More headaches for the half-mother

The Latvian government appears to have decided to privatize Lattelecom by swapping its shares in mobile operator LMT for the 49 % of Lattelecom held by TeliaSonera (the half-mother). The Swedish stake will then be sold to a new investor, most likely The Blackstone Group, a US private equity company.
The decision was announced over the objections of a coalition partner, the Fatherland & Freedom party, whose Minister of Economics Kaspars Gerhards would prefer to have 100 % of Lattelecom put up for auction by both current stakeholders.
The government has also indicated that it does not want to divide Lattelecom into wholesale and retail units, a condition TeliaSonera insists upon. The European Union is expected to mandate such a functional seperation for telco operators soon, and TeliaSonera, British Telecom and Telecom Italia have already done so voluntarily.
My guess -- the shakily backed government plan will fall apart either because of political dissension or the non-acceptance of terms by TeliaSonera. According to some sources, Prime Minister Ivars Godmanis is ready to let everything go back to "square one"where things stay as they have been, that is, TeliaSonera remains a minority stakeholder in Lattelecom and an indirect holder of more than 60 % in LMT. In other words, the Swedes will remain reluctant and restricted owners of companies they want to either buy 100 % or divest 100 %, but these options will be blocked by the government.
Another stumbling block for the deal is that Blackstone will surely demand an airtight management agreement in order to take less than a controlling stake in Lattelecom. That means that all strategic and management decisions will be made by managers appointed by Blackstone, with the government kept at arm's length. The government is unlikely to accept this, so the deal may collapse on that note.
And on we go...

The muddlers decide - we pick a new half mother

The Latvian government more or less decided on a scheme for finding a new half-mother for Lattelecom. It is an amalgam of ex-Lattelecom CEO Nils Melngailis and The Blackstone Group's  plan B -- to buy 49 % of Lattelecom and Minister of Transport Ainars Slesers plan to swap 23 % of mobile operator LMT for TeliaSonera's stake in Lattelecom.

How it will work is that the 49 % held by the Swedes will be parked with the Latvian State Radio and Television Center (LSRTC) until it is bought by, most likely, Blackstone. Blackstone will most likely demand an ironclad management contract so that the government doesn't use its remaining 51 % majority to mess with strategy and operations.

TeliaSonera will then do a deal to get the rest of the shares in LMT held by Lattelecom and the state (they will already have the 23 % from the LSRTC and already directly hold 49 %). At the end of the whole Chinese fire-drill, the Swedes will have 100 % of LMT, the Latvian state and Blackstone --100 % of Lattelecom, plus covenants binding them to split Lattelecom into wholesale and retail units, as some other European operators, including Telia, the Swedish unit of TeliaSonera, have already done. 

I am a bit late writing this because I didn't want it to look like an April Fool's joke. Also, I am leaving for the US this morning and won't be writing until I get over there (Boston, then an IBM event in Las Vegas).

The whole thing could still crack up if 1) the Fatherland and Freedom party decides to swamp the coalition boat -- it wanted some kind of auction of 100 % of Lattelecom (they would have a potential ally in Slesers, who wanted  100 % for the state) 2) if the management agreement is unacceptable to the government, or the government's desire to modify such an agreement pushes Blackstone to walk away. 

Then there is the Baltkom/Peteris Smidre proposal.

So there is still a way to go and nothing is certain.

Yet another interesting question -- will Melngailis, who was closely linked to Blackstone's plan B, somehow return to running Lattelecom?  He is rumored to have been offered a position with Blackstone representing the private equity firm's interests in the Baltic, although there is at least one Baltic country that, until April 1, was giving Blackstone the finger. 

Baltkom honcho proposes merger with Lattelecom

Peteris Smidre, the founder and top honcho at Baltkom, Latvia's largest cable TV company which also provides internet, fixed and mobile telephony, has said he and an international investor could participate in an auction of TeliaSonera's 49 % of Lattelecom, after which Baltkom and Lattelecom could merge to form a single group.
Smidre said such a merger would dilute the Latvian government's holding in the merged company to less than 51 %. It would also open up synergies in content distribution -- Baltkom has some 180 000 cable subscribers -- and give Lattelecom access to Baltkom's virtual mobile operator, which runs on the Bite network. With all frequencies allocated, Lattelecom has no chance to start its own GSM/UMTS operator should it leave the TeliaSonera sphere one way or another.
Smidre would not comment to this blogger on which investors he had contacted, but they are rumored to be Citigroup and The Blackstone Group.
The Latvian cable and telecoms entrepreneur (he started Baltcom GSM, then sold it to Tele2) didn't deny that one reason for his proposal was to offer an alternative to the nationalization of Lattelecom proposed by Minister of Transport Ainars Slesers.
Slesers wants TeliaSonera to swap its 49 % of Lattelecom for 23 % of mobile operator LMT held by the Latvian State Radio and Television Center (LSRTC). TeliaSonera would then buy any outstanding LMT shares held by the Latvian state for cash. Lattelecom would then be 100 % owned by the state and the state-owned LSRTC.
This is a plan that passes the Alfred E Newman test*, sorta. The possible insanity is in believing that the Latvian government will decide anything at its very appropriately scheduled April Fool's Day meeting.
* not insane

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

New investor proposed for Lattelecom deal

Latvia's Minister of Transport Ainars Slesers has proposed selling TeliaSonera's 49 % share in Lattelecom to a new investor, while TeliaSonera says it will insist on implementing functional separation at Lattelecom if this deal goes through.
Slesers proposal effectively kills any chance of The Blackstone Group participating in the privatizaion of Lattelecom.
According to Kenneth Karlberg, head of TeliaSonera's Mobility business and the Sisyphus who has been rolling the privatization rock up the Latvian government hill for several years, the investor is someone "closer to the government" but apparently an entity that TeliaSonera could do business with. Karlberg declined to name the investor, saying that he was awaiting a formal written proposal to be delivered early next week.
Sisyphus (who may actually be getting the rock to the mountaintop this time) indicated to this blogger that TeliaSonera would still prefer doing a LVL 500 million deal to acquire 100 % of both operators, but if this fails, plan B is to develop LMT as a full spectrum competitor to Lattelecom, including fixed line services. Karlberg said that buying network and copper last mile capacity from a future Lattelecom wholesaler was an option for LMT.
He stressed that any deal selling 49 % of Lattelecom to the new investor would have to include covenants committing the new owners -- call them Brand X and the government -- to implementing the functional seperation of Lattelecom into wholesale network and retail services companies as proposed in TeliaSonera's last letter to the government where it proposed buying both companies.

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.

Government non-decision likely on Lattelecom

The Latvian government will take up the issue of Lattelecom's privatization today March 11, but will very likely reach no decision, according to press reports.
Diena's Baiba Rulle writes that no decision will be reached. while a letter may be written to The Blackstone Group indicating that its request to buy the 49 % of Lattelecom held by TeliaSonera is something to discuss with TeliaSonera. This ignores the fact that the government has a right of first refusal to the stake that it must formally waive.
Also, it is avoiding the issue of Nils Melngailis continuing as CEO, something that Blackstone has politely insisted on, at least between the lines of its most recent letter. As it looks now, Melngailis is resigned to resigning (he is vacationing, not likely to return, probably will do some consulting for the new honcho to smooth transition). So I say Blackstone is out of the picture and the whole process, in all probability, is going nowhere, as before. But it is going nowhere with no one really at the wheel anymore...
I wrote earlier that a working group would consider TeliaSonera's latest offer to split Lattelecom into a wholesale and a retail unit and buy the remaining government stakes in the fixed network operator and mobile operator LMT for LVL 500 million. Now it appears the government will examine this offer directly today rather than on March 18, as it would have, had the working group examined it March 12. It may still do so, since the Swedish Sisyphus, Kenneth Karlberg, the head of TeliaSonera Mobility, is coming on March 12 to roll the rock...I mean, present his case again.
Going to a TeliaSonera lunch with some honcho presenting on how the wholesale-retail split would work, so I may be able to report some more late.

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.

Blackstone withdraws from Lattelecom offer?

Edited on March 4 for some run on sentences :)

The Blackstone Group has sent a letter to the Latvian government indicating that its offer to buy the 49 % of Lattelecom owned by Sweden's TeliaSonera was based on Nils Melngailis remaining as the fixed network operator's CEO. This according to informed sources.

Since Melngailis has resigned, apparently under political pressure, the offer, logically, must be withdrawn. That means that the giant American private equity group is withdrawing from Latvia as an investment environment, not just the individual deal.

The initial management buy-out of 100 % of Lattelecom financed by Blackstone and a bank consortium was rejected for no particularly convincing reasons on January 17.  Melngailis and Blackstone made another Plan B bid for TeliaSonera's share with the hope that the government would auction off its 51 % share in a reasonable time with the private equity company the only likely buyer (at this point, some kind of MBO plan would be executed). The purchase would also have involved covenants giving full operational and strategic control of Lattelecom to management (keeping the government at arm's length).

Now the whole thing has fallen apart, TeliaSonera has neither an exit nor a way to move forward with Lattelecom and mobile operator LMT (which it controls directly and indirectly just over 60 %). 

The government has postponed for at least two weeks deciding on TeliaSonera's latest mildly sweetened offer to split Lattelecom into two companies -- a network wholesaler and services retailer --and to pay the same price of 500 million LVL (see the earlier post). 

My opinion -- this is the start of another round of muddling around and procrastination. The government either doesn't know WTF it wants or it has some byzantine, bizarre "Latvian" plan for putting whatever will be left of Lattelecom in a few years into the "right hands". Time will show. 

In bed with the loonies?

Lattelecom management as represented by CEO Nils Melngailis and The Blackstone Group have officially expressed their interest in buying 49 % of Lattelecom from Sweden's TeliaSonera. This comes on the heels of a USD 1 billion bid by TeliaSonera to buy 100 % of both Latvian telcos (Lattelecom and Latvian Mobile Telephone/LMT).

The Latvian government has already repeatedly declared that it will not let the Swedish group own both companies, citing competition worries.

If Melngailis proposal is accepted, it would leave TeliaSonera free to execute its "Plan B", to acquire 100% of LMT and develop it as a full-spectrum operator (wireless & fixed wireless voice, wireless broadband, maybe even TV). Against this, Lattelecom will have to compete (despite any formal agreements on management and strategic decision making) with one arm tied behind its back. 

Over the next three years, Latvia faces both municipal and national parliamentary elections in a time of political turbulence and the possible rise of new populist political movements. One can hardly expect to have the government as a rational partner. Already, the government has changed its mind several times in the last couple of months about what to do with Lattelecom -- sell, keep, sell again, auction, etc...

All I can say is -- good luck!

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.

Blackstone honcho outlines what could be

I had an opportunity to do a phone interview on December 20 with Walid Kamhavi, a Blackstone managing director (they have many) connected with the foundering management buy-out of Lattelecom. 

The odd part is that I published a complete translated transcript of the interview on my Latvian-language blog(can be found through www.nozare.lv  almost immediately --I simultaneously translated and transcribed. But I am not really up for listening to the whole thing again (unfortunately, I leapfrogged to videoblogging, skipping podcasting along the way).

So here are the main points:

--Blackstone can offer many synergies to Lattelecom, since it hold stakes in several telecoms companies (Deutsche Telekom, TDC) and telecoms related companies (some wireless and cable outfits listed on their home page). It can also offer economies of scale in certain kinds of purchasing and sophisticated financial advice and contacts should Lattelecom or any of its subsidiaries want to tap the capital markets. 

--Blackstone is partnering with the present management of Lattelecom (Nils Melngailis) and any change would mean a review of their commitment.

--at some point, the passage of time will erode the anticipated benefits to all parties to the proposed deal (a nice way of saying -- delay long enough, and the thing will fall apart, which I believe is exactly what the Latvian government wants to happen).

--should the deal go through, Blackstone does have an exit strategy, but this is a long-term project that would involve growing the value of Lattelecom with the engagement described above. The eventual divestment could be within the telco industry, as a merger or consolidation (again, presumably in telecoms), or to new financial investors (another Blackstone-type outfit).

All in all, it was a fair view and shows that contrary to the hallucinations of some Latvian commentators, Walid and his team are not George Soros' handpuppets nor mere speculators tossing their telecom roulette chips on the table and standing back to wait for a win. 

Alas, I view Hell as a place where journalists spend eternity transcribing interview recordings, so I probably won't do the English-original version unless the Christmas spirit and long Christmas holidays take their toll. 

The reason I rushed to do the Latvian-translated version was that I saw the Dienas bizness (my former workplace) journalist come in after me (at the Lattelecom office) to do her phone interview and presumed they would put something on their website immediately. They did, but it was a rehash of my Latvian blog. The article with some different nuances, was published the next day.

Melngailis kicked -- it's semioffical

Acting Latvian economics minister (and Minister of Justice) Gaidis Berzins told journalists he saw no legal or economic reason to extend the tenure of Lattelecom CEO Nils Melngailis. Berzins qualified the statement by saying it was his personal view, but the ministry he heads (after the resignation of Minister of Economics Jurijs Strods) is the holder of the state's 51 % share in Lattelecom. This effectively torpedos the LVL 290 million management-employee buy-out that Melngailis had proposed as a way of breaking the defacto deadlock and uncertainty the company faced because of its unresolved ownership issues. TeliaSonera, which owns 49 % of Lattelecom was told that the government would not sell it the rest of the company. The Swedish group has been asking for years to get 100 % or at least a majority in both Lattelecom and Latvian Mobile Telephone (LMT), where it currently indirectly (through a proportional share of Lattelecom's 23 % of LMT ) holds a majority. It appears the Latvian government, which will resign on December 5, will not do....whatever...

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.

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:

Click To Play