Slovenia’s internet market at a turning point

Telekom Slovenije (TS), Slovenia’s largest internet service provider, has just undergone its third unsuccessful privatization since 2000.

Slovenian Sovereign Holding (SSH), which was selling a 72.75 percent stake of TS on behalf of the Republic of Slovenia, received just one binding offer to acquire the telecommunications giant.

The sole bidder, a private equity company called Cinven, said it plans “to invest significantly to upgrade the network, to stop the company’s revenue decline, stabilize and then grow revenues sustainably for the long term”.

The single bid by Cinven caught Slovenian media and industry analysts by surprise, given that Deutsche Telekom had been lobbying hard for some time to buy TS.

The Commission for the Prevention of Corruption gathers lobbying reports from officials in the public sector. Its documents show that in 2013, Deutsche Telekom’s representatives lobbied Mitja Mavko, the former state secretary at the Ministry of Finance, at least twice.

In June of that year, Mavko was visited by three employees of Magyar Telekom, which is wholly owned by Deutsche Telekom: Károly Schweininger, the head of mergers and acquisitions; Márton Szot, senior mergers and acquisitions manager; and advisor Gábor Kiss.

And what did they talk about? “Expressed an interest about the privatization of (TS),” states the lobbying report.

Five months later, Mavko was visited by Siniša Đuranović, then the head of operations for Hrvatski Telekom (Croatian Telecom).  Deutsche Telekom holds 51 percent of Hrvatski Telekom and is also involved in Hrvatski Telekom subsidiaries in Croatia and in Bosnia and Herzegovina.

Đuranović was accompanied by Axel Scheuermann, the senior project leader at Deutsche Telekom, and Oliver Knipping, a member of the supervisory board at Hrvatski Telekom. Again, the topic of the lobbying contact was stated as “expressed an interest about the privatization of (TS).”

Military Intelligence Analyzes TS

But Deutsche Telekom never put in a bid to acquire TS, and it is not clear why not.

Shortly before the bids were due, TS became the center of a political firestorm. Then-Minister of Defense Janko Veber ordered the Intelligence and Security Services at the ministry to perform a “security analysis” of the sale of TS, citing potential national security issues if it was sold to a foreign buyer.

Veber is a member of the Social Democrats, which opposes current privatization plans. Prime Minister Miro Cerar asked Veber to resign for overstepping his powers; Veber refused. Next the Parliamentary Assembly voted 68 votes to 11 to dismiss Veber.

Four days later, the bids for TS were due.

Despite early interest from the Russian company MTS, which had also lobbied Mavko regarding TS in September 2013, in the end Cinven was the sole bidder.

Cinven has invested in the telecommunications industry in the past, and today holds shares in two relevant companies: The Numericable Group (made up of French cable operator Numericable and Completel, a business-to-business telecommunications operator), and Ufinet, which provides fiber optic cable to operators in Spain and Latin America.

The government placed TS on the list of critical infrastructure of national importance in April 2014, because it has the biggest cable network in the country. Veber was conviced it was necessary to consider possible national security issues arising out of the sale to a foreign entity.

According to data from the State Surveying and Mapping Authority, TS owns 68 percent of the cable network. Consequently, whoever buys TS will have access to two-thirds of Slovenia’s telecommunications network.

But the sale eventually tanked. After long deliberations Cinven decided to pull its offer, citing “a highly uncertain business environment in which Telekom Slovenije operates, highlighting the complex nature of the political environment in Slovenia, together with the strong response by the public in regard to this sale process,” as was reported by SSH.

Up-and-coming regional player

As the largest internet service provider in the country, TS has a market share of 35.1 percent of all connections, according to Agency for Communication Networks and Services (AKOS).

The second largest is Telemach, which reigns as the largest provider of Internet via coaxial cables in the country with a market share of 59 percent, and 76 percent along with the providers it controls or recently acquired.

Telemach is a part of United Group, a company incorporated in the Netherlands, which was acquired by the American investment fund KKR in October 2013 for around € 1 billion (US$ 1.1 billion), media reported. United Group has a complex offshore ownership structure and history of moving its assets around.

United Group is well-placed in the wider Balkan region as it owns Serbia Broadband, the largest internet service provider in that country; Telemach in Montenegro and Bosnia and Herzegovina, as well as other media content providers in the region; various TV sports channels and the new 24-hours news network N1 which has an exclusive affiliate agreement with American CNN.

Buying spree

In Slovenia, Telemach holds about 20 percent of the broadband internet connections market, which rises to about a quarter thanks to its shares in other providers: Tušmobil, Elektro Turnšek, Telemach Rotovž, and Telemach Tabor.

Telemach is second only to TS in the larger telecommunications cable network, controlling about nine percent: eight percent in its own right, and another one  percent thanks to shares in other companies.

It’s the majority owner of Telemach Rotovž, and in March it published a takeover intention notice to buy up the remaining 22 percent of shares, offering € 1,100 (US$ 1,235) per share, or € 2,550,000 (US$ 2.5 million) for the entire stake. However, when the sale went through Telemach ended up with an additional stake of about five percent.

In October of 2014, Telemach bought Tušmobil, the third largest mobile phone service provider, which was owned by Tuš Holding, which in turn is solely owned by businessman Mirko Tuš. Telemach acquired Tušmobil’s subscribers and about 27 kilometers of Slovenia’s cable network (less than 1 percent), while for Tuš it was a necessary deal as his main creditors (the banks) pushed him to sell off some of Tuš Holding’s investments.

Tuš and his wife, Tanja, own the Tušmobil trademark. On Oct. 16, 2014, Telemach’s owner—Slovenia Broadband in Luxembourg—approved the trademark transfer in exchange for a € 29 million (US$ 32.7 million) loan note.

On Oct. 17 of that year, Telemach and Tušmobil signed a letter of intent at a sale price of € 110 million (US$ 124 million). It was a move Slovenia Broadband had clearly been thinking about for some time, as it stated in its 2012 consolidated financial report that “the acquisition is in line with the Group’s efforts to take advantage of Slovenia’s growing mobile telephony market and will provide us with increased base of potential quad-play subscribers”.

Competitors Seeing Red

Quad-play denotes a package of broadband internet access, wireless internet access (WIFI), as well as TV and mobile services. And it seems the United Group’s quad-packages or individual services might soon be marketed under new trademark names: UNIFON, UNIFI, UNIFI Powered by United Group and UNIHOME.

Those are trademarks that Telemach applied to register with the European Union’s Office for Harmonization in the Internal Market (OHIM) at the end of September 2014. Meanwhile, Telemach is already offering its subscribers wireless service under the brand UNIFI in Slovenia, Serbia, Macedonia and Bosnia.

But the trademark registration is not going smoothly.

While the trademark applications for UNIFON and UNIHOME have so far not been challenged by other trademark holders, two others have: UNIFI and UNIFI Powered by United Group. The German telecommunications giant Deutsche Telekom filed its protest on the last day of the scheduled opposition period.

It is objecting to the trademark’s color (Pantone Rhodamine Red), which it had registered for its own trademarks with the German Patent and Trade Mark Office several years ago.

Two other companies are objecting to the UNIFI application, citing the “likelihood of confusion on the part of the public”: a Germany-based global communications software and services company called Unify, and an American networking technology manufacturer called Ubiquiti Networks.

Ubiquiti, which filed its challenge on the same day in April as Deutsche Telekom, says it registered the UNIFI trademark in February, 22 days before Telemach did.

Meanwhile, Telemach managed to register UNIFI Powered by SBB (SBB stands for Serbia Broadband) with the Slovenian Intellectual Property Office in November 2014, albeit in different colors than the UNIFI mark it is trying to register with OHIM. The Unifi color that Telemach is using for its regional WIFI network is Pantone Rhodamine Red.

However, both Ubiquiti and Deutsche Telekom applied for an extension of the “cooling off period” along with Telemach during which the parties can terminate proceedings at no additional cost. This period ends in July 2017.

Telemach says it is keeping both Tušmobil and Telemach trademarks for the moment, noting that expected “synergies of fixed and mobile services” will benefit from a single trademark and the Unifi and other new trademarks are meant for branding wireless internet services through public hot spots that Telemach is building.

Fallen from grace

The third largest broadband internet service provider, T-2, was pushed into liquidation in the summer of 2015, but then the Slovenian Constitutional Court stopped the action in its tracks.

One of the shareholders filed a complaint with the court claiming its constitutional rights had been breached when its main creditor, the Bank Assets Management Company (BAMC) had forced the liquidation. (The BAMC or “bad bank” was established in 2013 to restructure bad loans made by the country’s state-owned banks). Thus, the court also decided that the liquidation procedure must be halted until it reaches a decision.

T-2 has an 18.4 percent broadband market share and its own fiber optic network; it was in the middle of a financial reorganization when it was pushed into liquidation. Creditors claim a total of € 181 million (US$ 203 million) in unpaid claims; the bankruptcy manager acknowledged € 114 million (US$ 128 million) of them, and the expected payout is 44 percent.

But one of the main keys to acquiring T-2 lies with the state.

Long before the company’s downfall, its indirect owner was the Maribor Archdiocese. After T-2 was pushed into bankruptcy, one of its creditors, Gratel—the company that built the optical fiber cables  network for T-2—and its partners got into the ownership structure by converting the money owed them into shares.

However, this debt was allegedly never proven and the maneuver is now under investigation by Slovenian authorities. Data of the Surveying and Mapping Authority shows that T-2 owns 1.4 percent of the telecommunications infrastructure network and Gratel owns 1.3 percent; their shares of the network consists of fiber optic cables.

During T-2’s upward rise to third place among internet service providers, state-owned banks made many loans to the company. In the end, the BAMC bought up all € 145 million (US$ 163 million) worth of bad debt T-2 owed the banks.

In March 2014, BAMC published a notice for prospective buyers of the debt. However, a year later it published a disclaimer stating: “Because of an ongoing sale procedure we are currently not accepting bids to buy said debt from new interested buyers. Further information will be available on May 20, 2015.”

Then in August, the BAMC and two other lenders succeeded in challenging a previously overturned decision to liquidate T-2 as the Court agreed with their arguments and effectively called for the beginning of a liquidation procedure.

Slovenian media have speculated about who the buyers of the debt could be, and the names always come down to two: the KKR fund, one of the ultimate shareholders of Telemach; and Simobil, the second-largest mobile phone service provider with roughly a third of market share.

Simobil is owned by Telekom Austria Group, which owns VIPnet, an internet service provider in neighboring Croatia, and also VIP in Serbia. Simobil does not own its own share of the cable network, and is therefore logically interested in buying the debt.

Currently, T-2 is controlled by the Krč brothers and owned by companies Garnol (majority shareholder), Gratel and Lokainvest. These companies are directly or indirectly controlled by Jurij Krč, the majority shareholder of Gratel and previous sole shareholder of Garnol, which he later transferred to his brother Štefan.

As mentioned before, Gratel had an important role in the expansion of T-2 as it was building its fiber-optic-to-the-home (FTTH) network. It was one of the first companies that started building fiber cable networks after Slovenia joined the European Union and its laws were changed to allow private companies to build telecommunications networks.

Eyeing the third place

At least one of the last two in the top eight—Amis with a 11 percent market share and Teleing with a mere 1 percent of the market—will remain vulnerable. Entrepreneur Janez Smolkovič owns Teleing, which is a regional operator that will face challenges in future development facing off against larger players.

In June, Amis’s majority shareholder Amisco in Belgium  was acquired by Telekom Austria. But Amis does not have its own cable network; it is buying access from those who do, therefore Telekom Austria could still be in the market to acquire T-2 with its optical fiber network once the court drama is over. It could thus become the number 3 player on the Slovenian internet service market.

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