Political crisis could put Cesky Telecom privatisation on hold

24-02-2005

The crisis in government—triggered by media inquiries into the personal finances of the Prime Minister and his wife—came just as Czech companies were making public their 2004 full-year results. Not surprisingly, stock in blue chip companies that ended last year in the black—such as the chemicals producer Unipetrol—did very well on the Czech bourse. But the share price of Cesky Telecom, which boasted record profits last year, suffered from concerns that Prime Minister Stanislav Gross might be forced to resign.

Unipetrol's stock jumped to its highest levels since October 1997; while recent comers to the exchange, like the pharmaceuticals company Zentiva, also reached an all-time high this week. But concerns about the Prime Minister's personal finances, and in particular his wife's business dealings, rained on Cesky Telecom's parade, on fears its privatisation would be delayed.

The impact of the political intrigue, however, only registered briefly on the Prague bourse, says head of research at the Atlantik brokerage, Jan Schiesser:

"Judging by the Prague Stock Exchange performance on Monday and Tuesday, the market is shrugging off the political uncertainty completely, with the exception of Cesky Telecom shares, which are basically stagnating or slightly dipped. [But] the other Czech blue chips are gaining significantly."

Heading into last weekend, it appeared that the crisis in government might be resolved, with the head of the Christian Democracts, a junior coalition party, backing away from calls for the Prime Minister to resign. But Miroslav Kalousek, after meeting with Mr Gross, and later with the Czech President, returned to his earlier position, and criticised Mr Gross for what he called the Prime Minister's "connections to income stemming from questionable business" and demanded that the Social Democrat chairman step down as premier.

If Prime Minister Stanislav Gross were to resign, the privatisation of Cesky Telecom--the last Central European fixed-line operator still under majority state control--would almost certainly be delayed and could be terminated. If that were to happen, Cesky Telecom's stock value would suffer in the near term.

On Monday, shares in Cesky Telecom fell as much as much as 1.5 percent, to just over 400 crowns, or about 17.40 US dollars. Given that the company recorded a profit of 243 million US dollars last year, after losses in 2003 due to its outright purchase of the largest mobile operator, Eurotel, that drop is far more significant than the numbers would initially suggest.

So how likely is it that the privatisation will be delayed? Atlantik's Jan Schiesser again:

Stanislav Gross, photo: CTKStanislav Gross, photo: CTK "The probability is equal to the probability that the coalition Cabinet would collapse, and we would have early elections. The question is how big that probability is. I was quite surprised by the development over the weekend, but I still expect early elections to be quite unlikely."

The main opposition Civic Democrats were far more popular among voters than the Stanislav Gross' Social Democrats even before the current crisis. If early elections were called, and the Civic Democrats formed a new government, Mr Schiesser says, they would be more likely to look to sell the state's controlling 51 percent holding in Cesky Telecom on the capital markets — an option the current government is also considering, if a satisfactory bidder isn't found — than through privatisation.

"ODS [the Civic Democrats] haven't yet presented their own attitude, or approach, to the privatisation of Cesky Telecom; so it's difficult to say based on official party positions, since there are none. But the likelihood of privatisation through the private equity markets is significantly higher under a Cabinet led by the Civic Democrats."

The government has received five preliminary bids for Cesky Telecom. Three of them are frin other European telecoms: Spain's Telefónica, Belgium's Belgacom and Switzerland's Swisscom, have already qualified to initiate due diligence and have until March 27 to complete it.

Two financial consortia have also made bids: the PPF and J&T consortium, which brought in the Italian telecom Tiscali to satisfy the government's requirement that financial bidders must partner with a major telecoms company; and Blackstone/CVC/Providence, which is reportedly negotiating with mobile operator Orange and France Ttelecom.

According to the Atlantik brokerage's Jan Schiesser, the Spanish and Belgian bids are long-shots, due to indebtedness in Telefónica's case, and the structure of the bid in Belgacom's. Otherwise, he says, at this stage, the Swiss bid looks strongest.

"It's relatively early: based on the indicative bid, the highest offer came from the local consortium, PPF and J&T consortium — and now this consortium has teamed up with Tiscali — they offered the highest price, 71 billion [crowns], but I would put them rather on the end of the row of likely winners."

"I would see quite a big chance for Swisscom because of its financial strength and the structure of the offer. I think the financial consortium of Blackstone/CVC capital partners/Providence will be strong financially, if they team up with Orange or, for example, Vodaphone, they will have a high chance."

24-02-2005