US embassy cable - 05PRAGUE500

UNCLAS SECTION 01 OF 02 PRAGUE 000500 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EUR/NCE, EUR/ERA AND EB/CIP 
COMMERCE FOR 4232/ITA/MAC/MROGERS 
 
E.O. 12958: N/A 
TAGS: ECPS, EINV, EZ, EUN 
SUBJECT: HIGH PRICE FOR CESKY TELECOM PLEASES CZECH 
GOVERNMENT 
 
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. 
CABANISS