Cablegate: High Price for Cesky Telecom Pleases Czech

This record is a partial extract of the original cable. The full text of the original cable is not available.





E.O. 12958: N/A

REF: 04 PRAGUE 1790

1. Summary: (U) The Spanish telcommunications firm
Telefonica will pay $3.6 billion for Cesky Telecom (CT), much
more than the government had expected to get for its share of
the company at the outset of the privatization process.
Telefonica will have to offer to buy out the minority
shareholders of CT, which will further raise its investment
in the company. Some experts question the impact of
Telefonica's expansion on its finances. The purchase is
expected to generate some synergies in mobile telephone,
internet and data services. The privatization process was
generally deemed to have been conducted in a fair and
transparent manner. The unexpectedly high price justified
the government's decision in December to offer CT to
strategic investors before putting the shares up for sale on
the Prague Stock Exchange. End Summary.

2. (U) The Czech government took a break from its protracted
crisis on April 6 and unanimously approved the sale of
state-owned Cesky Telecom, along with its subsidiary Eurotel,
to the Spanish telecoms operator Telefonica, Telefonica
agreed to pay the government Kc 82.6 billion ($3.6 billion)
for its 51.1% controlling share. This sum exceeded
government expectations by as much as 20-30 billion crowns --
up to $1.3 billion. The failed attempt to sell CT in 2002
brought an offer of only Kc 50 billion ($2.1 billion). This
year's result justified the government's decision to offer CT
to strategic investors before turning to the capital markets,
over the objections of Finance Minister Sobotka and to the
disappointment of local investment powerhouse PPF (reftel).

3. (U) Swisscom reportedly offered Kc 79 billion, and
Belgacom Kc 67.4 billion. Telefonica will be required to
offer to buy the shares of CT's remaining shareholders,
institutional and individual. It is hard to say how many
shareholders might sell out, but it could cost Telefonica as
much as another $3 billion if it has to buy all the
outstanding shares. The purchase of CT marks a new direction
for Telefonica, which has heretofore concentrated on
customers in Latin America. CT's 3.3 million fixed lines and
Eurotel's 4.6 million mobile phone customers will add only a
small amount to Telefonica's 43 million fixed lines and 74
million mobile customers worldwide. Nevertheless, the
handsome sum paid by Telefonica will have to be financed, and
the Standard and Poor's credit rating agency second-guessed
Telefonica's expansion plans by placing its current A- rating
on "creditwatch negative". Telefonica will pay the
government Kc 502 per share compared to the current market
value of the shares of Kc 400.

4. (U) CT has little room to grow in its fixed-line
business. Telefonica is expected to bring expertise and
advantages in data and broadband internet services, into
which CT has only just begun to venture. Telefonica's
experience in international mobile systems may help to
improve Eurotel's roaming services and hasten the
introduction of third generation UMTS services. On the other
hand, CT's experience with new EDGE high-speed mobile
internet services could benefit Telefonica. Telefonica's new
Czech subsidiary may even provide a base for expansion into
other Eastern European markets.

5. (SBU) The CT sale has been under close scrutiny because
of previous unfortunate experiences in the Czech Republic
with privatization of major state-owned companies. This sale
was swiftly concluded and relatively unencumbered by special
conditions that seemed to unfairly favor one or another
bidder, as has been the case in other privatizations. A
source close to the privatization told us that the current
government's political crisis actually helped to keep the
privatization process fair and transparent by discouraging
back-room dealing that would have compounded the government's
problems if revealed. However, they added that the due
diligence process uncovered some unseemly deals by the
current CT management in the course of CT's and Eurotel's day
to day business. As a result, Telefonica intends to replace
all but one or two of the current managers. These managers,
headed by CEO Gabriel Berdar, will still enjoy generous
"golden parachutes" as they exit.

6. (U) In the small Czech economy, sales such as that of CT
have a measurable impact on the currency if not handled
carefully. The Czech crown is already under constant upward
pressure due to financial inflows. Therefore, the government
has agreed that the purchase price will be paid in euros and
held in a special account in the Central Bank. Some will be
expended to pay off debts in the off-budget transportation
and housing funds, and at the National Property Fund. The
rest the government plans to hold as a reserve for future
efforts at pension reform. The Prague Stock Exchange had
hoped that a sale through it would jump-start interest in the
capital market here, and is therefore disappointed that did
not happen. As it is, there exists a possibility that the
shares of CT (and the recently privatized petrochemical firm
Unipetrol) will be pulled from the exchange by the new
owners, which would further reduce the handful of actively
traded share issues on the exchange.

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