MFDnes reports today that there could be a breakthrough in negotiations between Cesky Telecom and the minority shareholders in Eurotel, the No. 1 Czech cellular operator, regarding the sale of a 49% stake to Cesky Telecom. CT holds 51% in Eurotel, and the remaining 49% is evenly split between Verizon Communications and AT&T Wireless. The two US companies agreed in principal on Friday to sell, but the price they reportedly demand (some USD 2 bil., according to the paper) is too high for Cesky Telecom and the state, Cesky Telecom’s majority shareholder. The paper reports that the state would find half this figure acceptable, that the US owners are considering lowering their offer, and that a decision on that matter could be made before the company’s AGM on June 15.
In principle, we’d see an increase in Cesky Telecom’s stake from 51% to 100% as positive for the company and the stock: it would improve the growth profile of Cesky Telecom, increase the exposure to cellular telephony, improve consolidated profitability, and raise the return on shareholder equity (assuming that CT does not overpay). In the short term, CT would have to borrow to finance the acquisition. Borrowing some CZK 50 bil. (USD 1.25 bil.; our estimate) is not a major problem given the overcapitalized balance sheet of Cesky Telecom (total assets are 66% financed by equity), though the cost of the additional borrowing would likely reduce the short-term positive impact of the acquisition on consolidated profits. This does not alter our view that the acquisition would add value to the stock (assuming a reasonable purchase price, which we see at CZK 50-55 bil.), particularly ahead of CT’s privatization, and we recommend buying CT stock.
(Ondřej Daťka)