In 1993, the Hungarian government, intoxicated with Western economics, resolved on two major telecommunications moves. One was to invite bids for the privatisation of national communications corporation Matav (67% were sold to a company owned by Deutsche Telekom and the US Ameritech). The other was to bring in local telecommunications operators, not necessarily the national telecommunications corporation.
Matav, which also tendered a bid, retained concessions for twenty nine districts, for Budapest, the capital, for inter-regional communications and for international telecommunications. Matav lost in 14 out of the 21 districts in which it competed as an independent entity, and now operates 35 districts. The only partnership it formed was with Bezeq and Poalim Investments, in three districts. Another successful Israeli bidder was the partnership between Giltek and Tal Cables.
In 1997, when business looked promising, there were annexed to the two original Digitel 2002 districts neighbouring on Budapest the two CGE districts of the south (Deltav), and the Matel (Magyar Telecom) company was formed. Giltek’s 37.5% of Digitel 2002 became 7.85% in Matel. Giltek acquired the share of Tal Cables, and was left as the sole Israeli member of the group.
Closing the gap with Matav
The Matel company today is the second largest operator in Hungary, with some 225,000 working lines. The entire country has 3 million lines, and Matav (including AmiTEL), has 2.4 million lines. There are four independent companies, which together hold 30% of the market.
"Matel's strategic target", explains the company’s CEO, formerly in charge of privatisation procedures at the Hungarian Treasury, "is to remain the second operator and to close the gap with Matav, inter alia by swallowing up the other competitors. Another aim is to compete under the tender expected to be issued this year for a third cellular operator in Hungary, using GSM technology. Preparations are being handled by Yair Segal, who co-ordinated the work in Israel on behalf of Discount Investments in relation to the cellular tender won by Cellcom, and the international telecommunications tender almost won by Dolphin.
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Hungary has two cellular operators. One is Westel, owned in equal shares by Matav and US West of the USA, which also operates both an analog and a GSM network. The other is Pannon, owned by Teledenmark, Dutch and Norwegian communications firms and a Hungarian firm, which operates a GSM network. The tender conditions are due to be published next month, including the distribution of ownership percentages between the foreign and the Hungarian companies. Thereupon, Matel’s owners will start putting together the consortium that is to compete. At present, they are examining offers by infrastructure manufacturers such as Nokia, Ericsson, Siemens and Alcatel. Motorola also wanted in, but was rejected out of hand, due to its involvement in the set up of Hungary’s Tetra network, the European equivalent of MIRS.
Matel’s owners are:
- CGSAT, (Compagnie Generale de Services et d’Applications de Telecommunications) a subsidiary of the French CGE (Compagnie Generale des Eaux), with 39.92%;
- GE Capital investment fund of the United States, with 25.26%;
- ACT, a subsidiary of Giltek International, with 7.85%;
- Austria’s Raiffeisen group with 7.3%;
- Frances’s GCDD with 7.2%;
- Chase Manhattan Bank of the United States with 6.9%;
- Bancroft group of the United States with 3.4%;
- Budapest Hungarian Bank with 2.04%;
- The local authorities in the concession areas with 4.2%.
Giltek has an option to increase its holdings in Matel to 10.1% as the expense of CGSAT’s shares, at an agreed price, by January 2001.
Matel still has no other partners in the group competing in the cellular tender, but there are lots of options: GE has a partnership with SBC of the United States, Britain’s BT and Germany’s Mannesman in the French cellular company SFR, and also in communications companies for inland and international telephony which were recently formed in France. Other potential partners are Britain’s Vodaphone and the US Airtouch, which were recently awarded, jointly with CGE, a tender for a second cellular operator in Egypt.
Another Israeli holding senior office in Matel is Gabby Gavish, formerly of Giltek and Digitel 2002. "At the end of 1995, we took over operations in two districts from Matav. There were 25,000 working lines, of which 5,000 were hooked up through manual telephone exchanges. There was a commitment to the Ministry of Communications to set up at least 42,000 lines in 1996", Gavish relates. "Nobody believed it but we finished the year with a network of 45,000 new lines".
How do you market lines in Hungary?
Gavish: I can tell you how we marketed them. We installed a line, free of charge, for anyone who would consent. He was given a telephone and could make and receive outgoing and incoming calls to emergency services only. Three months later, if he hadn’t signed a contract, we repossessed the telephone. People are in no hurry to give up existing lines. The method proved itself. We have 35% penetration. The highest rate in Hungary, except inside Budapest".
What about value added services?
"In 1997, we introduced ISDN on the Internet, data communications and wireless telephony by Europe’s DECT method. In ISDN we provide a base of 128 kb and for big companies we provide a PRA line, which is a line of 2 mgb, a connection for 30 ISDN lines".
Do Hungarian regulations leave you any rope?
"Each operator may do anything in the field of communications, but only in his own district, and that includes cable television. We intend to go into that this year. Matav, too, is going into cable TV in its districts only next year. We will provide the services on the same optic fibre infrastructure that we laid for telephony services. There is sufficient capacity".
And telephony via the Internet?
"It is permitted, but we do not want to annoy the government, which still owns the international calls company, and calls on the Internet will bypass it. This is because of the argument over the Interconnect".
How much does Matav collect from you for the Interconnect?
"30% to 25% of revenues. About three times as much as other European countries. Which means that our profit potential is far larger".
$400 million have so far been invested in the set up and operation of Matel. Of that amount, one third ($132 million) consists of shareholders’ equity, one third of loans from the East Europe Development Bank and one third from operations. A first operating profit is expected in mid-1999, net of financing costs and before tax. In 1997, group revenues reached $62.7 million. Operating profit before financing expenses came to $25 million. Giltek itself invested in the Hungarian project up to $10 million.
To the question of when and how the shareholders will see money, Giltek joint CEO Rami Barash replied, "Either from a dividend or from disposal. There is still no definite dividend policy".
Gavish, who currently reports to Matel rather than to Giltek, is much more definite. "Shareholders will not see dividends in the next ten years. We intend to be a second operator, and everything will therefore be invested in development".
A company that is already earning, however, is Giltek Hungary, almost wholly (95%) owned by Giltek International, and which executes Giltek’s traditional work of setting communication networks. The company was founded in 1996, to meet the commitments of Digitel 2002 and Deltav . but in the second half of 1997, it started to work for other concerns such as Matav and also AmiTEL, for which it laid the main channel of the optic fibre system. Today, the company has agreement with Digitel 2002 and Deltav for setting up 18,000 lines, laying 150,000 km of optic fibres, and maintaining some 50,000 public lines and telephones in the two companies.
In 1997, Giltek Hungary had a turnover of $10 million and earned $1.5 million. but the company has ambitions to expand and consolidate itself in the Hungarian market and to enter into other fields of communications in Hungary and elsewhere. "Communications infrastructures in Hungary are still in the initial stages, and since we have a good name and a great deal of experience, from Israel and Brazil, we feel we have business here for many years to come", Rami Barash concludes.
Updating the business plan
A far less optimistic view is taken by AmiTEL’s Israeli manager, Yoel Harel (formerly IDF’s Chief Signals and Electronics Officer). AmiTEL is a partnership between Matav (50%) and Aphrodite of the Netherlands in which Bezeq holds 66.6% and Poalim Investments 33.3%. The Bezeq holding in AmiTEL is 33.3% and that of Poalim Investments 16.6%.
In 1994, AmiTEL won a tender for the establishment and operation of a telephony network in three districts of south Hungary, following a link-up between Bezeq and Matav. Later on, Poalim Investments assumed one third of Bezeq’s investments and holdings in the project. So far, the company has set up just over 80,000 new lines, while the business plan spoke of 110,000 lines by the end of 1997.
Even though it did not meet its original target, AmiTEL earned $300,000 in the first quarter of 1998, following a loss of $3.5 million in 1997. Harel expects profits to increase due to easier financing terms, and notes that even in April, the company earned $200,000.
By the end of 1997, $60 million had been invested in the set up of the networks, and of that amount, $15 million was invested by Bezeq and Poalim Investments. Harel estimates that a further $15 million investment will be required over the next three years, in order to introduce into the company sophisticated services such as ISDN, Internet access, and advanced data communications, in anticipation of the Hungarian telephony market being opened up to full competition in year 2002.
Although AmiTEL has not lost in the past year, such results will probably not satisfy a company like Bezeq after four years in Hungary. Yoel Harel says "When I first came here in September 1994, I said the business plan was pretentious and not feasible in the region allotted to AmiTEL. It could, perhaps, have been put into effect in Israel. We therefore update it annually. It is now clear that its target of 100,000 lines will not be achieved. At most, if the economic situation greatly improves, we may reach 90,000 lines. This is not bad in itself, but it is not what the business plan intended".
Why do Bezeq and Poalim Investments need holdings in AmiTEL?
"The economic consideration is an important one, but there is another aspect. AmiTEL today is a leader in the economic relationship between Hungary and Israel. It constitutes an example and a guarantee for the entry of Israeli companies into Hungary".
The author was a guest of Giltek Communications in Hungary.
Published by Israel's Business Arena June 24, 1998