BELARUS NEWS AND ANALYSIS

DATE:

03/10/2007

Telekom Austria Bets On "Outpost Of Tyranny"

Vidya Ram,

LONDON - Telekom Austria has made a point of venturing into markets that have few players, and while going into a so-called outpost of tyranny might pose some risks, the strategy could pay off.

On Wednesday the company announced it would be moving into the largely untapped telecommunications market of Belarus by acquiring a 70% stake in MDC, one of the country's largest mobile phone operators, for 730 million euros ($1.0 billion). Austria Telekom also has an option to buy the remaining stake for 320 million euros ($453.7 million) in 2010.

Telekom Austria's share price rose by 45 euro cents (64 cents), or 2.4%, to 19.25 euros ($27.29) in morning trading in Vienna.

The purchase price is 5.9 times MDC's current annual earnings, and is considered a low price by analysts. That helps offset the risks involved in entering the Belarusian market, where growth opportunities come at the cost of considerable political risk.

The country's authoritarian regime, headed by President Alexander Lukashenko, has been accused of human rights violations, and was named by U.S. secretary of state Conoleeza Rice as one of the six "outposts of tyranny" in the world.

There are three main telecom operators in the country, including a Russian telecom operator, a state-controlled firm, and MDC, which has 2.7 million customers. The market is expected to see rapid growth over the next decade.

"The acquisition of MDC is the consistent execution of our strategy for profitable growth in Eastern and south Eastern Europe," said Chief Executive Boris Nemsic. "It offers us an entry to the attractive telecommunications market in Belarus, while the terms of the transaction once again underline our disciplined approach to expansion."

However, things aren't as rosy as they may appear, Dresdner Kleinwort analyst Georgios Ierodiaconou told Forbes.com. While the low purchase price means Telekom Austria (other-otc: TKAGY - news - people ) is taking less of a risk, the company may have to pay MDC's former owners a share of the revenues from 2010, if it hauls in big profits.

The acquisition is also slightly out of step with Telekom Austria's strategy of concentrating on south Eastern European countries like Slovenia, Croatia and Bulgaria.

In April the company said it was setting aside 4.1 billion euros ($5.8 billion) to be split between new acquisitions and a share buy back in the next three years. Analysts had been expecting the next purchase to be made in Bosnia Herzegovina. Ierodiaconou said he still expected the Bosnian acquisition to be made, though possibly at a later date than had been expected.

International ventures account for a growing part of Telekom Austria's portfolio, a strategy that has been welcomed by analysts. Stiff competition within Western Europe and regulatory pressures -- including cuts on the charges that mobile phone companies can levy for calls made from abroad -- have weighed on the performance of telecom companies. Recently France Telecom (nyse: FTE - news - people ) entered Austria's home territory with the acquisition of mobile phone operator One in a move that was seen as a blow to Telekom Austria.

Source:

http://www.forbes.com/markets/2007/10/03/belarus-telekom-austria-markets-equity-cx_vr_1003markets07.html