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.