Connecting CEE to the rest of the world

The telecom, media and technology (TMT) sector in CEE has experienced significant growth over the past five years despite the financial crisis and economic downturn in many countries in the region. Having put in place considerable communication infrastructure, such as mobile networks and broadband capacity, TMT companies have been able to reap the benefit of changes in consumer and corporate behaviour.

By Pieter Puijpe, Global Head of Telecom, Media & Technology at ING

 

New products such as smartphones and tablets have resulted in fundamental growth in consumer demand for data capacity and mobility needs. The result has been exponential growth in mobile and broadband use in CEE.

Sustained investment over the past decade in CEE means that many countries in the region now have a mobile telecom infrastructure that can match the best in Western Europe. However, as in other parts of the world geography plays a major role in determining broadband speed and access to mobile connectivity. For example, sparsely populated areas have different technology infrastructure requirements and some developing markets may not have legacy infrastructure to build on. Despite the diverse operating environment across CEE, there are countries with shared characteristics. For example, Poland, the Czech Republic, Slovakia and Russia have highly developed mobile markets.

 

Consolidation trends

One of the trends in the TMT sector in recent years has been consolidation. Although there are instances of regional consolidation, the majority continues to occur at country level. Consolidation now also takes place across sectors, with cable, mobile and fixed-line assets being combined to enable companies to offer a more integrated product offer (often described as triple/quadruple play).

Increasingly, consolidation involving media companies – previously mostly a separate business – is occurring with telecoms and other companies seeking content to exploit their infrastructure assets and customer bases. Meanwhile large investments continue to be made in network upgrades and connectivity (such as telecom tower infrastructure and fibre backhaul networks). Consolidation at a country level is being facilitated by divestments of larger European incumbents. Many of these companies bought assets in CEE in the 1990s and 2000s and are now selling them to focus on their domestic markets, which have increasingly large investment requirements and have become more competitive. An example is Telefonica which announced plans in October 2013 to sell its stake in Telefónica Czech Republic to streamline operations and cut company debt.

Another prominent example was the acquisition in November 2011 by Polish entrepreneur Zygmunt Solorzak of Polkomtel, the number two mobile operator in Poland in terms of revenue. Vodafone and a number of state-related industrial owners were the sellers. Solorzak owns Polsat, Poland’s number one free-to-air private TV station and Cyfrowy Polsat, the largest DTH satellite platform in Poland, as well as wireless internet network companies. The acquisition was supported by a PLN 14.3 billion financing package which ING refinanced in July 2013 as a mandated lead arranger (MLA) with a PLN 7.95 billion senior secured acquisition bank facility. The facility was provided on a club basis by 17 financial institutions.

 

ING’s deep industry knowledge of TMT – driven by teams in Amsterdam, Frankfurt, New York and Singapore – enables the bank to add value for clients because it understands market dynamics. Moreover, the bank’s expertise gives it the confidence to lend over the long-term despite the risk of disruptive technology in TMT (few predicted the growth of smartphones and tablets five years ago, for example). ING has recently restructured its sector approach and fully integrated its TMT specialists to further align with the companies it services. The bank also offers specialist satellite financing and a broad range of media financing solutions, ranging from the free-to-air television sector to outdoor advertising. ING combines industry knowledge with a broad local presence across CEE, enabling the bank to follow its clients wherever they go.

Financing CEE TMT

MT is a sector with strong underlying fundamentals, including growing demand, strong cash flows and a sticky customer base. Consequently, many borrowers from CEE can potentially access the debt capital markets. Although bank liquidity for TMT borrowers remains strong, disintermediation is an important theme for CEE TMT companies and bond issuance is expected to grow strongly.

ING was joint lead manager and bookrunner for Russian integrated telecoms company VimpelCom’s dual-currency three-tranche USD 2 billion Eurobond offering in February 2013. The deal included the first-ever rouble-denominated Eurobond by a non-state owned corporate and – despite a pricing environment that was not ideal – generated significant oversubscription in both US dollar tranches allowing pricing to tighten compared to the initial guidance. While bond investors are playing an ever-increasing role in TMT financing, term lending and project finance from banks remains essential to finance capital expenditure, for example in greenfield infrastructure development. Despite turbulent conditions in some markets in recent years, TMT has continued to perform strongly as an asset class. With strong liquidity from international banks active in CEE – and extremely strong liquidity in local currencies from domestic banks in Poland, Russia and Turkey – conditions are competitive. As a result pricing has actually fallen over the past five years.