Bulgaria cleared an important hurdle when it finally approved the sale of mobile phone company BTC to a consortium led by Advent International in February, in one of the region’s largest leveraged buy-outs. Financing for the deal finally closed in June. Gyuri Karady of Baring Private Equity Partners says: ?It tested the legal framework in Bulgaria, and it looks like the rule of law prevailed, which is a triumph for Bulgaria.? Progress on the deal was one of the factors that helped the country obtain an investment-grade rating later in the year.
The long saga of BTC’s privatization began in 2000, when Bulgaria tried and failed to sell the company to strategic buyers.
Then, in 2002, it tried again, and this time attracted bids from two consortia.
One, led by Advent, included Enterprise Investors and was backed by financing from the European Bank for Reconstruction and Development, Mezzanine Management and Bank Austria.
The other included Turk Telecom and Koc Holding, the Turkish company in which Unicredit has a stake.
Advent’s consortium, called Viva Ventures, bid about e210 million for the 65% stake, and the Turkish consortium bid e185 million. At the time, some trade unions and members of parliament complained that the bids were too low. However, Viva’s bid was accepted and it signed the contract in March 2003. It also committed itself to e400 million in investment in the company.
Chris Mruck of Advent recalls ruefully: ?I was pleasantly surprised when the deal initially went quickly.? Mruck says that everyone in the consortium expected some political risk, because the deal was a privatization.
Sure enough, after the contract was signed, the deal ran into problems.
In May 2003, the Bulgarian privatization agency’s supervisory board advised the agency to scrap the sale because the consortium’s offshore vehicle, a necessary part of any LBO structure, apparently did not meet the conditions of the sale. Mruck says: ?It was difficult to explain what financial investors were. They could be asset strippers, or they could be responsible corporate citizens like Advent. The negative image of financial investors was used to tar us by some people against the deal.?
The agency’s decision exposed the weaknesses in the Bulgarian coalition government, with the sale being blocked by the Turkish Movement for Rights and Freedoms (MRF), the ethnic Turkish junior party in the coalition. The party, which had also previously blocked the privatization of Bulgartabac, was keen to see the Turkish consortium win the bid.
The Simeon II National Movement party, the main party in the coalition, was left in the tricky situation of trying to keep its majority while also placating irked foreign investors.
Viva Ventures complained that it had already signed the deal, and the case was picked up by Bulgaria’s supreme court, which ruled in favour of Viva. However, the deal was still not signed.
Fierce lobbying
Viva eventually increased its deal bid to e280 million, plus e700 million in investment, and promised to lay off fewer staff. The consortium also managed to build up pressure on the government to honour its original contract, through the markets and political contacts.
The US ambassador to Bulgaria, James Purdew, wrote an article in Trud, the country’s leading newspaper, saying that the BTC deal was a test case for privatization in the country. The ambassador pointed to the lack of US investment in Bulgaria and said that Advent finally being granted the deal ?would show that US companies can come here and make good business?.
Many emerging-market analysts also said the deal was a test case for Bulgaria, and that the country was unlikely to get an investment-grade credit rating until it made improvements on privatizations.
Advent also successfully put pressure on the government. Mruck says: ?We had good access to ministers at all levels in the coalition government.? Finance minister Milan Velchev and economy minister Nikolay Vassiliev were especially keen that the deal would not damage the strong rapport the country had built up with the markets through debt restructurings and other market-friendly measures.
However, Mruck says: ?The challenge, especially in the Balkans, is to get all the various ministers to pledge their support at the same time.?
As 2003 turned into 2004 and no resolution was reached, it looked as if the deal might be put off altogether. Mruck says: ?Towards the end I was thinking ?if people don’t approve this deal soon, then we’re just not welcome’.?
But in February, in a surprise move, the government finally gave its approval, and Advent was able to win the deal for the second time. Mruck says: ?What gave us the victory was partly the moral higher ground of having already signed the deal, and partly sheer persistence.?
Mruck says if he had known the deal would take so long and so much effort would be expended, he would still have gone ahead. He says: ?BTC is overstaffed, it needs a considerable investment programme, and it has to fight for a place in the mobile market. But the company has the opportunity to invest in the next stage of technology, to leapfrog a stage in efficiency.?
Mruck says the deal could not have taken place if Advent and its private-equity partners had not had access to leveraged finance.
The debt financing was provided by the EBRD, Citigroup and Bank Austria, while the e40 million mezzanine tranche was provided by Mezzanine Management, as well as the two development banks, DEG and FMO.
The deal was a victory for Bulgaria, which was awarded an investment-grade rating by Standard & Poor’s in June and by Fitch in August.
The latest upgrade was the twelfth the country has been assigned in the past three years.
It was also a success for LBOs, as such a high-profile deal brought LBOs and mezzanine financing to the attention of the rest of the central and eastern European market.
Bulgaria is now attracting ?an unprecedented level of interest from private equity? according to Deloitte & Touche. Besides the $1.2 billion MobilTel LBO in May, the country has attracted a e32 million dedicated Bulgarian fund from UK investment company Equest Partners.
According to Deloitte, the Bulgarian government is also planning to back four smaller private-equity firms to promote the country’s SME sector.
