Crises seem to be blossoming all over Europe. From Dominque Strauss-Kahn in France to financial crises in Greece, Spain, Ireland, and now Italy, the whole continent seems caught up in turmoil. In particular, however, one issue that caught my eye (and that has, perhaps, more far-reaching implications than l'affaire DSK) is happening right now in Paris, and is one that the investment community needs to pay special attention to.
It appears that while French officials fiddle away, France Telecom (FTE.PA), the country's largest telecommunications company, has seen its investment in Telekomunikacja Polska SA (TPSA, or Polish Telecom, TPSA.WA) turn quickly into a $950 million liability. Between $770 million owed to or set aside for former joint venture partner Danish Polish Telecommunications Group (DPTG, a unit of Denmark's headset and hearing aid-maker GN Store Nord (GN.CO)) and $182 million in fines just levied by the European Commission, Poland's TPSA has become a very embarrassing -- and very costly -- France Telecom subsidiary.
Most recently, Fitch Ratings, an independent international agency providing issuer and bond ratings, just issued a financial outlook release on TPSA, citing the company's "material contingency risks," like the DPTG liability, as a primary reason for the agency's decision to keep the company at a "stable" BBB+ rating, rather than positively upgrading their financial outlook. The Fitch report notes that "there is little evidence so far that TP[SA]'s fixed business is being sustainably turned around..."
How did this happen? A former state-owned monopoly and now Poland's largest telecommunications operator, TPSA has an $8 billion market capitalization, annual revenues over $5 billion and is profitable, even with a provision for its substantial liability to DPTG. In June the company was found by the European Commission to have run afoul of E.U. anti-monopoly rules. TPSA was found to be abusing its dominant position to keep competitors out of the marketplace between 2005 and 2009, resulting in a hefty EUR 127 million ($182 million) fine for the company.
According to E.U. Competition Commissioner Joaquin Almunia, "This case shows our determination to ensure that dominant telecom operators do not systematically hinder competitors who can make a real difference in the market to the benefit of consumers and businesses."
Initially, France Telecom's subsidiary took a defiant tone, announcing that they would challenge the fine, with one analyst, Pawel Puchalski, stating that the fine was "higher than I expected and constitutes decisively bad news for TPSA for many reasons."
TPSA's initial defiance in the face of the recent E.U. sanctions matched their response to claims by Denmark's DPTG, awarded by a Vienna arbitration panel, over the interpretation of a 1991 agreement between DPTG and TPSA's predecessor. The arguments relate to the calculation of revenue relating to the fiber connection built and installed by DPTG for the Polish company.
At the time, DPTG helped finance what became the core of the Polish telecommunications infrastructure, a system linking the Baltic coast to the south of Poland, known as the North-South Link. It was a big risk for DPTG to invest in the burgeoning Polish economy at the time, and though the deal worked fine for a while, Polish Telecom eventually stopped sending checks, which led to the current conflict. DPTG claimed TPSA had trimmed its share of the profits by hundreds of millions of Euros. The arbitration panel in Vienna, which was the agreed-upon venue for settlement of disputes between the parties, agreed.
This pattern of arrogance against two regulatory bodies (the European Commission and the Austrian arbitration panel) suggests that TPSA's executives (or, perhaps more accurately, TPSA's French leadership) believe they are above criticism, calling the Austrian arbitration award illegitimate and "violates the principles of public policy in Poland," whatever that means. TPSA refused to play by the rules, and, when faulted, refused to take responsibility for their actions.
TPSA and corporate parent France Telecom now appear to face more E.C. claims from other market participants seeking compensation for the company's behavior between 2005 and 2009. And GN has already filed for an additional phase-two claim of EUR 320 million.
A few days ago, in the face of this financial iceberg, TPSA signaled a dramatic shift in its position towards these fines and obligations. In a major turnaround, TPSA president Maciej Witucki, who's just been elected for another three year term, acknowledged that a "settlement [with the Danes] will one day be needed." He added that, even if TPSA succeeds in convincing Polish courts not to enforce the Austrian ruling against them, it "does not cancel the decision of the arbitrators in Vienna. It will remain an important decision and DPTG will be able to take action outside of Poland."
It's been further reported that TPSA will now create a provision to cover the European Commission' fine on top of a reserve created earlier this year to cover the Austrian arbitration ruling on DPTG's first claim.
With Poland now at the helm of the E.U., one would hope its leading companies would follow the rules of law and good corporate behavior in dealings with cross-border business relationships.
Former Clinton administration official, U.S. economist and Chairman of the Council for European Investment Security Dr. Robert J. Shapiro put it bluntly in a Warsaw Business Journal article published this spring:
When a country's leaders dismiss the norms of international finance and commerce, the transfers that produced the rapid growth and income gains of the last decade will usually flow or even stop. Consider Argentina, where FDI [foreign direct investment] inflows fell by two-thirds after Buenos Aires stifled its foreign lenders for tens of billions of dollars and ignored court orders around the world to pay up.
The markets in France have begun to take notice as well. Deminor, a Paris-based shareholder advocacy group, has made France Telecom's management of TPSA's case a priority issue, questioning executives at a recent shareholder meeting and calling on the AMF, France's securities regulator, to investigate France Telecom's failure to adequately disclose its Polish subsidiary's growing liabilities.
The French government, which owns 29 percent of France Telecom, is no stranger to such commercial intrigue. The recent Bettencourt Affair, which linked the French Minister of Finance to Liliane Bettencourt, the heiress of the L'Oreal cosmetics empire (one of France's largest employers and taxpayers), in a tax evasion scandal significantly harmed the Sarkozy government.
It's well and good for French President Nicolas Sarkozy to call for what he calls "moral capitalism," but his words would carry a bit more weight with investors if government-owned entities followed his principles in their actions.
As for the TPSA controversy, this is a great opportunity for France, Sarkozy and France Telecom to direct their Polish subsidiary to own up to its responsibilities. And responsibility sometimes carries a price in hard currency.
Follow Hilary Kramer on Twitter: www.twitter.com/@HilaryKramer
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This situation, according to Hilary Kramer, is the afore-mentioned law breaking by Polish Telecom and non-observing of international standards tolerated by Prime Minister Donald Tusk and President Nicolas Sarkozy.
The motion related with TP rating issued by Fitch stands as the best conclusion of Hilary Kramer’s intentions, and simultaneously the best example of her manipulations. According to the author because of the dispute with DPTG and fine declared by the European Committee, Fitch was given the Polish Telecom rating on an unchanged level, and it could even raise it! You don’t need to be a stock exchange analyst to see that if the agency did not lower the rating of the company, despite the possible perspective of paying several hundred million Euro, then this proves both the good financial condition of our company, as well as the fact that these payments are not exaggerated.
Hence the unchangeably stable rating granted by an independent agency, the 10 percent increase in the value of exchange rate of Polish Telecom shares observed from the moment when arbiters declared their decision, as well as suspension of the proceedings in the case by the court in Poland, can stand as the best proof confirming that Hilary Kramer is certainly not acting to the benefit of the market and facts.
Wojciech Jabczyński
Spokesman of TP Group
I would like to provide some more information about the situation that is allegedly “tolerated” by Poland and France. In August 2010, after 9 years, the Arbitrage Tribunal in Vienna has issued his decision on the dispute between Polish Telecom and DPTG concerning controversial due amounts registered in the contract concluded in 1991. For nine years arbiters were unable to interpret the discrepancies, hence they divided the questionable period of 15 years into two parts and they issued a decision constituting… an arithmetic average of claims reported by Polish Telecom and DPTG. The “method” of calculation obviously favours the Danes – it may be proved by the fact that claims filed by DPTG were doubled as the second stage of the dispute. This decision (it all indicates that it was also settled n the basis of average calculations of the sides) is to be issued in 2013. Since DPTG was granted a value that was 20 times higher than the questioned amount, Polish Telecom did not agree with the decision issued by arbiters from the very beginning, and by defending its rights, the company applied to common courts in Austria and Poland. The court in Poland has just suspended its proceedings and the assignment of an enforceability clause for the decision of arbiters until the court in Vienna shall settle the case. Decision of the Arbitrage Tribunal has no legal power in Poland.
I appreciate the “activity” of Hilary Kramer, as well as her interest in Polish Telecom, therefore I deplore that she never contacted us, and did not response to all our attempts to contact her. This is the major proof confirming her biased approach to the problem, or it may be even a purposeful action aimed at Polish Telecom.
What is significant is the fact that readers of Huffington Post are not perceived as addressees of this new content. Hilary Kramer constantly repeats already known arguments: she believes that the court dispute between telecommunications operator and the Danish company, which no longer provides its services, stands as the main threat for investment attractiveness of Poland (by the way: Poland has just been acknowledged by UNCTAD UN agenda as the sixth most attractive state to conduct investment among all countries worldwide), she calls Polish and French governments to deal with the case (stock exchange analyst and investment advisor believes that it is appropriate for the governments of these both states to focus on the dispute conducted by a public company, not to mention that the issue is currently being heard by two independent courts!), she accuses Polish Telecom of breaking the law, she compares this situation to tax affairs in France, and compares Polish as well as French prime ministers to Hugo Chavez and Alexander Lukashenko.
As an investment advisor and a manager of a consulting company, she has sent a letter to the Polish ambassador in the United States of America, warning about fatal outcomes for Polish economy resulting from actions undertaken by Polish Telecom. As a columnist, she published two texts on Internet sites of Forbes magazine that were entirely devoted to Polish Telecom and DPTG. Finally, being an expert on international markets, she participated in a conference organised by a fictional CEIS (Council for European Investment Security) lobbying organisation devoted to Poland, and to be more precise … to the dispute between Polish Telecom and DPTG.
What also seems non-accidental is the quotation of the text by Robert J. Shapiro, the President of CEIS. For the last several months he devoted much of his time and work to Poland and Polish Telecom. Apart from organising two conferences on our company, the organisation also published a “report” on investments in Poland, and Polish Telecom is the only Polish company mentioned in this text. The whole report covers 19 pages and our company is mentioned 35 times, mainly in the contest of the dispute with DPTG and negative economic consequences of the above. Polish media have unanimously considered R. Shapiro as a lobbyist of the Danish side and boycotted all his attempts to exist in media.
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The article by Hilary Kramer presents our the company Polish Telecom (TP SA), in an unfair and completely untrue light. Readers have unintentionally become the recipients of the contents that are not an objective, description of the issue elaborated by a professional journalist, but a presentation of arguments prepared by the person engaged in a dispute on one of its sides.
I truly believe that the demanding readers of such an opinion-forming medium deserve a full image of the situation and the point of view of the other side. Especially when the published information is untrue, just as in case of accusations against Polish Telecom related with breaking the law at the time when the case is still being examined by the court and no valid sentence has been stated, and the court in Poland has just suspended the proceedings within the scope of which the Danish side applied for granting legal power to the decision made by arbiters.
Hilary Kramer has been undertaking these kinds of actions against Polish Telecom for almost a year now, quite often presenting information interpreted as convergent with the arguments proposed by the Danish side. The reader should be aware of the fact that Hilary Kramer plays numerous roles in this whole case.