that he backed the nationalization of the fixed network operator by swapping the 49 % stake in Lattelecom held by TeliaSonera for 23 % of mobile operator LMT held by the Latvian State Radio and Television Center (LVRTC).
The other offers on the table, at least nominally, are TeliaSonera buying out all of Lattelecom and LMT for LVL 500 million (you don't often see that much cash on the card table in these parts) as well as a clinically dead offer by The Blackstone Group to buy the TeliaSonera stake and somehow roll the rock from the tomb and bring back Nils Melngailis as CEO.
I hope Nils has been having job interviews, YGTBFC* to come back to this. In fact, even with ironclad management contracts, Blackstone has to be PFC** to even think about sharing ownership with the Latvian government.
I think the April Fool's joke will be that the muddle will continue. The only one who made a decision before Easter was Melngailis and some others at Lattelecom who are departing on that very day, April 1, no joke.
And then there was the move by the Bulldozer (as Slesers was portrayed in 2006 campaign posters). Dramatic, decisive, probably totally batshit.

*you gotta be fuckin' crazy

**pretty fuckin' crazy

The rock rolls back for the half-mother

News agencies are reporting that a planned meeting March 12 between Sisyphus (Kenneth Karlberg) of TeliaSonera, the half mother of Lattelecom and Latvian government officials has been cancelled.
Karlberg, currently head of TeliaSonera Mobility, had planned to meet with Minister of Economics Kaspars Gerhards and Minister of Transport Ainars Slesers to argue in favor of the modified proposal presented by TeliaSonera to buy the government's stakes in Lattelecom and mobile operator LMT.
In other words, the rock has rolled back down again, just as in the Greek myth. Some say that the futile attempts to break down the bizarrely- (non) argued resistance of the Latvian government have become an obsession for TeliaSonera, a need for the Swedish group to prove that it can get something done (after, not without struggles, getting control of both fixed and mobile telcos in Estonia and Lithuania).
Slesers is said to favor a deal where TeliaSonera would sell its stake in Lattelecom to The Blackstone Group. However, this plan B is already dead in the water with one essential element missing -- Lattelecom CEO Nils Melngailis has resigned. The fact that some other key staff, unsurprisingly, his press secretary Maija Celmina, are leaving indicates that this film will not be rewound.
There will be another indecision point for the government on March 18. It looks like the wise men and women running the country have made the decision by indecision to let Lattelecom drift toward the devil's mother (pie velna mātes), at the same time driving off a giant American investor (who is, to be sure, experiencing some financial pain from what is happening on the markets) with all that implies for the image of Latvia's investment climate.

LATE BREAKING NEWS

It seems Sisyphus did meet with Minister of Transport Ainars Slesers today, contrary to the muddled disinformation spread by, alas, my own news agency LETA. I may be able to get more info on what they discussed on March 13, when Kenneth Karlberg is back in Stockholm, doing exercises for his next run up that hill with the big rock.
My guess is that Slesers verbally told Sisyphus to work something out with Blackstone, but then Blackstone is all but officially out of the picture.

No decision on Lattelecom privatization

As predicted in this blog, the Latvian government failed on March 11 to take any decision on the privatization of Lattelecom (and the parallel sale of the state's remaining stake in mobile operator LMT).

However, Prime Minister Ivars Godmanis indicated to journalists that the government had not changed its view that both companies should not be sold to the same buyer -- TeliaSonera. The Swedish telecoms group had said it was willing to modify its offer for both operators and promise to split Lattelecom into  legally separate wholesale and retail entities. This has been done in Sweden with TeliaSonera' s network operator Skanova.

At the same time, the government has effectively rejected two alternative bids -- the proposed management and staff buy-out financed by The Blackstone Group and a bank consortium and a "plan B" whereby Blackstone would buy out TeliaSonera' s 49 % holding in Lattelecom and later bid on the 51 % held by the government.

However, even the plan B bid was based on the continued management of the company by CEO Nils Melngailis and the signing of a management agreement that would have kept the government at arms length from Lattelecom.

Melngailis is definitely leaving the company on April 1, and some of his staff have already moved on. Press secretary Maija Celmina is joining the press staff of President Valdis Zatlers'  office. Agris Tamanis, a key executive at Lattelecom BPO is also said to be leaving his post on April 1.  It appears he will be joining a start-up together with social network draugiem.lv founder Lauris Liberts. It is not 100 % certain that Tamanis departure has anything to do with the failure of the MBO and Melngailis departure, but it could have influenced a choice to work with the start-up full time.  Among Lattelecom middle management there also appears to be a sense of uncertainty as to what will happen with the company and the direction set by Melngailis after April 1.

And now for some weird theories:

1) A seemingly frivolous lawsuit by an unknown, small Latvian company, Time Investments demanding participation in the privatization of Lattelecom (now heading for Latvia's highest appeals court) is rumored to be backed by Ventspils business interests and possible investors from Russia. Claiming to be acting on behalf of unnamed investors, Time Investments is seeking to set aside the rights of first refusal of the current stakeholders in Lattelecom and open the privatization to any and all. 

2) Minister of Transport Ainars Slesers is rumored to have supported the MBO and the Blackstone plan B, having seen the implications of rejecting a global American investor and the benefits of having American investment. In the wake of the "giant" Blackstone, other American investors would come to Latvia. Naturally, Slesers business partners and even the minister himself could benefit (if political conditions change) in a legitimate way. Some American deals could go to Slesers business associates and in the future, there could be deals for a then ex-minister.

New Lattelecom honcho to be chosen in closed process

A new CEO for Lattelecom will be chosen by a closed, invitation-only search and selection process, according to a report by the Latvian news agency LETA.
LETA, which quotes Lattelecom supervisory council chairman Gundars Strautmanis, says the selection process will be completed by April 10 to ensure a rapid transition of leadership following the April 1 departure of Nils Melngailis.
Melngailis resigned citing a lack of support from the stakeholders in Lattelecom (the Latvian state - 51 % and TeliaSonera - 49 %). Most likely, the government was the "villain"in this development, since it first approved, then in January rejected a management buy-out proposed by Melngailis almost a year ago. TeliaSonera is also probably not wringing its hands about Melngailis departure -- it's handwringing should concern what happens now.
It is unlikely that any international manager will jump into what is seen as an unstable, politically influenced hotseat at the top of Latvia's incumbent fixed-line operator. Juris Gulbis, currently the CFO of Lattelecom, has been mentioned as an insider who might be tapped for the CEO post.
Valdis Vancovics, a board member and head of network services, could, in my opinion, be another inside candidate. However, one can wonder to what extent he was involved in Melngailis' strategy of looking to export Lattelecom services abroad. The government, which seems, IMHO, to understand little or nothing of the telecoms business, has not said what kind of strategy it sees for the company after Melngailis is gone and his plans have been rejected.
Well, we will see who is tossed into the fire after April 10. :)

Latvian government says no Blackstone letter received

Latvian Prime Minister Ivars Godmanis' press secretary Edgars Vaikulis told this blogger that no letter has been received from The Blackstone Group reminding the government of the link between its offer to participate in a buy-out of TeliaSonera's 49 % share in Lattelecom and the continued leadership of the fixed network operator by Nils Melngailis. Melngailis has submitted his resignation effective April 1 and is currently on vacation.
I wrote in an earlier post that, according to an informed source, Blackstone had sent a letter to the Latvian government reminding it that the offer to buy out TeliaSonera was dependent on Melngailis remaining at his post. Logically, the between-the-lines message was: no Melngailis, no deal. For this reason, my assertion that the deal was dead was published with a question mark in the headline, but I would be surprised if it wasn't.
ADDED LATER
My sources insist that a letter has been sent, but say that the tone of it was very mild, just saying that Melngailis' departure increased the risks faced by the proposed deal. I still maintain that Blackstone, however politely and indirectly, is heading for the door.

Knowing the Latvian Postal Service, the letter may simply not have arrived, although business communications generally are sent by courier or electronically.
Vaikulis confirmed that the government had received a letter from TeliaSonera that it would consider in a special working group on March 12, then submit the working group's recommendations to the regular government meeting on March 18. Vaikulis didn't disclose the content of the letter. This blog has written (and news agencies in Sweden report that TeliaSonera confirms) that the letter proposed dividing Lattelecom into separate wholesale and retail units to ensure competition.

Search process started for new Lattelecom CEO

The stakeholders in Lattelecom, the Latvian fixed network operator, have agreed to start a search process for a new CEO and board chairman to replace Nils Melngailis, who resigned effective April 1.
Lattelecom is owned 51 % by the Latvian government and 49 % by Sweden's TeliaSonera. Melngailis resigned in the wake of a management buy-out effort that was aborted by the government on January 17. With the company showing record 2007 revenues and earnings only slightly down from a year earlier, the departure of the experienced Latvian-American manager is seen as politically motivated.
Melngailis was not re-elected as chairman of Lattelecom's board in December, a signal that he was not wanted.

ADDED later:

Juris Gulbis, currently the finance director and acting board chairman, is rumored to have a good chance at the position. In view of the policized run-up to Melngailis resignation, it is doubtful that many international managers from outside Latvia will apply. Gulbis has a backrgound in a largely Russian-owned international alcoholic beverages distribution company as well as Latvijas balzams, a local liquour producer, so he has some internationa experience (Cyprus, Switzerland).

Now the half-mother should worry

Nils Melngailis has resigned as CEO of 49 % TeliaSonera-owned Lattelecom effective April. TeliaSonera should be worried.
Whatever problems the half-mother may have had with Nils, he at least kept the company growing and profitable. Maybe they saw him as a bit of a loose cannon, pushing into the Eastern markets that half-mommy wanted for herself and into the outsourcing space. But every year, the cannon fired almost half a golden cannonball into the Swedes' pockets.
OK -- growing a fixed line business in the age of convergence would have hit a wall in any case, but Melngailis departure, leaving Lattelecom with no one at the helm, should accellerate and amplify the inevitable decline, or at best, stagnation. After all, the company added only around 2000 new fixed subscriber lines last year (while DSL subscribers rose to over 150 000 out of 620 000 customer lines). But the mobile market had more than 2 million users.
About the only ray of hope is that Melngailis is still sticking to his offer (now as a private investor?) to buy out TeliaSonera's share together with the Blackstone Group and then run the company on an ironclad management sets policy deal with the Latvian (loonie-tunes) government keeping 51 % as hitherto.
If you ask me, the owl's tail will blossom (pūcei aste ziedēs), as Latvians say, before the government goes for this deal, which means that Melngailis would come back as the top honcho at Lattelecom. His leadership and his team were the reason the giant US investor agreed to the original MBO and continued to hope for a stake in Lattelecom even after that was rejected on January 17.
So where does that leave the half mother? Holding a leaking bag, if you ask me. It has been told that it will never be allowed to buy the rest of Lattelecom, and now it cannot easily sell its current holding, since there are no realistic buyers. We might go back to the swap of 49 % of Lattelecom for the rest of Latvian Mobile Telephone (LMT). That deal could have been done in late 2006, but wasn't.
Without Melngailis and given the rapid pace of change on the telecoms market, the value of Lattelecom will start to decline very rapidly. The Swedes could try to renegotiate a management agreement (there was one until 2004, with Sonera and later TeliaSonera executives running the company) to at least protect their interests, but it will be difficult to let their CEO invest in any significant new projects, since the half-mother's position is one of hold until you can divest.
If a politicized CEO is appointed by the government (as is likely), Lattelecom could start losing significant business customers, creating an opportunity for LMT and others to jump in with an offering of nearly-full-spectrum services (mobile, fixed mobile, wireless broadband). That would put the half-mother in the bizarre position of luring away the fattest cats (you expected rats?) from its own sinking boat. This, of course, has been happening in the context of mobile for fixed substitution without anyone sinking.
The best outcome might be to go back to Plan B 1.0, swap the 49 % plus a big cash payment for the remaining LMT shares, and let the government amuse itself with 100 % ownership of Lattelecom. It would also make the case for finding a new CEO easier, since the mandate would be to run a state-owned company with politicians breathing down one's neck. There are people who have done that in Europe and elsewhere.

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.

Endgame for Nils Melngailis of Lattelecom?

There are press reports citing reliable sources that a search process will be started for the vacant position on the Lattelecom board that opened when CEO Nils Melngailis was not re-elected as chairman. As things look now, the point of this exercise is to find a de facto replacement for Melngailis, who did not take the hint after his politically motivated expulsion from the chairmanship. There are no compelling objective (financial results-related) reasons for asking Melngailis to leave. Lattelecom has been doing as well as any fixed-line-only operator can do.
The government apparently wants Melngailis out because as an independent-thinking, Western-educated, experienced manager (a background with IBM Business Intelligence and Coopers & Lybrand), he proposed a management buy-out of Lattelecom to break the interminable indecision about the ownership of the company. Melngailis sees the interests of Lattelecom and increasing its value and competitiveness as his primary task and loyalty (had their been a clear ownership direction, this could have been different, for example, to make the company an integral part of TeliaSonera or whatever).
Look for Melngailis to leave once the government drags out its indecision about the half-assed MBO he still hoped for (The Blackstone Group buys 49 % of Lattelecom from TeliaSonera and waits for a chance to get the rest from the government?!). This could happen by April. Then some lackey will be found to formally run the company (unless the Swedes get worried about having their 49 % run into the ground) while whatever happens...
This whole black humor laced series of events should also be a warning to serious foreign investors to stay away from anything that has to do with Latvian government interests. Getting into any business with a government stake in Latvia is like rolling in the hay with a tar baby. You end up inextricably stuck to the thing and covered in itchy hay for your efforts.

Melngailis last stand - why?

Why is Lattelecom CEO Nils Melngailis, whose MBO plan was rejected by the government and who was removed (for no clear reasons) as board chairman, still hanging on?
One explanation is precisely that -- no clear reasons for him to "take the hint" and resign. Lattelecom has performed well in its financial indicators, and proposing an MBO that was initially accepted by both shareholders is not a a breach of trust as some Latvian commentators have suggested. Were this so, there would be very few MBOs in the world, as any management member proposing one would face dismissal for disloyalty, breach of trust and the like.
It is clear, however, that the Latvian government does not want Melngailis running Lattelecom, and TeliaSonera, the other owner, is probably not completely at ease with him. However, neither side can really show cause for his dismissal, so that it is an issue of honor for Nils not to resign "under a cloud" that has nothing of substance in it. Indeed, to propose the MBO and to get so far as to have The Blackstone Group and a bank consortium assembled, ready to execute, was a high risk move, showing entrepreneurial courage. It should, in proper context, be a significant merit on Nils CV even though it was ultimately torpedoed by the Latvian government.
Melngailis was recruited and hired to lead Lattelecom, to be a strategist (coming from IBM's Business Intelligence unit), not as a hard-charging, win-at-all-costs dealmaker. That he got as far as he did with the MBO is remarkable, given that, on the government side, we are dealing with capricious and irrational decision-makers.
Which brings us to the next question: WTF are Blackstone still doing here? If they want to buy 49 % of Lattelecom and share it indefinitely with the loonie-tunes 51 % government owner, there is a bridge that many Blackstone execs cross every day that may be for sale...
Here, again, the reason may be Blackstone's reputation as hard bargainers -- bulldogs, as one source put it. So they are playing out the bulldog role until -- I think quite soon -- they will drop their end of the bone.
An interesting question -- what about the four banks who are putting up LVL 200 million of the LVL 290 million deal. How long can they provisionally budget significant funds (around LVL 50 million from each) that will never be lent. Isn't it time to write off this deal and rebudget the lending plan for 2008?
My prediction -- the whole thing will be dead by Easter, Blackstone gone and Nils heading for a continued international career in a less irrational business environment. The next confrontation may well be TeliaSonera against the government's efforts to force it to sell out. A straight deal, Lattelecom shares plus cash for Latvian Mobile Telephone (LMT) and basta was also ignored by the government. They are the wavering, paranoid (everyone will sue us), hallucinating (many will come to an auction of Lattelecom), insecure and blatantly ignorant (of international business practices) villain (or simply idiot) in this whole game.

Another death knell rings for the Lattelecom MBO

Sorry, folks, for being a bit behind on this, but the outgoing Latvian government on December 18 decided not to extent the memorandum of understanding with Lattelecom, The Blackstone Group and the bank consortium and TeliaSonera regarding the management and staff buy-out proposed by Lattelecom CEO Nils Melngailis.
The issue will be decided by "the next government", in effect, the present government 2.0 (shaken and stirred a bit), where attitudes and opinions are unlikely to change.
My call -- the whole thing will be muddled around until 1) Blackstone backs off and the consortium falls apart 2) Melngailis resigns. At the end of a day lasting 2-3 years, we may see TeliaSonera at last collecting what it has been waiting for -- both Latvian Mobile Telephone (LMT) and whatever is left of Lattelecom.
An outside chance is that the new government will organize (after a decent interval) some kind of MBO or sell-off 2.0 that will have the "right" bidders, including local interests. Though it is strange to bleed something half to death just to get your claws into it...

Lattelecom honcho's next-to-last letter

Nils Melngailis, the deposed board chairman but still managing director of Lattelecom has written a letter to the company's owners (Latvian government 51 %, TeliaSonera 49 %) stating that the present state of affairs presents commercial and legal risks. Lattelecom does not have a fully functional management structure in the absence of a permanent board chairman. The government has not named anyone despite effectively firing Melngailis.
As I see it, this letter is the next to last before Nils resigns and the MBO collapses. The government will then get letters from The Blackstone Group and the bank consortium stating that they have withdrawn as financiers of the deal. That will be the end of it.
What the government does afterwards is hard to predict, except that whoever replaces Nils will face all the same problems exacerbated by almost a year of indecision. Put simply, the mobile operators are capable of starting to eat Lattelecom's lunch by offering flat rate deals and quality of service guaranteed wireless broadband (at least at select locations) that is as fast as Lattelecom's DSL (10 Mbps).
Until a final resolution of Lattelecom's ownership is reached (this may take a few more years, seriously! ) the new CEO will face the same issues as Melngailis -- limited opportunities to expand outside of Latvia and no possibility to go into mobile services.
It may all end in 2010 with TeliaSonera or TeleNordica (TeliaSonera + Telenor) or Telefonica Norte or whatever buying Lattelecom at a firesale and making it the fixed network internet and IP TV division of Latvian Mobile Telephone (LMT).

Lattelecom CEO out, but not...?

The Supervisory Council of Lattelecom has decided on December 6 not to recommend the extension of Nils Melngailis mandate as a member (and chairman) of the Lattelecom Managing Board while recommending to shareholders the re-election of two other board members whose terms expire in a few days.
The stakeholders (Latvian government 51 % and TeliaSonera 49%) are holding an electronic meeting on December 7 to vote on these recommendations.
The council's actions amount to a defacto dismissal of Melngailis, but no replacement candidate has been recommended. Supervisory Council chairman Gundars Strautmanis predicts that despite the Council's recommendations, Melngailis will be re-elected and also continue to work as managing director (CEO) of the company, a position theoretically unaffected by his loss of a board seat.
Meanwhile, lame-duck prime minister (his government resigned on December 5) Aigars Kalvitis says this is the best time to privatize Lattelecom (!?), a surprising reversal of the government's defacto rejection by delay of the MBO offered by Melngailis with a consortium including several banks and The Blackstone Group to finance the deal. The fact that the government has apparently voted against recommending re-election of Melngailis also amounts to a rejection of the MBO, even though some officials say this is not so.
My interpretation -- make things such a murky mess that the MBO consortium, especially Blackstone, will go away all by themselves. Then, perhaps, the carcass can be divided among local vultures...:)

Report: Government effectively fires Lattelecom CEO

The Latvian daily Diena reports that Nils Melngailis, CEO of Lattelecom, has been effectively fired by the Latvian government. Minister of Justice and acting Minister of Economics Gaidis Berzins reportedly told Melngailis that the government, which owns 51 % of Lattelecom, would not extent his tenure as chairman of the management board.
The newspaper points to Melngailis support of a management-employee buy-out of Lattelecom as the reason for the government's step. Reported Baiba Rulle suggests that former prime minister and founder of the ruling People's Party, the so-called oligarch Andris Skele may be behind the effort to unseat Melngailis.
She earlier wrote that Melngailis brought the large US private equity group Blackstone into the MBO deal in order to checkmate efforts by Skele to get a piece of Lattelecom. Skele has been known for making extremely complex and byzantine arrangements to take an almost untraceable interest in major projects. He allegedly backed the discredited Latvian TV digitization project through several layers of offshore companies.

No chance of a Lattelecom deal in 2007

Latvia's acting minister of Economics and Justice Minister Gaidis Berzins (Fatherland &Freedom) has said there is no chance the present (disintegrating--JK) government will approve the Lattelecom management and employee buyout (MEBO).
The government is expected to resign on December 5, the same day that beleaguered Prime Minister Aigars Kalvitis has said he will step down. Kalvitis was under pressure to resign because of a number of political scandals and controversies unrelated to telecommunications privatization.
Lattelecom management led by CEO Nils Melngailis had hoped to seal the LVL 300 million deal involving The Blackstone Group as a equity partner by year's end. It now looks like Latvia could be under a caretaker government or facing political turmoil, perhaps including dismissal of the national legislature, the 100-member Saeima, well into 2008.
The political situation along with increasing uncertainly on financial markets around the world increases the liklihood that the Lattelecom MEBO will simply be muddled to death. See my earlier posts.

Tele2 open to Lattelecom on its network

Tele2 in Latvia is open to the idea of Lattelecom starting a virtual mobile operator on its network, Tele2 Latvia CEO Petras Kirdeika told this blogger.

Kirdeika said Tele2 would consider a commercially viable proposal from Lattelecom or any other operator wishing to lease part of Tele2's mobile network.

He said that the company would also be ready to negotiate a co-financing agreement if Lattelecom's (or another operator's) needs required the building of additional network capacity.

In reporting its third-quarter results, Tele2 said it had built a record 50 base stations across the country during the period.

Lattelecom CEO Nils Melngailis has said that if the company succeeds with its MBO, it will have to move quickly to offer mobile services in addition to fixed line telephony and internet. Bite Latvija, which has hitherto been open to virtual operators, effectively declared a moratorium on new actors on its network after being purchased by  Mid Europa Partners, a private equity company. Kenneth Campbell, CEO of the Bite Group, told this blogger (as reported in the magazine Kapitāls), that Bite's priority was to strengthen its own brand. 

He let it be understood that Lattelecom was such potentially strong brand that it could not be allowed to cannibalize Bite's potential and existing customers.

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.

Lattelecom eyeing Pionit, a stealth IT company?

Lattelecom, in the midst of an MBO, is already looking beyond that for forging closer ties with selected IT companies. The most interesting of these may be Pionit AG  in Germany, where one of the chief "assets" is Mikus Grasmanis, a Latvian software engineer and one of the key inventors of GRADE, a business process analysis toolkit developed initially by the Institute of Mathematics and Informatics at the University of Latvia in the early 1990s. Also behind Pionit is Janis Gobins, the "godfather"  of the modern Latvian IT industry (Software House Riga, which later morphed and merger into Dati and Exigen/merged with Dati/).

Pionit was founded in 2006 and is still kind of a stealth company, but apparently looking to do sophisticated projects in business process management and the "industrialization" of software development projects. Pionit is the foothold in Germany that Lattelecom's new business directions in outsourcing and IT solutions need and have been looking for.  Valdis Lokenbahs,  formerly a major honcho at Dati, also recently joined Lattelecom. One reason he was recruited may have been his experience setting up a Dati operation in Germany and his ideas about building what he called a global software factory (assembling resources in a number of countries to optimally produce a software solution).

I predict that, by the end of 2008, Pionit (which already advertises its cooperation with Lattelecom) may become one of the first acquisitions of  the newly privatized Lattelecom.  Indeed, Nils Melngailis, Lattelecom CEO, strongly hinted that Lattelecom will grow in the future by major acquisitions, even of companies of similar size as Lattelecom at present. He was speaking at an annual conference for Lattelecom business customers and partners on September 19.

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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Lattelecom & wireless broadband, HP in NYC

Once the management/staff buyout (MBO) is complete, one of Lattelecom's priorities will be to expand its broadband coverage. CEO Nils Melngailis has said as much. More than 100,000 of Lattelecom's more than 600 000 wireline customers already have DSL, and the aim is clearly to get almost everyone aboard. That includes customers beyond the reach of the present network in rural towns and outlying areas.
Another priority is to move into mobile services. In this regard, I have mentioned a number of options, with the most likely one being a virtual operator (MVNO) on the Bite network, where all paying customers are welcome. Another option would be to experiment with mobile WIMAX (something not likely to be viable until the middle of 2008). I have also mentioned that Lattelecom could forge closer ties, perhaps even buy Triatel, which runs a non-standard (for Europe) CDMA mobile phone and data network, plus an EV DO wireless broadband network (satisfactory at my country cottage 35 km outside Riga). Triatel is already cooperating with Lattelecom for installing fixed wireless telephony and landed an EU and government-financed rural broadband project.
After a bit of chatting with sources, it looks like the best fit between Lattelecom and Triatel could be in the wireless broadband space, or so some think. Triatel appears ready to be persuaded into some kind of broader, more permanent deal. The question is, how much infrastructure overlap there may be and is this not at odds with the rather strange rural wireless broadband project backed by the government? The basic idea of that project, rather than helping spread "last mile" solutions (which Triatel is) was to establish parallel wholesale infrastructure and hope that resellers would appear in the poor rural areas and have a choice of wholesalers whose internet connection they could then distribute to the rural farmsteads, huts and hovels in the forest.
Meanwhile, earlier this summer, Lattelecom announced it was buying a bunch of Alcatel point to point high capacity microwave links in order to extend its broadband reach beyond the optical and wire network. That sounds like extending infrastructure to me. Still, the last mile could be set up and sold by Triatel, especially if it was part of the Lattelecom fold. Watch these developments...:)

HP in New York

I'm off to New York on September 4 for some kind of Hewlett-Packard (HP) all day event on September 5. Piecing together some sparse e-mails from the local organizers, it will be a series of break out events on various gadgets and issues. There has not exactly been a flood of information as to what, when (and just some bios of who), but it will held at some posh hotel (the Ritz) on the Battery, far from the delights of the rest of Manhattan. Or so the month old e-mails claim. But hey, I already have my electronic ticket (in French) from HP, so thanks!
Many of the discernable events are of interest, and, hopefully, I will be able to blog and videoblog from there, both here and for my Latvian employer. I notice blogger has added a "add video"function, which means I may be able to bypass the sometime slow(to post uploads) and (therefore) dubious YouTube and the quicker alternative, blip.tv. Anyway, I will give it a test. After that, I will be off to Boston to see family and back in Latvia on September 11