Hungarian Telephone and Cable Corp.

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Hungarian Telephone and Cable Corp.

1201 Third Avenue, Suite 3400
Seattle, Washington 98101
U.S.A.
Telephone: (206) 654-0204
Fax: (206) 652-2911
Web site: http://www.htcc.hu

Public Company
Incorporated: 1992
Employees: 900
Sales: $60.3 million (2004)
Stock Exchanges: American
Ticker Symbol: HTC
NAIC: 517110 Wired Telecommunications Carriers; 518110 Internet Service Providers and Web Search Portals

Hungarian Telephone and Cable Corp. (HTCC) is a holding company for subsidiaries involved in providing local and long-distance telephone service and Internet access to businesses and residences principally in Hungary. Through Hungarotel Tavkozlesi Rt., HTCC provides local and long-distance telephone service to a population base of 668,000 in the regions of Bekes, Nograd, and Papa/Sarvar. Hungarotel also offers broadband and dial-up Internet access under the name "Globonet." The company's other primary operating subsidiary is PanTel Tavkozlesi Rt., which provides voice, data, and Internet services to businesses throughout Hungary. PanTel's network, through a combination of owned and leased capacity, extends beyond Hungary's borders into Austria, Bulgaria, Croatia, the Czech Republic, Romania, Slovakia, Slovenia, and Ukraine. A third, smaller subsidiary, PanTel TechnoCom, provides telecommunications services to the Budapest-based oil firm Mol Magyar Olaj-es Gazipari Rt., the country's largest company. HTTC is majority owned by the Danish telecommunications company TDC A/S.

Origins

HTCC was created to seize a business opportunity created by the collapse of a centrally planned economy in Hungary. Shortly after World War II, the Hungarian communist party, with Soviet support, established a communist dictatorship patterned after the Soviet model, setting in place one-party rule, land collectivization, and the nationalization of banks, industrial concerns, utilities, and scores of private firms. The country joined the Council for Mutual Economic Assistance, a Soviet-bloc economic organization, in 1949 and for the next four decades adhered to the precepts of Soviet-style communist rule, including the nationalization of any private industrial firm with more than ten employees. When the Eastern European bloc severed its ties to the Soviet Union between the late 1980s and early 1990s, Hungary led the way, becoming the first satellite nation to transition to Western-style parliamentary democracy and a free market economy. Hungary also enjoyed what was considered to be the smoothest transition of all the Soviet-bloc countries, easing relatively trouble free into a private-enterprise-based economy that attracted the likes of HTCC and other firms seeking to take part in the country's large-scale privatization effort.

Beginning in 1988, Hungary began establishing the foundation for a market economy, a process that, in part, involved dismantling government-owned and -operated monopolies and allowing the private sector to step in and take control. In the telecommunications sector, Magyar Tavkozlesi Rt. (Matav) ruled supreme during the communist era, operating as a government-controlled monopoly in charge of the country's entire telecommunications system. In 1992, the Hungarian government began the process of privatizing the country's telecommunications industry by selling a 30 percent stake in Matav to MagyarCom, a company owned at the time by Deutsche Telekom AG, a German public telephone company, and Ameritech, a U.S. based telecommunications company. Over the course of the ensuing decade, Matav's ownership changed. In 1995, MagyarCom increased its stake in Matav to 67 percent. In 1997, Matav completed its initial public offering of stock, which reduced the interests held by MagyarCom and the Hungarian government to 60 percent and 6 percent, respectively. In 1999, the Hungarian government sold its 6 percent stake. In 2000, Deutsche Telekom purchased the stake in MagyarCom owned by Ameritech's successor, SBC Communications Inc., which left MagyarCom, a German-controlled company, in majority control of Matav.

The initial 30 percent stake sold in 1992 to MagyarCom coincided with two other events, one that reshaped Hungary's telecommunications landscape and the other, the formation of HTTC. The Hungarian government divided the country into 54 telecommunications service areas, thereby creating a way to sell the rights, the concessions, to private interests and remove the service areas from Matav's network of local, wireline telephone service. Matav was allowed to continue its monopoly in providing domestic and international long-distance services for another decade and it would continue to own the concessions to local wireline service in some areas, but the privatization of the company and the division of the country into telecommunication fiefdoms made room for other interested parties to enter Hungary's telecommunications industry. HTCC was one of the interested parties that joined the fray, a company formed in March 1992 to acquire concession rights to operate as a local, wireline operator. Although it intended to operate only in Hungary, the company established its headquarters in the United States, occupying offices in New Jersey and Connecticut before moving to its main offices in Seattle, Washington. The company's business was conducted through a Budapest-based company, Hungarotel Tavkozlesi Rt., HTCC's primary operating subsidiary.

The process of determining whom Hungary's new local telephone operators (LTOs) were going to be began in 1993. The Hungarian government started soliciting bids for concessions to build, own, and operate telecommunication networks in 25 of the 54 service areas not controlled by Matav. The government awarded 23 of the 25 concessions, allowing Matav to retain the rights to the two service areas for which there were no successful bidders. The winning bidders represented the new face of Hungary's telecommunications industry, the companies against whom HTCC would compete in the coming years. HTCC acquired the concession rights to five service areas. Matav acquired the rights to eight service areas. Monor Communications Group, part of Denver, Colorado-based UnitedGlobalCom, Inc., acquired rights to one service area. A joint venture company, Invitel Telecommunications Services Rt., controlled by AIG Emerging Europe Infrastructure Fund and GMT Communications Partners Limited, acquired the rights to nine service areas.

Mid-1990s: HTCC Building Its Backbone

For HTCC, one year old when it received the nod of approval from the Hungarian government, winning the bid did not mean the company could immediately enjoy a revenue stream to offset its operating costs. HTCC began as a development-stage enterprise, a status that would continue for three years after its formation. The years were spent raising debt and equity financing, assembling its management team, and obtaining the all-important concession rights. The company paid $11.5 million for the rights to its five service areas, a territory of operation comprising three regions: Bekes, Nograd, and Papa/Sarvar. Of the three regions, Bekes was the largest in terms of population, home to 391,700 of the company's total population base of 668,000. Nograd was slightly larger than Papa/Sarvar, with the two regions claiming 147,900 and 128,400 residents, respectively. For the money paid for its concession rights, HTCC received a 25-year license to provide local, wireline telephone service to its service areas and an agreement to have exclusive rights to its service areas for a decade, the same terms accorded to Monor, Invitel, and Matav. To become a fully operational company, HTCC needed the infrastructure to put its concessions to use. In the first fiscal quarter of 1995, the company acquired 15,500 telephone access lines from the Hungarian government, the first phase of an acquisition program that saw HTCC pay $23.2 million between 1995 and 1996 for existing telecommunications infrastructure, which included 61,400 access lines. The initial acquisition enabled the company to generate revenue for the first time in 1995, a year in which revenues reached $4 million. The acquisition of additional access lines in 1996 increased revenues to $20.6 million, but the end of HTCC's development-stage period of existence did not confer profitability to the company. HTCC lost $20 million in 1995 and $54.7 million in 1996, which, when added to the losses incurred during the company's developmental stage, brought total losses to more than $80 million.

Although the acquisition of access lines and infrastructure assets from the Hungarian government put HTCC in business, much remained to be accomplished before the company could take full advantage of its service areas and turn its losses into profits. The infrastructure acquired in 1995 and 1996 needed to be upgraded, requiring millions of dollars to replace antiquated manual exchanges and analog lines, and the telecommunications network needed to be expanded to serve all the residences and businesses in the company's operating areas. Between 1996 and 2000, HTCC's capital expenditures totaled $190 million, contributing to a net loss of $36 million in 1997 and $50 million in 1998, but by the end of the period the bulk of the improvement and expansion effort was completed. By the end of 2000, the company had the capacity to provide basic telephone service to all of the 283,300 homes and 38,400 businesses in its three operating areas, fueling hopes for a more profitable future.

Company Perspectives:

With competition fully in place in Hungary, the Company faces new opportunities and challenges. The Company's goal is to provide the broadest array of telecommunications services with exceptional quality and service at reasonable prices by becoming the most efficient full service telecommunications provider in Central and Eastern Europe.

HTCC began to perform encouragingly well during the first years of the 21st century, enjoying financial success for the first time, which gave it the ability to expand the scope of its business. After recording its first annual profit in 1999, a $3.1 million gain, the company lost $5.3 million in 2000, but went on to post a profit for four consecutive years. HTCC reported net income of $11.1 million in 2001, $27.3 million in 2002, $12.4 million in 2003, and $16.2 million in 2004. Revenues during the period increased from $42.9 million in 2000 to $60.3 million in 2004, supporting the feeling that the company, after years of investment, had established a stable business foundation. Against the backdrop of improved financial results, the first half of the decade included several significant events. In 2002, the company's exclusive operating rights to its service areas expired, but the year also marked the end of Matav's absolute control over providing long-distance service, which opened a new avenue of growth for HTCC. The period's most noteworthy event occurred on the acquisition front, when a new addition to HTCC's holdings substantially strengthened the company's role in Hungary's telecommunications industry.

Acquisition of PanTel in 2005

In 2004, HTCC took the first step toward adding a new operating subsidiary. In November, the company acquired a 25 percent stake in PanTel Tavkozlesi Kft., a company founded in 1998 by the Hungarian state railroad company to compete with Matav. Using the railroad company's rights-of-way, PanTel built a fiber-optic telecommunications network spanning 3,700 kilometers that was capable of carrying voice and data traffic, as well as voice and data over Internet Protocol. PanTel, unlike Hungarotel, served the entire country, including Budapest, where nearly one-fifth of the country's population resided. Further, once Matav's monopoly rights for long distance voice services expired in 2002, PanTel began serving customers in neighboring countries, including Austria, Bulgaria, Croatia, the Czech Republic, Romania, Slovakia, Slovenia, and Ukraine. PanTel offered its telecommunications services to business customers, and through PanTel TechnoCom, provided service to the Hungarian oil company Mol Magyar Olaj-es Gazipari Rt. In February 2005, HTCC completed the acquisition of PanTel, acquiring the 75 percent of the company it did not already own from the Dutch telecommunications company Royal KPN NV. The acquisition represented a major addition to HTCC's operations, combining PanTel's $128 million in revenues to HTCC's $60 million in revenues and giving the company national and international exposure to the telecommunications market.

In the wake of the acquisition, HTCC stood poised to play a more prominent role in Hungary's telecommunications industry. Belief in the company's potential increased, particularly in the minds of executives at the Danish telecommunications giant TDC A/S, formerly known as Tele Danmark. TDC had been an early investor in HTCC, increasing its stake in the company to 21.3 percent by 2000 before taking a 63 percent interest in March 2005. Executives at TDC were convinced HTCC had the potential to become a legitimate competitor to Deutsche Telekom's Matav, a belief that pitted a Danish company against a German company for control of Hungarian telecommunications services. In mid-2005, once under Danish control, HTCC began integrating Hungarotel, PanTel, and PanTel TechnoCom into a single company to be housed in the same offices and managed by the same executive team. The process was expected to be completed by the end of 2006. As the company prepared to increase its stature and wage a more competitive battle against Matav, there was much ground to be gained. Matav, with annual revenues eclipsing $3 billion, boasted local wireline service areas covering 72 percent of Hungary's population and 70 percent of its geographic area. HTCC could not expect to overtake its much larger rival in the near future, but the TDC-controlled company was intent on narrowing the gap separating the two telecommunications providers.

Principal Subsidiaries

Hungarotel Tavkozlesi Rt.; PanTel Tavkozlesi Rt.; PanTel TechnoCom Rt.

Principal Competitors

Magyar Telekom Telecommunications Company Ltd.; BT Group PLC; Deutsche Telekom AG.

Key Dates:

1992:: Hungarian Telephone and Cable Corp. (HTCC) is formed to take part in the privatization of Hungary's telecommunications industry.
1993:: HTCC acquires the rights to operate in five service areas.
1995:: HTCC begins providing local telephone service.
2000:: All major expansion and improvement work on the company's infrastructure is completed.
2005:: PanTel is acquired.