Written by: John Letzing

Even as they pick the last bits of the country’s privatized economy off the auction block, German investors show no sign of losing interest.

Telecom indigestionGerman interests have been tripping over themselves to move further into the Czech telecom market. Although the buyer vying for the purchase of Czech Telecom is a consortium (Deutsche Bank/TDC), Deutsche Bank controls the money. “(TDC) has an option to buy a stake in the future based on performance,” says Jan Schiesser, Chief Analyst at Atlantik Finanční Trh. Much has been made of the government’s failure to sell when the market was booming a few years ago, leaving them to settle for a much lower price under current conditions. Schiesser calls the failure to sell at a better time “the biggest mistake in the last four or five years.” Yet he adds that “the company is very strong. There was no need to sell it.” But others point to an urgency less financial in nature. John Gole, telecom analyst with IDC, says of the sale: “there were huge reasons to get the deal done and to create a transparent and fair telecom environment. [The government] had an independent regulator, but it still controlled the leading operator and the leading mobile operator (Eurotel). And so it had the ability to influence the market…whether or not the government really was doing anything of that nature, the structure of the market created the impression that that was happening.” Negotiations for the sale have been protracted, not least due to the fact that Deutsche Bank, through its stake in České radiokomunikace, is already a significant shareholder in mobile operator T-Mobile, the chief opponent to its intended new investment, Eurotel. Above and beyond mobile, says Gole, there remains the problem of having stakes in fixed-line carriers and possible future competitors Contactel and České radiokomunikace. Deutsche Bank is expected to sell Eurotel to a major European player soon after purchase, which would take care of one conflict of interest. Still, according to National Property Fund spokesperson Lucie Králová, it must obtain a purchase permit from the Antimonopoly Authority in order to complete the deal. As for Contactel, it may well be absorbed by a division of Czech Telecom. Spokespeople for Deutsche Bank declined to comment on any details.

KEEP THE SUSHI bars and golf courses coming. The more at home the Japanese have felt in the Czech Republic, the more likely that country’s financial interest has become. Of course, it’s not only added creature comforts that are bringing a surge of investors from the Far East. CzechInvest, the government agency responsible for supporting international investment, has lately made a strong push in Asia – with two offices opened there in the last three years (Japan and Hong Kong). A surge in greenfield development has resulted, the highlight being a commitment made by Toyota together with Peugeot/Citroe¨n to build a plant in Kolín. The flurry of Asian activity has led some to speculate on the future of the country’s traditional powerhouse foreign investor: Germany. “German influence is still relatively strong,” says Martin Jahn, CEO of CzechInvest, “though they don’t have the dominance they have had in the past.”
Statistics of late seem to belie Jahn’s claim. But what has propped up the German numbers is a large-scale shopping trip through the country’s most attractive bits of privatized infrastructure. German firm RWE settled on a premium price for the country’s gas sector (Transgas and distributors) of EUR 4.1 billion (CZK 133 billion), and thus became the second-biggest pipeline operator in Europe. This caused the total amount of German foreign direct investment for the first half of 2002 to balloon to an extraordinary 4.47 billion Euros, some 75% of the total from all countries. Apart from the purchase of gas, German investment compared to Asian was EUR 370 million to EUR 106 million. And the greenfield investment by Toyota with Peugeot/Citroe¨n, at EUR 1.5 billion, should further level the interests of Asia and Germany by the end of this year.
Utilities are only one piece of the Czech privatization pie that is just now offering up its sweetest pieces; Telecom seems the next to go. Monopoly operator Czech Telecom, too, has a German suitor in Deutsche Bank. Though negotiations have seemed drawn-out, leading many to speculate that Deutsche Bank is pressuring the government to lower its already considerably low price (EUR 1.82 billion for a 51% stake), others point out that the extremely complicated nature of the deal could alone account for a delay.
Interestingly, all of this good news about German money flooding the country comes on the heels of consistently incongruent bad news regarding the German economy. Chronic problems with unemployment there seem to bode pressure to keep investment and jobs inside of the borders. Not the case, says Andreas Schaefer, of the Czech German Chamber of Commerce, who adds: “Most (German) politicians realize that when a company invests abroad, it helps save jobs in Germany.” Oftentimes, an inexpensive plant in the Czech Republic may be the only thing keeping its German cousin afloat.
In terms of telecommunications, news from Germany has also been grim. Deutsche Telekom, parent of local mobile operator T-Mobile, now sits under a frightful mountain of debt – some EUR 66.2 billion. But analysts say that Czech T-Mobile is both too small and too profitable to be subject to a major strategy shift. “They (Deutsche Telekom) can solve the debt issue, and there are various options for doing so,” says Frank Wellendorf, an analyst with West LB Panmure in Germany. In fact, Wellendorf notes, should a further stake in the Czech market become available, DT may well be interested. “My guess is DT would not force it in the current phase,” he says, “but if one of the shareholders (in T-Mobile) wanted to sell at a reasonable price, Deutsche Telekom would not hesitate very long.”

Martin Jahn

Indeed, all bets are on Germany’s interest in the Czech economy to grow dramatically in the near future. Even with little left to pick up through privatization, existing investments will likely swell. The key factor is imminent EU entry, slated for 2004. As part of its annual survey, the Czech German Chamber of Commerce recently asked members how EU entry would affect their presence here. Schaefer says that, “by a wide margin, companies said they will increase it.” This is due mainly to diminishing concerns about legal stability. As Schaefer observes, “the Czech Republic in the EU means that the rule of law will be enforced.” This economic development means that the fates of the two nations will become more solidly intertwined, perhaps more so than any others in Europe – Germany now accounts for a dramatic 36% of all Czech foreign trade. This is perhaps an unlikely formula for two countries with a mutual history checkered by animosity and mistrust.
As German investment becomes even more commonplace, there is hope that not only historical mistrust but also some inimical flaws will fade away. Chief among them, claim many observers, is a tendency among Germans to try too hard not be stereotypically imperious managers. The effort to be low-key and unobtrusive, says Deloitte & Touche partner and analyst Pavel Stehlík, can be a detriment: “they do not act like German occupiers…and as a result they lose a lot of opportunities. They could make changes a lot faster than they do.” Andreas Schaefer agrees, but is quick to point out one sensitive area where this behavior works best – in the media. Nearly all of the Czech news media, including national leading dailies, are German-owned. Yet as a rule, the foreign investors steer clear of day-to-day management decisions. And that, says Schaefer, makes everybody more comfortable.

Auto industry shifting gears Since being bought by Volkswagen in the early 1990s, Škoda Auto has more than doubled sales to roughly 450 thousand cars annually. With the release of the Superb last year, company PR gushed that a return of luxury sedans created a direct link to the firm’s glory days in the ’30s and ’40s. The reverie was interrupted by a cold dose of corporate reality in October of this year. VW Chairman Bernd Pischetsrieder made no secret that VW’s new strategy, adopted in light of weak results of late, would involve a deeper differentiating amongst the family’s brands. Škoda, along with Seat, will now be marketed more clearly as a low-end car, while VW and Audi will be pushed as executive-class models. The main problem seems to have been that Škoda, once a laughable little product from the East, was cannibalizing VW’s own sales. Communication is likely clear between Škoda director Vratislav Kulhánek and his German board of directors, and the VW head office in Germany. So why are different people saying different things in public? Jaroslav Černý, spokesman for Škoda Auto, denies Škoda has been cutting in on its owners’ sales. “We draw our customers not from VW, but from outside of the concern,” says Černý. But evidence overwhelmingly indicates otherwise. “It’s really been reflected that VW is quite concerned about substitution – they’re looking to reduce that level of cannibalization,” says Tim Armstrong, auto analyst for eastern Europe with Global Insight. “There is a shift in long term strategy for Škoda – they’re looking at reducing its up-market potential, making sure that VW is clearly higher.” The local team can’t be happy about being handed the ignominious title of low-end producer – especially when a hint of class had just been restored to the Škoda name. The unusually sleek Škoda Superb thus will be discontinued after 2008. Černý claims that it’s an open question as far as what will happen then, but for now, it looks as though Škoda must swallow a bitter pill and fulfill its role, as Armstrong puts it, of producing “value for money, good quality but nothing excessive.”

 

Buying into banking Burhard Dallosh The final privatization round of Czech banks featured one striking anomaly: where were the Germans? For a group that, in terms of foreign investment, seems to have fingers in just about everything else, it seemed odd it should sit back while Belgian, French and Austrian players snapped up the biggest retail banks in the land (ČSOB, Komerční banka and Česká spořitelna, respectively). “It’s safe to say,” according to Jan Slabý, analyst at Wood & Company, that Germans missed out. Part of the answer may lie in troubles that German banks have experienced at home. Competition there is fierce and draining, and the environment overdue for consolidation. And as Burkhard Dallosch, general manager of Commerzbank explains, the German market can provide enough room for significant domestic expansion, pending that consolidation. Belgium and Austria on the other hand, says Dallosch, “have had their consolidation already…that’s one reason they are looking abroad.” Costs were also taken into consideration on the part of German banks. “The prices that have been paid for banks, in our opinion, are too high to be justified if you have other possibilities for growth. The cost in reshaping the institutions must have been considerable as well,” says Dallosch. Still, cracking the retail market is something almost all banks here are now trying to do, as wages and general financial awareness grows – Commerzbank included. It will simply have to do so independently.

 

Tapping into utilities Petr Stehlík It raised eyebrows last winter when German utility company RWE stepped up and handed the Czech government a very handsome sum for Transgas – some CZK 133 billion. RWE spokesman Andreas Brabeck calls it “a reasonable price.” Deloitte & Touche partner and analyst Pavel Stehlík agrees, citing the acquisition as a sound bit of strategy. According to Stehlík, who handled consultation with Transgas during pre-privatization: “the acquisition of the Czech gas sector was critical (for RWE) for two reasons – first, closing the gap in size, and second, growing their gas business, because they were much stronger in energy than in gas. It was important to have a second leg as big as their first one. And the last thing is it was important for them that they got access to Russian contracts.” Having those contracts will enable RWE to better manage risk, allowing it to opt for gas from either Russia or its former supply in the North Sea. Additionally, the fact that RWE supplies the city of Prague with energy through its stake in PRE creates interesting opportunities for gas/electricity synergy. When it comes to investing in utilities, says Stehlík, Germans now have a definite advantage. Enron’s implosion refocused the attentions of American firms on internal issues, Spanish firms were hit hard by troubles in Latin America, and Electricité de France has become far less aggressive of late. That’s left Italians and Germans. And when it comes to dealing with major utilities so close to their borders, Germans don’t like to give much ground. As Stehlík notes in regard to the prospect of a German firm (be it E.On or RWE) buying energy producer ČEZ, which may come up for sale within the next few years: “(it) is either bought by Germans, or bought by others who will use it to attract the German market. So the interest of German companies, if it isn’t in buying it, must be not to allow anyone else to buy it.”