Cesky Telecom, a.s.

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Cesky Telecom, a.s.

Ol353 anská 55/5
130 34 Prague 3
Czech Republic
Telephone: (420) 271 411 111
Fax: (420) 271 469 868
Web site: http://www.telecom.cz

Public Company
Incorporated: 1993
Employees: 13,337
Sales: CZK 51.48 billion (2003)
Stock Exchanges: Prague
Ticker Symbol: BAATELEC
NAIC: 517212 Cellular and Other Wireless Telecommunications; 517110 Wired Telecommunications Carriers

The company Cesky Telecom, a.s. is a former state monopoly that still dominates the telecommunications market in the Czech Republic. The firm offers fixed-line voice services, broadband Internet and data services as well as mobile service through its subsidiary Eurotel. Cesky Telecom was established in the early 1990s to oversee the national telecommunications network after the fall of communist power and the breakup of Czechoslovakia. The company inherited an underdeveloped network and proceeded to modernize it at a rapid pace with the help of Dutch and Swiss partners. The firm has struggled for nearly a decade to achieve full privatization; more than one planned sale has fallen apart before it could be completed. The state still retains a 51 percent stake in Cesky Telecom while the remainder is publicly held. The company is one of the most heavily traded stocks on the Prague Stock Exchange. Since the Czech telecommunications market was opened to competition in 2001, Cesky Telecom has been striving to retain its leading position by offering professional Internet, data, and mobile services to offset the drop in usage of fixed line service.

Establishment and Privatization of
SPT Telecom in the Early 1990s

Czechoslovakia's telecommunications network was neglected during the communist period. Most central planners did not consider services to be a genuine form of production, so they failed to invest in the communication infrastructure. Instead, investment was targeted at primary forms of production such as industrial enterprises. Telephone services served as a stable source of revenue that was channeled to more valued entities in the central planning system. In particular, the telephone service was used to subsidize postal services, which operated at a loss. Telephone tariffs were not related to the cost of providing service. Charges for domestic calls were low and charges for international calls were extremely high.

As a result of this neglect, there were only 1.6 million telephone lines in Czechoslovakia in 1980—10.6 lines per 100 people in the country. About 700,000 new lines were added over the next decade, bringing the average up to 14.9 lines per 100 people, but over the same period the waiting list for a telephone line nearly doubled. Only 33 percent of households had their own telephone in 1990. Residents of some remote villages hardly ever held a telephone in their hands.

In late 1989, the Velvet Revolution brought about the collapse of communist power in Czechoslovakia. That year SPT Praha (short for Sprava post a telekomunikaci Praha, the Ministry of Posts and Telecommunications) was created as a state-owned monopoly for postal and telecommunications services. In 1990, SPT entered into a joint venture with Bell Atlantic and US West to establish Eurotel Praha as a mobile telephone service provider. The American partners held a 49 percent share in the enterprise. Eurotel acquired the exclusive right to operate a network on the 450 MHz system, an analog standard.

Separatist impulses led to the dissolution of Czechoslovakia on December 31, 1992 and the formation of independent Czech and Slovak Republics. The Czech Ministry of the Economy assumed responsibility for telecommunications. In 1993, SPT Praha was split into two separate entities: the Czech Post and SPT Telecom. This finally put a stop to the subsidy of postal services with telephone revenues. SPT Telecom was now in charge of an aging analog telephone network composed of deteriorating copper wires. The waiting list for telephone installation had grown to 800,000 people. Despite these problems, the telecom entity produced a reliable profit. SPT Telecom had a profit of CZK 6 billion on revenues of CZK 18 billion in 1993.

By this point, the privatization process in the former Czechoslovakia was in full swing. The government wanted a speedy transition from state to private enterprise, and starting in 1991 it sold citizens vouchers that could be used to bid at large auctions of hundreds of companies. The telecommunications enterprise was scheduled to be part of the second wave of privatization in 1994. In preparation, SPT Telecom was converted into a joint stock company, SPT Telecom, a.s., at the start of 1994. Later that year, a 26 percent share in the company was auctioned to Czech citizens, and SPT Telecom became the largest company listed on the newly established Prague Stock Exchange. Also in 1994, the Eurotel mobile phone enterprise acquired a license to operate a network on the digital GSM standard.

International Partnership and Rapid Modernization:
1995–99

The next stage in the privatization of SPT Telecom involved controversy over whether to allow foreign companies to gain control over telecommunications in the Czech Republic. Minister of Economics Karel Dyba contended that SPT Telecom needed the financial resources and technical know-how of a foreign company in order to modernize its network as quickly as possible. He managed to push his stance through over those who feared a loss of state control. In September 1994, the state set guidelines for the sale of a further 27 percent stake in SPT Telecom. The offer attracted potential investors such as France Telecom, Deutsche Telecom, Bell Atlantic, AT&T, and Stet International, many of whom joined into consortia to submit final bids. J.P. Morgan & Co. acted as investment advisor for the Czech side. SPT Telecom was an attractive investment since it had the potential to grow several times over and give its partner a strong foothold in Eastern Europe.

Amid the conflict over the proposed sale, SPT Telecom's general director Jiri Makovec was ousted at a board meeting in December 1994, ostensibly because he had awarded a lucrative telephone card contract to a firm to which he had personal ties. His departure, however, was likely related to the fact that he opposed selling to a foreign investor. Makovec was replaced by Svatoslav Novak, the former deputy minister for telecommunications at the Ministry of the Economy. Novak worked hard to reassure employees who were suspicious of the prospect of foreign involvement.

In the spring of 1995, J.P. Morgan received five final bids for the 27 percent stake in SPT Telecom. In June, the stake was awarded to TelSource, a consortium comprised of KPN NV of the Netherlands and Swisscom Ltd. of Switzerland. New shares were issued and the state's holding was diluted to 51 percent. Bessel Kok, the Dutch head of TelSource, became deputy general manager of SPT Telecom, which gave TelSource operating control despite its minority stake. A shareholders' association was subsequently formed to contest the sale on legal technicalities, but it did not succeed in invalidating the deal.

SPT Telecom's most urgent task now was to modernize its network. The company had already gotten about CZK 7 billion in loans from the World Bank and other institutions to fund a program that would wipe out the waiting list for a telephone line and replace the analog network with digital exchanges. Modernization proceeded at a rapid pace after the partnership with TelSource. The size of the waiting list went down for the first time in 1996, but it still stood at 623,000 and was about two years behind. Telephone density was up to 27 lines per 100 people. SPT Telecom was trying to shake off its bad image with an advertising campaign using the slogan, "Forget the past, look to the future." Progress continued so that by the end of 1998 the waiting list was down to 141,000 people, 70 percent of households were connected to the network, and two-thirds of lines were connected to digital rather than analog exchanges.

These rapid advances led to steady increases in revenue throughout the late 1990s. Annual revenue rose from CZK 32.5 billion in 1996 to CZK 51.9 billion in 1999. Net profit was steady at around CZK 6 billion a year. Besides the expansion of its network, SPT Telecom made large cuts in its workforce during this period and installed modern billing and service equipment. A new tariff system was introduced that eliminated the disparity between expensive international and cheap local calls. Rates were raised slightly to reflect the true costs of telephone service, which was a requirement for the Czech Republic to join the European Union. In 1998, SPT Telecom introduced ISDN Internet services, which became a small but growing part of overall revenue. The mobile phone subsidiary Eurotel also grew during the late 1990s. It began offering service on the GSM standard in 1996, which led to increasing revenues over the next few years despite the entrance of some competitors in the mobile market. The decade ended with a small skirmish between SPT Telecom managers and a newly elected Czech government whose telecommunications minister, Antonin Peltram, was trying to force changes to the supervisory board. TelSource became frustrated with what seemed like purely political maneuvers and threatened to pull out of the company. In mid-1999, Peltram's choice for a new head of the supervisory board was installed and TelSource stayed with the company for the time being.

Company Perspectives:

To implement its vision, the Group has formulated a mission statement: to be a leader on the electronic communications market in the Czech Republic and to offer its customers the best solutions to their telecommunications needs; to be a preferred employer for top professionals, whom it wants to motivate to build up value of the company further; to be a premium builder of shareholder value in the area of electronic communications; to be an active stakeholder in the development of the Czech community of which it is a part, and to promote outwardly the ethical and professional principles which it espouses and applies to its own development.

Unsuccessful Privatization Efforts: 2000–02

At the start of 2000, SPT Telecom changed its name to Cesky Telecom, or Czech Telecom, to more clearly express the nature of its operations. The second stage in the privatization of Cesky Telecom began in December 1999, when the Czech cabinet approved a plan to sell the 51 percent state-held share in the company. At first, it was expected that TelSource would be interested in this stake, but in August 2000, KPN, the Dutch member of the consortium, announced that it would be investing in mobile licenses in Europe instead. This generated uncertainty about the future of Cesky Telecom. The government needed money from the sale to make up for a huge budget deficit; meanwhile, shares in telecommunications companies were losing value in a worldwide trend. In the summer of 2001, TelSource signed a contract with the Czech government to work jointly in selling both the state's and TelSource's shares in Cesky Telecom. A call for bids was launched late that year.

By the spring of 2002, Cesky Telecom was in talks with two consortia led by Deutsche Bank and Swisscom. Then the government postponed the sale because the bids were too low. After receiving new bids that summer, the government agreed to sell its 51 percent stake to a group comprised of Deutsche Bank, TDC of Denmark, and other investors for EUR 1.82 billion. However, the TelSource stake was not part of this agreement. The deal was called off in November before a contract could be signed because the Deutsche Bank consortium failed to reach agreements with TelSource and with Atlantic West, the 49 percent partner in the Eurotel unit. Deutsche Bank had hoped to buy more than just the 51 percent stake in Cesky Telecom, but it turned out that KPN was not as eager as expected to sell its TelSource share, and neither was Atlantic West able to offer terms acceptable to Deutsche Bank and its partners. While the sale was falling apart, the Cesky Telecom supervisory board dismissed CEO Premysl Klima and replaced him with Ondrej Felix, the board chairman.

The Czech government had been planning to liberalize the telecommunications market since the early 1990s, and the need to stand up to competition was a primary motivating factor in the development of Cesky Telecom over the decade. In early 2000, the government approved a Telecommunications Act that gave Cesky Telecom a little extra time before it would have to face full competition. The market for the local and international fixed-line voice market was opened at the start of 2001, but call-by-call selection of operators would not be implemented until 2002, and pre-selection of operator would not be allowed until 2003. The act also set up the Czech Telecom Office as a regulatory entity for the telecommunications sector. The main competitive challenge for Cesky Telecom was in the area of mobile services. Start-up fixed-line operators complained that they could not make a dent in Cesky Telecom's market dominance because it was not offering reasonable interconnection agreements.

Responding to a Changing Market: 2003–04

The use of fixed-line voice services began declining after the start of the new century, putting pressure on Cesky Telecom to diversify its operations. A new ADSL broadband Internet access portfolio was introduced in early 2003. Cesky Telecom also started up wholesale operations, leasing its network to other local and international operators. The company incorporated branches in Slovakia, Austria, and Germany in 2003 to promote this service. The company also made personnel changes, reducing management levels to bring the number of employees to about half of the 1997 level. In June 2003, Gabriel Berdar took over as CEO from Ondrej Felix, who remained chairman of the supervisory board. Berdar had a successful background as the head of Dell Computer's Czech subsidiary.

The Czech government had been working on a new privatization strategy since the break-up of the Deutsche Bank deal in 2002. A sale was more likely to go through if the difficulties posed by the TelSource and Eurotel holdings were cleared up. Cesky Telecom had tried unsuccessfully to buy Eurotel from the Atlantic West consortium in 2001. Finally, in the fall of 2003, Cesky Telecom acquired Atlantic West's 49 percent share and took full control of Eurotel. In December of that year, TelSource sold its 27 percent stake to various financial investors, thus negating the joint sale agreement it had with the Czech government. These developments laid the ground for the relaunching of the privatization process at the start of 2004. Potential bidders were TDC of Denmark, Swisscom, and the Czech financial group PPF. The sale was expected to be completed in 2005. The government did not cancel out the possibility of selling Eurotel separately from Cesky Telecom.

Meanwhile, Cesky Telecom was engaged in disputes with the government. The company was fined by the Anti-Monopoly Office for alleged anti-competitive practices related to discounts and bonuses offered to clients who signed long-term contracts. Cesky Telecom, on the other hand, accused the government of failing to properly reimburse it for its statutory obligation to provide universal services such as public pay phones and emergency calls. Conflict also erupted with Eurotel, leading to the resignation of Eurotel's CEO Terrence Valeski. He was replaced by managers from Cesky Telecom. One of Cesky Telecom's complaints was that Eurotel had been planning to launch an Internet service that would compete with its own ADSL service.

Key Dates:

1990:
Mobile phone operator Eurotel is established as a joint venture between the Czechoslovakian telecom ministry, Bell Atlantic, and US West.: 1993:
The Czech Ministry of Posts and Telecommunications is split into the Czech Post and SPT Telecom.: 1994:
SPT Telecom becomes a joint stock company and is partially sold to Czech investors.: 1995:
The TelSource consortium buys a 27 percent stake in SPT Telecom; a rapid modernization program is launched.: 1996:
Eurotel launches mobile service on the GSM digital standard.: 1998:
SPT Telecom introduces ISDN Internet service.: 2000:
SPT Telecom changes its name to Cesky Telecom.: 2001:
The Czech telecommunications market is opened to competition.: 2002:
A planned sale of the state's remaining share to a Deutsche Bank consortium falls through.: 2003:
Cesky Telecom acquires full control of Eurotel; TelSource sells its stake in Cesky Telecom.: 2004:
The full privatization of Cesky Telecom is relaunched.

Despite these disputes, Cesky Telecom remained relatively strong in its core services. Annual revenues had dropped slightly over the past few years to CZK 51.5 billion from a high of CZK 57.2 billion in 2000, but the company still controlled nearly three-quarters of fixed-line services and half of the mobile market. The challenges in the coming years would be to carry out a full privatization, stave off competitors, and emphasize newer technology to replace the drop in fixed-line usage.

Principal Subsidiaries

Eurotel Praha, spol. s.r.o.; OMNICOM Praha, spol. s.r.o.; CenTrade, a.s. (86.5%); SPT TELECOM (Czech Republic) Finance B.V.; CZECH TELECOM Austria GmbH; CZECH TELECOM Germany GmbH; CZECH TELECOM Slovakia s.r.o.; AUGUSTUS, spol. s.r.o.