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Mergers & acquisitions

Telefònica Close to Czech Mate

Spanish giant Telefònica SA is in pole position to acquire a majority stake in Cesky Telecom a.s. after submitting the highest offer to the Czech government.

In a process that was expected to raise about $2.6 billion, Telefònica surprised the sector with a high bid of 82.62 billion Czech Koruna ($3.6 billion) for the 51.1 percent stake. The Spanish carrier's offer was CZK502 ($21.76) per share, way above Cesky's closing price of CZK400.3 ($17.38) on the Prague stock exchange on Wednesday. The Czech state's privatization agency, FNM, has recommended that the government announce the Spanish carrier as the official winner.

Telefònica's bid trumped Swisscom AG's (NYSE: SCM) offer of CZK79.2 billion ($3.43 billion), or CZK481.5 per share, and Belgacom's (Euronext: BELG) bid of CZK67.5 billion ($2.92 billion), or CZK410 per share.

The FNM did not provide details of the bid from a consortium including France Telecom SA (NYSE: FTE) and private equity groups The Blackstone Group, CVC Capital Partners, and Providence Equity Partners, as the offer was deemed to include "unacceptable" conditions that could "endanger [the] successful completion of the transaction," according to an FNM statement.

Those conditions are believed to have linked the consortium's final offer to Cesky's share price, while the other bidders made fixed-price offers.

The size of Telefònica's winning bid had the expected impact on Cesky's share price on Thursday morning. The stock leapt more than 11 percent to nearly CZK446 ($19.36) in early trading.

Quite when the Czech government will make an official announcement is unclear, though, because of the uncertain political situation there (see Eurobites: M&A Special). However, the Czech finance minister said late Wednesday that a formal decision could be made on April 6.

And until the decision is final, Standard & Poor’s has placed Cesky on "CreditWatch" in case there is a potentially negative outcome. "A successful bid could have positive or negative implications for the ratings, depending on who the winning bidder is," said S&P credit analyst Michael O'Brien in a prepared statement. "Key aspects to assess include the future funding of the company (including any financial support from a new incoming majority shareholder), as well as Cesky Telecom's post-transaction financial policy, capital structure, and business strategy." (See S&P Puts Cesky on CreditWatch.)

So what does Telefònica have planned for Cesky? And is this the start of a new phase in that carrier's international expansion plans? Analysts at Lehman Brothers note that this move will "raise questions [about] Telefònica's acquisition strategy," as the carrier has previously focused on Latin American expansion (see Telefónica Buys BellSouth LatAm Ops).

The Spanish operator had not returned calls about its plans for Central and Eastern Europe as this article was published.

However, Telefònica has been placing more focus on regional activities around Europe during the past year, particularly in the U.K. and Germany (see Telefonica Ramps Up UK Presence and Telefonica Germany Picks Telarix). And with Cesky Telecom it has targeted a carrier with a sound financial base and shrinking costs (see Cesky Reports $244M Profit for 2004, and S&P Affirms Cesky Telecom's A- ).

In addition, Cesky is also the dominant carrier in a new EU member country that is expected to play an increasingly important role in the economic growth of Central and Eastern Europe, though that process may take a number of years (see LRI: Eastern Europe Boom on Hold).

For those that look set to lose the bid, the Lehman team is most worried about Swisscom, which has no plans to raise its offer (see Swisscom Details Cesky Bid). "Given that the Cesky transaction was the only major positive out there for Swisscom in our view," Lehman's team expects the carrier's share price to underperform in its sector, as Swisscom is facing increasing competitive pressure in both its wireless and wireline businesses in its domestic market and shows few growth prospects.

As for the Belgian operator, "the uncompetitive nature of Belgacom's bid points to highly conservative acquisition criteria and questions the likelihood of Belgacom exploiting its balance-sheet capacity for acquisitions," notes the Lehman team.

— Ray Le Maistre, International News Editor, Light Reading

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