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Polska Telefonia Cyfrowa (PTC): poles apart
Article Type: Rearview From: info, Volume 10, Issue 3.
A regular column on the information industries
Peter Curwen Visiting Professor of Telecommunications at the Department of Management Science, Strathclyde University, Glasgow, UK. E-mail: email@example.com
In March 2005, Zygmunt Solorz, the CEO of Elektrim, a Polish power conglomerate in financial difficulties, succinctly expressed his opinion concerning the possibility that his company’s partner in Elektrim Telekomunikacja (ET), France’s Vivendi Universal, could be obliged to write off its 1.8 billion investment in Polish mobile operator Polska Telefonia Cyfrowa (PTC) as follows: “Every time you do business there is a risk. There are no certainties.”
Needless to say, Vivendi had not regarded itself as in danger of having to write off such a large sum when in 1999 it took a 51 percent direct plus indirect stake in ET with Elektrim holding the other 49 percent, given that Poland was potentially a large, high-growth market for mobile telephony and that ET held a 51 percent stake in a successful mobile operator, PTC, with Deutsche Telekom holding the other 49 percent. However, things began to fall apart when Deutsche Telekom, despite itself being heavily indebted in the aftermath of the telecoms meltdown of 2000/2002, attempted to acquire ET’s stake as part of a strategic rebalancing of its international mobile assets towards eastern Europe.
In September 2003, Deutsche Telekom offered 1.1 billion ($1.2 billion) for the ET stake and this was accepted by Elektrim and Vivendi which was itself sorely in need of a cash transfusion. It was announced that the deal would close in early 2004 (Major, 2003). However, ET’s creditors, which were owed 436 million, refused to accept the deal and it took a further year for it to be resurrected at the improved price of 1.3 billion (PriMetrica, 2004). Meanwhile, however, Deutsche Telekom had been pursuing a fall-back position by petitioning the Arbitration Tribunal in Vienna to render null and void the transfer of ET shares from Elektrim to Vivendi. In December 2004, the court not merely so ruled (without the right of appeal) but also ratified Deutsche Telekom’s right to exercise a call option to buy the entire 51 per cent stake now legally held by Elektrim, with the European Commission raising no objection to this action (Cellular-news, 2005).
In February 2005, Deutsche Telekom and Elektrim moved to appoint a new management board at PTC which promptly altered the shareholder register by striking out Vivendi’s indirect stake. The new board, accompanied by security guards and presumably intending to send a clear political message to France that the government stood square behind its part-state-owned national incumbent Germany’s ambassador to Poland, then occupied PTC’s H/Q and ejected the pro-Vivendi management. Vivendi’s immediate response was to initiate lawsuits against Deutsche Telekom, Elektrim and Mr Solorz (Cienski and Arnold, 2005).
The stance taken by the protagonists was of interest. Vivendi stood to lose its entire investment of 1.8 billion and hence was honour bound to take legal action even though it would thereby run up huge legal costs with no guarantee of success. Elektrim stood to regain the whole of ET without paying a penny of compensation to Vivendi and would then be able to negotiate a generous price for its stake from Deutsche Telekom while the latter would be able to gain control over assets with massive potential at a price well below market value. Mr Solorz, as noted, felt that Vivendi which at the time had been in the throes of an acquisition spree inaugurated by the ill-fated Jean-Marie Messier had gone into the ET deal with its eyes open and could have salvaged a good part of its investment by accepting the original 1.1 billion offer from Deutsche Telekom (Cienski et al., 2005).
From this point onwards the writs flew thick and fast. A court in Warsaw upheld the Viennese arbitration ruling: Vivendi appealed. A court in London ruled that Elektrim could not sell its shares to Deutsche Telekom until Vivendi and Elektrim had settled their differences: Vivendi claimed that it maintained the right to acquire the ET stake from Elektrim and that the Vienna Arbitration Tribunal had no jurisdiction over Polish companies (Phillips, 2005). In May, Vivendi sued Deutsche Telekom for 2.2 billion in the Paris commercial court for the “wrongful termination of negotiations” in September 2004 when Deutsche Telekom had thought that it would be able to annex the shares without payment. Meanwhile, Elektrim denied that Deutsche Telekom had exercised its call option (Arnold et al., 2005). However, in mid-June, Elektrim announced that the Vienna Arbitration Court had ruled that because Elektrim had not recovered the shares in ET held by Vivendi and passed its 51 percent stake in PTC over to Deutsche Telekom, the stake had become forfeit at book value only estimated at a mere 350 million. As a result, Elektrim’s share price halved overnight. Elektrim went on to point out that Vivendi had prevented the recovery of the ET stake through a series of lawsuits, thereby resulting in its own inability to comply with the original Vienna ruling, and that it accordingly intended to sue Vivendi for the difference between that sum and the market value of the shares (Cellular-news, 2006).
In September, Deutsche Telekom replaced the CEO of PTC with its own appointee, Klaus Hartmann. Left with no control over the PTC board, Vivendi did a strategic about-turn and offered to pay Deutsche Telekom 2.5 billion for its 49 percent stake in PTC although Deutsche Telekom confusingly now claimed to have control over 97 percent (Sovich, 2006). In practice, it appeared to be the case that Elektrim had filed for bankruptcy at the end of September and that Deutsche Telekom had at more or less the same time paid 600 million representing the agreed book value for the PTC stake to Elektrim. Thwarted by this turn of events, Vivendi promptly filed a criminal complaint alleging that “Elektrim and Deutsche Telekom had conducted secret and illegal negotiations” in order to permit Deutsche Telekom to exercise its call option (Telecoms.com, 2006). The somewhat extraordinary feature of this suit was that it was filed in Seattle, USA home of the T-Mobile USA H/Q under the so-called RICO law designed to fight organized crime (TelecomDirect, 2006).
There were also further developments in Austria where, in December, the Supreme Court, asked to rule on the validity of the Vienna arbitration award, concluded that any negotiations between Deutsche Telekom and Elektrim concerning the transfer of ET’s stake in PTC had not affected Vivendi’s rights to maintain its claim on its stake in ET. This meant, according to Vivendi, that Deutsche Telekom would be obliged to return the ET stake in PTC to ET. According to Deutsche Telekom, it meant nothing of the sort and it therefore intended to consolidate its now majority stake in PTC on to its balance sheet in November (Spencer and Amiel, 2007).
Vivendi ploughed on regardless, turning initially to the Polish Supreme Court and successfully persuading it to strike down all previous rulings made by Polish courts that favoured Deutsche Telekom on the grounds of procedural irregularities. It went on to obtain an injunction in the Warsaw District Court in mid-March 2007 that barred Elektrim from transferring any stake in PTC to Deutsche Telekom (Cellular-news, 2007). The immediate loser from all of the above appeared to be PTC itself which had slipped from first to third place among the mobile operators in terms of revenue and subsequently subscribers. Whereas Vivendi had effectively been prevented from building up PTC’s existing brands, “Heyah” and “Era”, Deutsche Telekom had been prevented from introducing its global “T-Mobile” brand through fear of the consequences if the brand had later to be dropped. Further damage was being done through the entry of a fourth licensee, Netia P4 which had supplanted PTC as the brand stocked by PTC’s former leading retailer, Germanos. Perhaps the most awkward problem, however, was Deutsche Telekom’s failure to get the Polish company register to accept its board appointees (Knapen and McQuaid, 2007).
In August, Vivendi was given the go-ahead to pursue a claim for $7.5 billion damages against Deutsche Telekom in Seattle, but Deutsche Telekom promptly struck back with a threatened $3.5 billion suit against Vivendi for compromising the value of PTC with legal challenges (Mechnig, 2007). This was filed in January 2008.
Deutsche Telekom has fully consolidated PTC in its accounts yet it cannot be said to be in control of the operator. Meanwhile Vivendi has fully written off its PTC stake so regaining it would be a massive bonus. But will the payments to lawyers and other advisers eventually outweigh any advantage gained by either protagonist?
1. Vivendi and Elektrim jointly held a 3 per cent stake via Carcom Warszawa and Elektrim Autoinvest.
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