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Telia Company heading for a difficult exit from Latvia

It is beginning to look like Telia Company, a 49% owner of Latvia’s fixed network telecoms, internet and TV service provider Lattelecom and indirect holder of a majority in Latvian Mobile Telephone (LMT) is heading for a difficult exit from a market it entered in the early 1990s and hoped to integrate as part of a Nordic/Baltic regional telecoms market including Latvia, Lithuania and Estonia.

Telia has made it clear that unless the Latvian government, formally the holder of a controlling share in both telcos, agrees to merge Lattelecom and LMT, it will divest its shares in both companies. A merger has been on the table since 2013, but the Latvian government has evaded taking a position and appears ready to reject this idea. It said last year it would leave things as is, pending aa EUR 179 000 study by KPMG Baltics on possible future scenarios for both companies.

The KPMG report has not been published in full due to confidential commercial data it contains, but generally is in favor of a merger and presents a merger and stock exchange listing (with the current stakeholders retaining 30–40 % of the merged entity each) as the best of several alternatives.

Meanwhile, Telia has succeeded in merging the fixed, mobile, internet and TV operations of its holdings in Estonia and Lithuania and changing the names of these companies over the past year to Telia Eesti and Telia Lietuva, respectively. There, things are moving ahead, and in Estonia, at least, contrary to fears of price rises, telecoms costs dropped by 5.4% year to year in September 2017.

Promises, promises … but NO!

The Latvian government has promised to give an answer to Telia “in November” after mulling the issues over again and pressing Minister of Economics Arvils Ašeradens, who recently resigned, to stay on and at least finish this business. However, the signals coming from Government House so far are negative, Prime Minister Māris Kučinskis has told local media that “no is also an answer”, so it is not hard to guess what final answer he is hinting at. Mr. Ašeradens has also been cautious, standing behind a “things are fine as they are” position and now leaving his post to try to save what is left of the centrist Unity Party (Vienotība/V) that he heads as party leader.

A likely “no” will trigger dramas for both sides on this matter. Telia and the Latvian state are bound by mutual right-of-first-refusal clauses in the original contracts establishing both Latvian telcos. By one optimistic estimate, Lattelecom and LMT have a combined value of EUR 900 million, but figures calculated for the annual Top 101 Latvian enterprises showed Lattelecom in sixth place valued at EUR 486 million and LMT in fourteenth place at EUR 338 million. Neither company is traded on the stock exchange, so the valuations are guesses by the compilers of the TOP 101, the investment banking and financial advisory company Prudentia and NASDAQ RIGA, the Latvian unit of the Baltic securities exchange network NASDAQ Baltics.

Unsaleable without a merger?

The Latvian government already indicated last year that it was not ready to buy out Telia’s stakes in Lattelecom and LMT. In any case, it does not have the money for such a deal and even if it tried to do a leveraged deal with international banks (borrow cash and pay off the interest from the telcos’ earnings), it is likely that any lender would demand a merger of Lattelecom and LMT as a condition of financing the transaction. In essence, Latvia has already exercised its first refusal rights by indicating it would refuse any offer from Telia to buy out its stake.

That seems to free Telia to look for another buyer, which is where problems start. The asset that it is selling is a non-controlling, 49% share in both telcos (or a little more than 60% indirectly in LMT, but that may also get complicated) where the other stakeholder is an indecisive entity (the government) hemmed in by a coming election and with no idea of what it wants to do with both companies, except not merge them. Also, Telia as a Nordic company with strong presence in Estonia and Lithuania is a natural presence in the region, while for any other major European telco (Deutsche Telecom, BT Group, Vodafone) taking a shaky foothold just in Latvia makes little sense. Of course, if someone really large were to acquire control of Telia, something that is not out of the question, it is a different story, but Latvia would still remain a troublesome tar baby stuck to an otherwise reasonably attractive package of assets.

Another serious hindrance to selling any stakes in Lattelecom and LMT is a new National Security Law which mandates that the sales of any stakes in “critical enterprises and industries” — which telecommunications certainly is — must be approved by the government. This reflects a fear — perhaps generated by earlier hints of an exit by Telia — that Latvian telecoms assets could fall, directly or indirectly into the hands of interests linked to Russia. Telia has owned Russian assets and has had past links to some Russian oligarchs, although its business “in the East” is being wound down (again, with the same problem — who wants to get into, say, Uzbekistan, where Telia already got burned for links to sleazy deals and will be paying an almost USD 1 billion fine to US and Netherlands authorities for engaging in corrupt practices). To make matters worse, former Telia CEO Lars Nyberg and other former executives face criminal charges in Sweden for corruption. The current CEO, Johan Dennelind, may have cleaned the stables at Telia, but any criminal investigations and trials will keep media attention on the Alpha horses who filled the place to begin with.

How to sell a de-facto stranded asset?

Telia may talk of selling unless Latvia agrees to merge Lattelecom and LMT, but what it is really saying is that it has, from a strategic viewpoint, an unattractive if not effectively stranded asset in both companies. This is not to say that LMT and Lattelecom are not making money. Lattelecom saw its nine-month earnings rise 8% over the year earlier to EUR 25.6 million, but that won’t go on forever.

There are already signs of emerging competition. Providence Equity Partners, the US-based private equity company that owns the mobile operator Bite in Latvia and Lithuania, finalized its purchase of Swedish Modern Times Group’s (MTG) Baltic media assets on October 18, which will be rebranded as All Media Baltics (AM). While no directly links, other than a common parent company exist between AM and Bite, it is obvious that Bite will be a sales platform and channel for the new/old established media company and probably offer a full-fledged interactive TV service over mobile internet, as does LMT (and Lattelecom over the fixed networks and terrestrial broadcast).

As content provision markets change and technologies emerge (5G with gigabit speeds could match fixed line optical in a few years for most household consumer needs), as the Latvian government dithers and international telcos remain wary of anything Telia may have to sell, it appears that the future “strategy” for Latvian telecommunications will be a kind of stalemate, with perhaps one temporary solution. That may be to let Latvia, like Gollum in Lord of the Rings, retain its “precious” — a controlling interest- while ceding strategic management control to Telia and maybe allowing a merger after all.

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