Boston-based private equity firm Advent International's pursuit of Bulgarian Telecommunications Co. (BTC) has ? at least for now ? ground to a mutually unsatisfactory conclusion. Whether Advent being left at the altar by its prospective partner represents an aberration in an otherwise increasingly stable, Westernised market, or a warning to prospective buyers to steer clear of privatisation deals in Central Europe, remains to be seen.
Some observers say the Bulgarian government negotiated with Advent in bad faith and scuttled the deal at the last minute in order to sell the company to a more politically correct consortium of Turkish buyers. Bulgaria says Advent didn't get its offer in order.
Justifying his decision last month to effectively pull the agreed €210m sale of the country's 65 per cent stake in BTC to Advent, Petar Nikolov, the chairman of Bulgaria's Privatisation Agency Supervisory Board, which is made up of politicians from several of Bulgaria's political parties, said the board was unhappy with Advent's insistence that existing Bulgarian telecom law remain unchanged in the future, and Advent's demand that it keep the majority of BTC's dividends from 2002.
Nikolov also claimed that documentation on the deal was not complete. He complained that the deal allowed for BTC's shares to be transferred to companies registered in offshore tax havens, which was not in line with the asset's sell-off strategy.
Advent strenuously denied any allegations of impropriety: ?The deal was transparent, honest and fair,? the firm said in a statement.
?It's a shocking turn of events, and quite frankly it's difficult to understand what they're hoping to gain from it,? Joanna James, managing director for Central and Eastern European investments at Advent, says.
Sources close to the deal insist the real issues at stake were politics and price. The say key figures in the inner circle of Bulgarian political power were never reconciled to the final offer and were determined to advance their own agenda by spiking the sale ? irrespective of the long-term cost to Bulgaria.
Bulgaria's Prime Minister Simeon Saxe-Coburg-Gotha said the decision shouldn't be considered a cancellation of the sale process but ?rather a continuation of negotiations.? Unfortunately for Advent, the next round of negotiations is with a group of Turkish investors that Advent originally beat in the first round of bidding.
?What is shocking about what has happened here is a political decision to kill the deal was taken literally ? literally ? at the 11th hour,? James says. ?If they had not made that decision by the close of business on May 7th, we would have closed the deal by default. What is shocking is they have led us on in good faith through the entire highly complex privatisation process and then turned round and, for reasons that can only be described as political, decided to kick us out because they want to offer the deal to the Turks.?
Public to private
Bulgaria is struggling with economic reforms as it aims to join NATO next year and become a member of the European Union in 2007. The country has not been a hotbed of deal activity since the collapse of the Soviet bloc. United States investment in Bulgaria has amounted to only $290m since 1989, compared with over $7bn invested by US investors in neighbouring Hungary during the same period.
The government that took power in July 2001, a coalition between former king Simeon Saxe-Coburg-Gotha and junior partner Ahmed Dogan, the leader of the Turk Movement for Rights and Freedoms (MRF), which represents Bulgaria's ethnic Turkish minority, had promised quick sales of BTC and tobacco monopoly Bulgartabak, whose privatisation was repeatedly delayed by previous administrations.
Cable and telecommunications deals in particular have been gathering steam in Central Europe. However, privatisations are a different story. This type of deal is fraught with political hazards in countries that until recently controlled state monopolies for most industries. In February, the government of the Czech Republic voted to postpone until 2005 the privatisation of its Cesky Telecom asset. The decision followed the collapse late last year of a planned €1.8bn sale of the Czech government's stake to a consortium of Deutsche Bank and Danish incumbent telecom operator TDC A/S.
The proposed deal with Deutsche Bank and TDC was agreed in principle in August last year, but it eventually fell apart after the buyers attempted to renegotiate the price tag for the state's 51 per cent stake in light of the continued fall in telecom valuations.
In March, the Bulgarian government abandoned the €110m sale of its 65 per cent stake in tobacco monopoly Bulgartabak to a Deutsche Bank-led consortium, ostensibly because the bidder disagreed with a provision to boost local tobacco-growing business. Political pressure from the junior coalition partner is widely believed to have been responsible – most of Bulgaria's ethnic Turks grow tobacco.
After the collapse of the tobacco privatisation, champions of reform in Bulgaria pinned their hopes on the sale of BTC. ?This deal is exceptionally important for Bulgaria's relations with investors and multinational institutions,? Valeri Dimitrov, the head of the Bulgarian parliament's economic committee, told Reuters in April. ?After Bulgartabak, all eyes are on BTC. We just have to complete it.?
A previous attempt to sell BTC during the upturn in the telecommunications market in 2000 to a Dutch-Greek consortium failed when bids disappointed in terms of price.
The latest tender for BTC similarly failed to attract major European operators, and ministers held a heated debate over whether to ask the bidders to improve their offers, to accept one of the existing bids or to abandon the tender altogether. Opposition parties, the media and trade unions in particular slammed the Advent bid as too low.
Nonetheless, Bulgaria's Privatisation Agency named Advent as a bidder in the running in June 2002.
Advent's winning bid for BTC, which serves 38 per cent of a country of eight million, was €45.48 per share, topping the €42.2 per share offer from the all-Turkish consortium. Both groups pledged to inject an additional €50m into the company and to invest a further €400m over the next five years.
While the Turkish consortium's offer for the 65 per cent stake amounted to only €185m, the group promised fewer staff cuts than Advent, proposing to reduce BTC's staff to 20,530 in three years from about 24,800.
In order to sweeten the deal, Advent softened its initial plans to slash BTC's staff to 16,000 in three years, revising the target to 18,300 in four years. It also pledged to invest €45m in social programs and an additional €700m of investment over five years.
But talks were suspended in December when Bulgaria's opposition United Democratic Forces lodged five charges of breach of law in the sell-off procedure with the state prosecutor's office, saying Advent's bid was too low and ?did not meet legal requirements for a transparent and economically effective privatisation.?
The prosecutor's office suspended the sale on the grounds of ?preventing a crime involving the abuse of office,? but in January, the office approved the sale and Advent signed a draft contract with the Bulgarian government on March 21. ?We won that case, and it was thereby established we were a legitimate bidder,? James says. ?In a sense, it strengthened our position.?
But the victory did not last. Advent had predicated its purchase on a number of conditions. Foremost among these was the requirement that the Bulgarian Parliament pass a new telecommunications law intended to regulate the telecommunications sector once BTC loses its landline monopoly in January.
Then, in April, citing a procedural breach in the privatisation process, the Turkish consortium reentered the picture, requesting new talks with the government on the BTC sale.
?We no longer believe the BTC tender process is fair and transparent,? Koc Information Technologies Group President Ali Y. Koc told a news conference. Koc, the head of the Turkish consortium, said the Privatisation Agency's talks with the preferred buyer had exceeded a 50-day negotiation period in violation of the privatisation procedure.
Koc said the Turkish consortium had attracted US private equity giant The Carlyle Group as a partner for the BTC deal. ?We are expecting to be invited to negotiations. We firmly believe that we will be offering much better conditions on technical, strategic and social aspects than the current [Advent] offer that is being negotiated,? Koc said.
In response, Advent issued a statement saying, ?such attempts for interference in the procedure were unacceptable for normal business ethics.?
Advent's chances were further damaged when trade unions, unhappy with Advent's plans for job cuts, said they would stage protests, while Transport and Telecommunications Minister Plamen Petrov reiterated that the terms agreed with Advent were unfavorable for Bulgaria.
Petrov also said he would insist that an as-yet-unspecified dividend from BTC's 2002 net profit of levs 199m ($110.6m) be allocated fully to the state. Advent insisted it get 65 per cent of the due dividend.
Koc termed Advent's position on the dividend as ?unjustifiable and unrealistic? given the fact that BTC had been stateowned throughout the whole of 2002.
?When the bids were made in September, it was clearly defined that no dividends would be allocated before the privatisation of the company,? Advent said in a statement. ?The international investors? would not understand the Bulgarian government making such a major change to the agreement at such a late stage.?
Bulgaria fails a test
Western business leaders take a dim view of Advent's experience in Bulgaria. ?The BTC sale is a test case for US investors. I want to underline, a serious test,? US Ambassador to Sofia James Pardew said in a statement published in Bulgaria's Trud daily. ?Advent participated and won the BTC tender, which everyone believes was fair and transparent. We believe the completion of a deal with Advent is of a strategic importance. It would show that US companies could come here and make good business.?
?We have been in contact with the US embassy, and they've been extremely helpful in helping us get access to certain people within the government,? James says. ?They have also been quite outspoken on their own behalf that it was very important for the government to stick to the legitimate process. Unfortunately, they have ignored that, and I think they will come to regret it.?
The International Monetary Fund, with which the Bulgarian government signed a two-year $300m deal in late 2001, also urged the government to reassure foreign investors it is able to deliver on pledges to complete long-delayed privatisation of state assets. ?We think it's very important that the government complete the privatisation of state-owned enterprises,? IMF mission chief for Bulgaria Jerald Schiff told reporters upon arrival in Sofia. ?It's important to? make it clear to investors everywhere that the government is able to carry through on its intentions.?
Advent's only remaining option was call in the lawyers. And indeed, in mid-May the firm confirmed its intentention to take legal action in the Bulgarian courts to invalidate the agency's decision.
The question arises ? even if Advent does secure the asset, would it then want to operate in a market that is has found difficult to trust? Many predict that the line of communication between vendor and buyer has been irreperably cut.