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Plans by German communications giant Deutsche Telekom to gain control of Greece''s one-time monopoly phone company will create a new Goliath in the Balkans - Europe''s fastest growing telecom market.

Under a three-way deal - to be announced sometime in the next two weeks - involving Deutsche Telekom, the Greek state and private-equity group Marfin Investment Group Holdings, the German telecommunications firm will pay about EUR2.9 billion for 25% plus one share of Hellenic Telecommunications Organization (OTE).

At the same time, Deutsche Telekom will appoint the chief executive officer of the company and control half of the seats on the 10 member board of directors, with the expectation that in a few years time, DT will take majority control of the company.

For Deutsche Telekom, the deal means access to long-coveted markets like Romania and Bulgaria, extending its footprint in Central and Eastern Europe from the Baltic to the Mediterranean.

More importantly, the fast-developing economies of the Balkans, a market of more than 60 million people, will be a fillip for Deutsche Telekom which, like incumbents all over Europe, has seen its market share and profitability steadily shrink with the deregulation of its home market.

"For Deutsche Telecom, the OTE deal would enable the company to gain exposure to the fast growing markets in the Balkans through OTE," said Vangelis Karanikas, an analyst at HSBC Pantelakis Securities. "That''s the logic of the deal, to gain exposure to high growth markets."

What''s less clear, however, are the benefits for OTE or, for that matter, the Greek government, which will also hold an equivalent 25% plus one share stake in the former monopoly for the time being.

For OTE, the immediate benefits will be the technical and commercial know-how that Deutsche Telekom will bring to the table, greater financing muscle for its investments in Greece and the Balkans, and potential cost synergies, particularly in the area of procurement.

According to Deutsche Telekom, the deal will result in some EUR2 billion in cost synergies, although it hasn''t been spelled out how much each company will benefit in particular.

"There are one or two areas where the deal could create some synergies for OTE," said Georgios Ierodiaconou, an analyst at Dresdner Kleinwort. "For example, Deutsche Telekom can help OTE launch new fixed-line services, such as things like broadband television. At the same time, it could help OTE reduce costs."

At the same time, the Greek government claims the presence of Deutsche Telekom as a strategic partner will ensure OTE''s future growth and development, while shielding it from political pressures or a predatory takeover.

Banking on the Balkans

Deutsche Telekom has long watched the fast growing markets of southeastern Europe. In 2000, Deutsche Telekom acquired a majority stake in Hungary''s Magyar Telekom Telecommunications (MTA) - arguably a model for the OTE deal - that gave it indirect control of telecom companies in Macedonia and Montenegro. In 2001, Deutsche Telekom acquired a direct majority stake in Croatia''s Hravatski Telekom.

But missing from the puzzle are the big markets-and new European Union members-Bulgaria and Romania, where OTE and its mobile subsidiary Cosmote have invested heavily.

At the same time, OTE and Cosmote will also bring Deutsche Telekom access to Greece, Albania, Macedonia, and, indirectly, Serbia.

Combined, those markets offer two key areas for growth: mobile telephony where mobile-phone penetration is still low by western European standards; and broadband-Internet access where household-penetration rates are mostly in the single digits.

"The Balkan potential is the key to this deal. Just look at a map of Europe and the Balkans is where there is growth," says a senior Greek telecoms consultant. "What''s more, the game in the Balkans is still in play. And whoever manages to gain a dominant position first, will have a huge advantage."

To be sure, a deal between Deutsche Telekom and OTE faces challenges from Greek unions and regulators.

Greece''s telecom workers union, OME-OTE, has already staged four 24-hour strikes against the deal over fears of job and wage cuts. They have vowed further labor actions and legal challenges.

While unlikely to block the deal, the unions could impede the implementation of the agreement at a day-to-day level.

"There is the element of execution risk in joint management control, which may result from the presence of different parties under the same roof," said Theodore Ritsos, an analyst at National P&K Securities. "This is not a new concept from a Greek perspective, we have seen examples of this before. But there is a fundamental difference between those other cases and OTE''s case, where there is a stronger labor union in the case of OTE."

On Thursday, a European court upheld a EUR12.6 million fine against Deutsche Telekom by the European Commission for discouraging competitors access to its networks between 1998 and 2001.

A second challenge will be from regulators. Both companies remain under the microscope of E.U. and national regulators to ensure open competition.

At the same time, OTE has had a particularly stormy relationship with Greece''s newly empowered telecom regulator, the Hellenic Telecommunications and Post Commission (EETT), which has taken an aggressive approach to opening OTE''s network to common access.

In a statement, EETT President Nikitas Alexandridis stressed that would continue.

"EETT constitutes the national independent authority, empowered to regulate the electronic communications market for all telecoms operators, irrespective of their ownership status," said Alexandridis. "Any decisions regarding the ownership or the management status of OTE do not and will not affect or influence either the regulatory obligations of OTE or the actions of EETT."



Source:Dow Jones Newswires