Left: Thierry Baudon, Mid Europa Partners: The game has changed. We are in
phase two of the transition in central and eastern Europe, and the markets are
mature and saturated. Right: Michelle Senecal de Fonseca, EBRD: Across the
region today we have 100% mobile penetration but fixed line services have not have
the same infrastructure investment 

 

 
 
 
 
 
The game has changed in central and eastern Europe, say two of the industry’s leading investors.
Thierry Baudon, managing partner in Mid Europa Partners — which has invested in companies such as Orange in Austria and Slovakia, Bité in Lithuania and Connex in Romania — says that the mobile industry is about to enter a period of consolidation which will see the giants taking over from private equity investors.
Michelle Senecal de Fonseca, vice president at the European Bank for Reconstruction and Development and the bank’s director for telecommunications, believes there is still a role for investors — but her focus is shifting from mobile investments to wireless broadband projects such as WiMax.
Meanwhile Baudon — a former EBRD senior executive — believes the opportunity for private equity in central and eastern Europe is on such projects as cable television, as they can also deliver broadband internet.
Both, though, are agreed that the last few years’ investment in mobile in the region has been successful. Penetration is high. Now, the emphasis is shifting to broadband services, either wired through cable networks or delivered wirelessly through WiMax and similar technologies.
EBRD, set up after the Communism collapsed across central and eastern Europe in a bid by the western economies to fund investment through free-market finance, is owned by 31 countries and two intergovernment institutions, one of which is the European Union.
“We’ve had 20 years of transition going on in this region,” says Senecal de Fonseca. EBRD’s focus ranges from central Europe to central Asia, from the Czech Republic to Mongolia. “Across the region today we have 100% mobile penetration in most of the countries.” 
 
 
Fixed investment
 
But fixed penetration is only 23-26% on average, she says. “Fixed line services have not have the same infrastructure investment,” says Senecal de Fonseca, a former US West and Sprint executive who joined EBRD in 2007. “Only only 17% of fixed lines are in rural areas. If you’re not in a major metropolitan area you don’t get access.”
That’s where EBRD comes in. “The remit of the bank is that we’re trying to support the emergence of the economy.” Telecommunications infrastructure is critical to the development of people in these countries.
EBRD has €21 billion of capital available. It works with the major participants in the capital markets for project funding and operates on normal commercial principles.
Different models for investment are required than are common in the west, says Senecal de Fonseca, but central and eastern Europe shares a competitive advantage over other emerging markets: a high literacy rate.
“There is still a lot of investment needed to get good telecommunications infrastructure,” she adds. “The main opportunities are in broadband — and broadband via mobile.” In addition, there’s as need for backhaul networks for mobile and for services such as mobile payment.
“Other areas we’re interested in are IT services” using the skills that are available in the region, as well as data centres. “We’re talking about near-shoring and offshoring,” says Senecal de Fonseca, an American who come to Europe in 1996 when Sprint set up its Global One partnership and stayed to work for a number of telecoms companies including WorldPort, where she was CFO, and NextiraOne, where she was VP for corporate development.
Though educational standards are high in central and eastern Europe, “we need to have continued investment in the training of individuals”, she adds.
It’s largely an evangelical role she has in EBRD. “What does the country need? You have to go out and look for people.”
Projects that EBRD finance include helping governments set up licensing structure for WiMax services or for a second fixed operator. “We also help with privatisations,” says Senecal de Fonseca. And, though 80% of EBRD’s work is with the private sector, “almost everybody has a minority government shareholding”.
 
 
Competitive market
 
Many countries are now developing a more competitive market, with second and possibly third mobile licences being offered, and moves towards 4G services. But she doesn’t see much opportunity for consolidation in the mobile business in the region: “Most of the markets have two or three operators and are stable. However we might see share ownership changing.”
There is a clear opportunity for consolidation in cable TV, though, especially as they start to compete with incumbent operators to offer telephony — and link up with mobile operators and internet service providers.
Wireless broadband services such as WiMax offer hope for bringing internet access to regions that are underserved at the moment, says Senecal de Fonseca.
“Most activity is in Russia,” she says, where EBRD has invested in a private-sector WiMax operator, Enforta. “There is a lot of private equity money going into WiMax.” Enforta plans to have service in 93 cities across Russia by the end of 2010. Apart from EBRD, other investors include Sumitomo, Baring Vostok Private Equity Fund, Bessemer Venture Partners and UFG Private Equity.
EBRD is not wedded to WiMax: “We’re technology agnostic at the bank,” she points out. And the choice of technology depends on regulations country by country.
To illustrate the point, the bank has invested in Datacell, a broadband wireless project in Azerbaijan that uses iBurst technology, made by Korean company Kyocera. Nevertheless LTE still has some way to go before it can compete.
EBRD takes a long term view of its investments: as a bank backed by so many countries, it can afford to do that, even though it follows commercial rules. “We give loans for two or three years longer than commercial banks, and we hold investments for five to 10 years or longer,” says Senecal de Fonseca. “Most private equity likes to exit in three or four years. We have a much longer viewpoint.”
And that’s where Mid Europa Partners comes in. The private equity investor dates back a decade, having been set up by people who were in the start-up team at EBRD 10 years before. Telecoms was one of the drivers, says Baudon. “It became clear that a few sectors would attract the bulk of foreign direct investment in the first decade — and telecoms was one of them.” It had been neglected by the commercial sector.
 
 
Pension funds
 
Mid Europa started with €500 million to invest and now has close to €4 billion of money from pension funds, insurance companies, sovereign wealth funds and other sources.
“From 1999 for eight years we invested in six mobile telephone operators,” says Baudon. Some of those have now been sold: Vodafone acquired Connex in Romania and Oskar in the Czech Republic in 2005 for a sum said at the time to be €2.6 billion.
“We’re still in T-Mobile in the Czech Republic and in Orange in Austria,” says Baudon. Indeed, Mid Europa is the majority owner of Orange Austria, licensing the brand from France Telecom. “The global operator gives us the keys to run it more effectively. We get the economy of scale and the branding, but we also get the nimbleness.”
Baudon’s company still owns Bité, “number two in Lithuania and number three in Latvia”. Other investments include Invitel, Hungary’s number two fixed-line operator, and the broadcasting towers in the Czech Republic.
“We tend to focus on the new EU member states,” says Baudon. This is an area which “is still growing 2-3% above the western European average, and sometimes 4-5% above”. But he sees Mid Europa’s time in the region’s mobile industry as coming to an end.
“It has served us well,” he says. “We are coming out without any casualties. But in 2010 the game has changed. We are in phase two of the transition in central and eastern Europe, and the markets are getting mature and saturated.”
Now, markets in Poland, the Czech Republic, Slovakia, Slovenia and other countries have increasing ARPU and churn is rising. They are, he suggests, becoming just like any mobile market in western Europe.
But for mobile and fixed operators “it is getting difficult to operate as an independent entity”, says Baudon, an engineer who went on to study economics and finance at the Sorbonne.
Important factors now include branding as a consumer service — “It’s no longer a technology play,” he says — as well as the economies of scale, particularly because of the impact of mobile data. As a result, “we are seeing the last years of private involvement in mobile telephony”, he says.
The market will consolidate into a handful of brands: Baudon believes the merger of the UK operations of Orange and T-Mobile sets a precedent for other countries. “In central Europe we are about to see the same thing happening. The number of operators will decline. In Austria there are five operators for nine million people. It doesn’t take a PhD in telecoms to see what will happen.”
 
 
Private equity
 
Private equity investors will probably be pushed out in this process of consolidation, he fears, though he thinks that “private equity is ideally placed to manage the integration”, partly because they can take a neutral view when two large operators come together.
Ultimately, the European market will be dominated by O2, Orange, T-Mobile and Vodafone, with little room for anyone else. So, where will private equity investors put their money next?
“Cable is still very fragmented,” says Baudon, who knows the market well, from a spell after EBRD with French utility group Suez. “There are still economies of scale to be had.”
At the same time, though, the technology is getting cheaper “and this helps midsize operators to survive, so the push for cable consolidation is less”.
Cable can compete where eastern European incumbents have missed out — on delivering broadband, he says. “I would have expected the incumbents to dominate with ADSL and win the fight.” But cable operators are already offering 100 megabit services, “and the incumbents cannot match that”.
This means “there is still a role for private equity” in cable, especially as “they can sell four products to customers instead of just one”, he says: TV, broadband internet, VoIP telephony and an MVNO too.
And the first of these is less susceptible to downturns, he notes. “The cable industry is still a good bet because it’s more entertainment, and the share of people’s disposable income that goes into entertainment is increasing as the urban middle class is getting broader and richer.” GTB