The UKE has announced it will begin proceedings to fine TPSA 3% of its fixed line sales for setting naked DSL rates too high.
The planned fine follows the failed PLN 100m fine the UKE threatened to impose on TPSA for not offering naked DSL quickly enough (Oct-Nov 2006). Recall that that was thrown out of the window eventhough TPSA took longer to unbundle DSL than the UKE prescribed. Strezynska (UKE Head) has not mentioned anything to TPSA regarding this proposed fine of 3% of revenues (fixed only, not TP Group). She announced to the Polish media that she intends to begin proceedings to notify TPSA that she will consider such a fine. The fine is over allegations that Polish naked DSL is still too expensive. This refers to retail naked DSL (TPSA has already signed wholseale naked DSL agreements with 5 competitors). The UKE says naked DSL should be PLN 22. This is based on the fact that reference wholesale lines are PLN 20, and Strezynska determined that 10% on top of that should cover DSL costs. however, recall that the UKE-appointed auditor accepted TPSA's cost base in October, which suggests that TPSA should offer naked DSL at PLN 30.
There is nothing in EU rules that say national regulators can require incumbents or other operators to offer retail naked DSL, let alone regulate the rates. Under IFRS rules, TPSA will have to provision for the potential amount if the payment/expense probablity is significant, which will be determined by legal advisors. TPSA says their advisors have advised them that pending more details from the UKE, the threat is not significant. The risk is some PLN 353m (3% of our forecast fixed revenues for 2006), some 14% of our forecast net profit.
We attach a low probablity of TPSA having to pay the fine. However, we maintain our Hold recommmendation given relatively rich valuation of 5.8x 2007F EV/EBITDA.