Ringing up big numbers out east

Europe's largest telecoms operators have a new ambition. Having lost monopolies at home, they now want to build networks that stretch across Europe all the way to Vladivostok. Charles Piggott reports on the telecoms battle for central and eastern Europe.

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Deutsche Telekom's 'logical expansion'

A few months ago journalists quizzed Pat Gallagher, president of BT Europe, about the size of British Telecom's war chest for eastern European expansion. They expected an answer in the billions. BT has already invested some €2.4 billion ($2.425 billion) in western Europe. Gallagher's reply was more surprising than a multi-billion dollar figure. He explained that BT had "no investment constraints" at all to get into eastern Europe's fast-growing telecom market. "BT will invest whatever it takes," he told the press after the launch of a major investment push into new markets in the east. Analysts speculate that BT's war chest for central and eastern Europe may top £3 billion ($4.8 billion).

BT is not alone in its ambitions, rather it's the latest contestant in a battle that began several years ago. Deutsche Telekom has been aggressively expanding into eastern Europe for more than five years and already has a considerable head start on many of its western rivals. It has built up stakes in Hungary's Matav, Croatia's Hrvatska Telekom, Austria's max.mobil and Poland's PTC and has other ventures in the Czech Republic, Russia and the Ukraine.

Deutsche Telekom's latest Dm3.6 billion ($2.02 billion) deal to buy MediaOne's east European assets (see box) will consolidate its ownership of operators that together boast more than 2.5 million subscribers.

"Telecoms consolidation is no longer confined to western Europe," says a telecoms analyst. "Deals like Vodafone's bid for Mannesmann have set the tone, even for eastern Europe. Deutsche Telekom's purchase of MediaOne's east European assets is not just an emerging-market play, it's a response to Mannesmann's 20 million mobile subscribers." Just weeks before announcing the MediaOne deal, Deutsche Telekom had signed an $850 million deal with the Croatian government for a 35% stake in national carrier Hrvatska Telekom (HT), having already lost a bid for Croatia's second GSM licence to Austria's Mobilkom.

But Deutsche Telekom's eastwards expansion really began six years ago when, with US telecoms operator Ameritech, it spent $875 million on a stake in Hungary's former state-run telecom monopoly, Matav. Two years later the two companies spent another $850 million to take their stake to just over 67%. Two years later still and the remaining shares in Matav were successfully floated on the Budapest and New York Stock exchanges. Matav is now 100% privately owned and run, notwithstanding the Hungarian government's golden share, which grants it limited powers of veto.

Matav's success has become the textbook story of how to privatize and transform a company. Across eastern Europe - from the Czech Republic and Poland to the Baltics and across the Balkans - government have been seeking foreign partners to help restructure dated national telecom carriers before floating them on the stock market. "Matav's 1993 privatization really got the ball rolling across eastern Europe," says Deutsche Bank telecoms analyst Jonathan Lee.

The success of Deutsche Telekom and Ameritech's investment in Matav helped to convince other major-league players that eastern expansion could be a viable alternative to the more saturated markets of the west. Liberalization is only just opening up many of the region's markets, and prospects for growth are good. For example, this year Matav's profits from its mobile subsidiaries rose by nearly 30% at a time when penetration rates for both fixed-line and mobile telephony across eastern Europe are rising fast. In such countries as Slovenia and Estonia, mobile penetration is already close to western European levels at around 25% of the population. But given that mobile penetration rates across the whole of eastern Europe - including such countries as Albania, Serbia and the Ukraine - is still at just 5.5%, there is still room for growth. Even in such more developed markets as Hungary, Poland and the Czech Republic mobile penetration is still below 15%. As a result, newer mobile start-ups such as Poland's PTC - in which Deutsche Telekom has an interest - have enjoyed explosive growth. PTC already has more than 1.5 million subscribers - more than half as many as the UK's One-2-One.

Data communication and the internet are also boosting telecoms business across the region. Matav's leased-line and data-communication businesses grew by more than 35% this year, earning €44 million in the first six months of 1999.

Figures like these have drawn large western operators to look away from their home markets where they face growing competition and the loss of their monopolies.

There are still plenty of deals to be done for companies looking seriously at eastern Europe. To date, Matav is eastern Europe's only fully privatized telecom, although companies such as Telekomunikacja Polska (TPSA), Czech Republic's SPT and Ceske Radiokommunikace are already partly private.

Across eastern Europe, three stories will dominate the next few years - privatization, consolidation and liberalization. Expect initial public offerings from Croatia Telecom, Slovak Telecom, Latvia Telecom and Lithuania Telecom and also possibly from Romtel and Bulgaria Telecom. Further stock market listings will also come from any number of mobile companies across eastern Europe. In addition, companies that have already listed, including TPSA, SPT and Ceske Radiokommunikace, are expected back in the market with secondary share offerings.

In addition to portfolio investment, direct investment in east European telecoms is also likely to play a large role in eastern Europe's telecoms revolution. In Hungary, Vodafone has aggressively entered the mobile market and French utilities and communications group Vivendi has become the second-largest local operator with about 13% market share by buying up local telecom operators. Dutch company KPN is also trying to increase its position in mobile operator Pannon GSM and long-distance carrier PanTel.

Deals are also likely to come out of the Czech Republic where the government wants to sell 51% stakes in both SPT and mobile operator Ceske Radio by the end of next year.

Although the London-stock-exchange-listed SPT is liked by analysts - particularly for its 51% holding in market-leading Czech mobile operator EuroTel - some complain about low productivity levels. Despite the company's effective management by KPN, analysts are unsure over SPT's future. Analysts recently downgraded the company's earnings forecasts after surprise third quarter results showed falling call volumes.
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Ringing up big numbers out east

Europe's largest telecoms operators have a new ambition. Having lost monopolies at home, they now want to build networks that stretch across Europe all the way to Vladivostok. Charles Piggott reports on the telecoms battle for central and eastern Europe.

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