Government Seeks Long-Term Growth for Key Telecoms

The Latvian government is actively engaged in charting a future course for two of its major technology companies, SIA “TET” and SIA “Latvijas Mobilais Telefons” (LMT). Discussions are ongoing with the Swedish company “Telia,” a key shareholder in both entities, to determine the optimal path forward.The overarching goal is to enhance the long-term value and regional leadership of these companies.

Economy Minister Viktors valainis emphasized the importance of these strategic decisions, stating that the government envisions a future where TET and LMT are valued in the billions and are dominant players in the Baltic region. This vision necessitates careful consideration and collaboration between the shareholders.

We want the value of companies to grow in the long run so that the value can be measured in several billion in years, and they are regional leaders.

Viktors Valainis, Economy Minister

Navigating Shareholder Dynamics

The government is keen to ensure that any future scenarios for TET and LMT are not reliant on state budget funding. Instead,the focus is on fostering an environment where the companies can thrive independently and increase their market share. Prime Minister Evika Siliņa highlighted the need for consensus with Telia, emphasizing that premature speculation could jeopardize ongoing negotiations.

Siliņa also addressed rumors regarding potential investments from second-pillar pension funds, clarifying that such proposals are not currently under consideration. the government’s priority is to find a mutually agreeable solution that benefits all stakeholders and strengthens the competitiveness of TET and LMT.

So at the moment, some decisions that may not, possibly have the consent of Telia, are speculation, so we publicly have to think about the signals we are broadcasting in Telia, because we are in a very active negotiating phase and they are very following this other business partner.

Evika Siliņa, Prime Minister

Breaking from the Past: A need for Modernization

A key driver for this strategic review is the recognition that the existing shareholder agreements, dating back to the 1990s, are no longer adequate for the current market landscape. Both the Latvian government and Telia acknowledge the need for change and are committed to finding a forward-looking solution.

The government’s objective is to create a clear and sustainable future for TET and LMT,enabling them to expand their market presence and solidify their position in the Latvian telecommunications sector. This includes exploring various options,with no possibilities currently excluded from consideration.

As the digital landscape evolves, with global 5G subscriptions projected to reach 1.9 billion by the end of 2025 (according to Ericsson’s Mobility Report),the modernization of TET and LMT is crucial for Latvia to remain competitive in the global market. The outcome of these negotiations will have a notable impact on the future of telecommunications in the region.

Addressing Unofficial Scenarios

Minister Valainis dismissed publicly discussed scenarios involving the redemption of TET and LMT shares as “third-party scenarios” that are not aligned with Latvia’s strategic objectives. he reiterated that all options remain on the table, and discussions with Telia are ongoing to reach a mutually beneficial agreement.

The government anticipates presenting a formal position to Telia in the near future, aiming to resolve the remaining unanswered questions and pave the way for a definitive agreement. The focus remains on ensuring the long-term success and competitiveness of TET and LMT in the evolving telecommunications market.

Government Prioritizes Defense, Health, and Demographics Amidst Budget Considerations

The Latvian government is carefully weighing its options regarding strategic investments, particularly concerning state-owned companies. Prime Minister Siliņa emphasized the need for a balanced and prudent approach, highlighting the government’s reluctance to commit budget funds without a clear understanding of potential outcomes.

Siliņa stated that the current challenges facing Latvia necessitate a focus on defense,healthcare,and demographic issues. The government is actively seeking innovative solutions and appropriate strategies to address these critical areas.

We understand that the challenges that Latvia currently have on the table will not be this scenario – we need to find the means for defense and visible health, program funding, including the issue that will definitely be resolved – demographics.

Prime Minister Siliņa

Exploring Opportunities for State-Owned companies on the Stock Exchange

A key aspect of Latvia’s strategic vision involves increasing the presence of state-owned companies on the stock exchange. This initiative aims to attract private capital,providing opportunities for both legal entities and individual citizens to invest in the nation’s capital companies. The Prime Minister believes this approach could benefit both strategic and other state-owned enterprises.

This move aligns with a broader trend of governments leveraging capital markets to bolster state-owned enterprises. Such as, in Estonia, the partial privatization of energy company Eesti energia through an IPO has been discussed as a way to fund renewable energy projects and modernize infrastructure.

Telia Negotiations: A Delicate Balancing Act

Negotiations with Telia, a Swedish telecommunications company, are ongoing. The government acknowledges receiving a counterview from Telia and is committed to continuing discussions. Prime Minister Siliņa urged caution regarding publicly available information, noting that not all reports accurately reflect the ongoing dialogue between Telia and the government.

Minister of Economics Valainis stressed the importance of considering both Latvia’s and Telia’s interests during the negotiations. He emphasized the need to find a mutually beneficial outcome that addresses the current disadvantages faced by both parties.

Not only Latvia’s interests have to be clearly defined, but also listening to Telia’s interests.

Minister of Economics Valainis

Valainis also cautioned against third-party interference, suggesting that some entities may be attempting to exploit the situation for their own gain. He described these efforts as perhaps indicative of “raiderism,” where third parties seek to acquire benefits or opportunities that rightfully belong to the primary partners.

Clarity and Confidentiality in Negotiations

Both the Latvian government and Telia are maintaining confidentiality regarding the details of the negotiations due to the commercially sensitive nature of the information. However, Latvia has expressed its desire to strengthen its participation in the involved companies.

While unofficial sources suggest that the redemption value of LMT and TET could reach approximately EUR 550-600 million, Minister Valainis dismissed publicly announced figures as speculation circulated by market participants and stakeholders. He emphasized that the government is relying on calculations provided by consultants, including those engaged by Telia.

The Minister reiterated that it is premature to discuss specific numbers or redemption processes, given the ongoing nature of the negotiations and the presence of numerous stakeholders with vested interests.

Navigating the Future of Latvian Telecommunications

Following the Cabinet of Ministers’ authorization in December 2024, the Ministry of Economy (EM) is weighing options to purchase Telia’s shares in “TET” and LMT. While initial proposals for Telia to further develop LMT and TET are reportedly off the table, the focus has shifted to how Latvia can best reclaim these assets.

Two Primary Acquisition Scenarios Emerge

Sources suggest two main paths are under consideration, each with its own set of implications for the country’s finances and control over its telecommunications infrastructure.

Scenario 1: State-Led acquisition

The first scenario involves the state directly acquiring Telia’s shares through major state-owned enterprises like “Latvijas Valsts meži” and “Latvenergo.” This approach could require a ample investment, potentially including up to €200 million from the state budget. While Prime Minister Evika Siliņa has expressed a desire to avoid dipping into the government’s coffers, the Ministry of Finance’s stance on this option remains unclear.

If this path is chosen,a unified LMT and TET entity would likely be overseen by a state-controlled capital company,possibly managed by the EM’s “Public Active Board” Posessor,which already controls 51% of TET and 5% of LMT. the long-term vision could involve preparing the combined entity for an initial public offering (IPO) on the stock exchange.

Initially, the unified company would likely continue managing the optical network infrastructure currently owned by TET. The JSC “Latvian State Radio and Television Center” (LVRTC) is also poised to assume management of the country’s critical information and communication technologies (ICT) infrastructure.

Scenario 2: Special Purpose Vehicle (SPV) Acquisition

The alternative scenario proposes establishing a Special Purpose Vehicle (SPV) to acquire LMT and TET from Telia. This SPV would be funded through investments from commercial banks, second-pillar pension funds, and the issuance of bonds worth approximately €200 million, attracting additional investors. Under this model, ownership of the unified company would be shared between the state and the SPV.

The Ministry of Transport (SM) reportedly favors this approach.However,some politicians are hesitant about direct participation of Latvian entrepreneurs in managing LMT and TET through the SPV. Previously,Jānis Tallijs,co-owner and chairman of the board of computer network equipment manufacturer SIA “Mikrotīkls,” has expressed interest,with representatives from “Draugiem Group” also mentioned as potential investors.

In this scenario, the LVRTC would likely acquire TET’s optical network infrastructure, while Latvenergo’s subsidiary, “Sadales tīkls,” is reportedly interested in acquiring the engineering system design and construction company “CITRUS SOLUTIONS” Ltd.

The Broader Context: A history of Negotiations

The current deliberations are the culmination of extensive negotiations between the Latvian state and Telia, exploring various options ranging from merging TET and LMT to maintaining the status quo.The possibility of acquiring both companies entirely or partially, as well as separating individual assets, has also been considered.

The complexities of the existing TET and LMT management structure have been a point of contention, hindering agreement between the Latvian state and Telia.

Implications for Latvia’s Digital Future

The outcome of these negotiations will have a profound impact on Latvia’s telecommunications landscape. A state-led acquisition could ensure greater control over critical infrastructure, while an SPV approach could foster private sector innovation and investment. The government’s decision will need to carefully balance these competing priorities to secure Latvia’s digital future.

“The decision on Telia’s stake is crucial for the future of Latvia’s digital economy.”
An expert from the Latvian Ministry of Economy

Latvian Telecom Landscape: A Complex Web of Ownership

The Latvian telecommunications sector is characterized by a complex interplay of ownership between the state and international entities, specifically Telia. This intricate structure influences strategic decision-making and potential restructuring scenarios involving key players like TET and LMT.

Key Players: TET and LMT

At the heart of the discussion are two major telecommunications companies: TET and LMT. TET’s ownership is divided between the Latvian state (51%) and Telia’s subsidiary, Tilts Communications (49%). LMT, on the other hand, sees Telia and its subsidiaries (Sonera Holding) holding 49%, the Latvian state via LVRTC and Possessor holding 28% and 5% respectively, and Tet owning 23%.

The Question of Control: State Influence vs. Shareholding

While Telia’s theoretical shareholding in LMT might appear significant (60.3%), the Latvian state effectively maintains decisive control due to its majority stake in TET. This control has, at times, reportedly hindered strategic decisions requiring consensus, highlighting the delicate balance of power within the sector.

Proposed Restructuring: A Shifting Landscape

Telia initially proposed a restructuring scenario involving LMT acquiring TET’s telecommunications business, which would then be spun off into a separate entity (“Tet telco”). This plan included special dividends for existing TET shareholders and Telia divesting its 49% stake in TET. An initial public offering (IPO) of 20% or more of LMT shares was also suggested, with both major shareholders selling portions of their holdings. This proposal aimed to streamline operations and potentially unlock value.

State Response: Hesitation and Alternatives

While public officials have remained largely silent on the specifics of Telia’s proposal, they have reportedly rejected the possibility of the state selling its shares.This stance underscores the government’s commitment to maintaining a strong presence in the telecommunications sector, deemed crucial for national interests.

Alternative Strategies: Exploring Synergies

Instead of a complete sale, alternative strategies are being explored. The LVRTC has expressed interest in financially supporting TET or its optical network infrastructure. LMT President Juris Binde has also voiced support for LMT potentially acquiring TET’s customer portfolio. Conversely, Uldis Tatarčuks, Chairman of the Board of Tet, previously suggested that TET could acquire parts of LMT. These discussions indicate a willingness to explore synergistic opportunities within the existing framework.

Financial Performance: A Comparative Analysis

Examining the financial performance of TET and LMT provides valuable context. In 2023,the Tet Group reported a turnover of EUR 295.753 million, a 9.5% decrease from the previous year, with profits declining by 40.1% to EUR 15.226 million. TET’s own turnover was EUR 187.204 million, a 19.1% decrease,and profit fell by 21.1% to EUR 18.987 million.

In contrast, the LMT Group demonstrated stronger performance in 2023, with a turnover of EUR 310.269 million, a 6.7% increase, and profits rising by 0.6% to EUR 32.069 million. The parent company’s turnover was EUR 175.062 million,a 5.9% increase, and profit increased by 20.6% to EUR 34.864 million.

Preliminary data suggests that the LMT Group continued its positive trajectory in 2024, with a turnover of EUR 309.6 million (a 0.5% increase) and an EBITDA of EUR 93.6 million (a 3.9% increase). However, TET’s 2024 performance data remains unpublished, creating uncertainty about its current financial standing.

Implications and Future Outlook

The future of the Latvian telecommunications sector hinges on the strategic decisions made by the state and Telia. The complex ownership structure necessitates careful consideration of all stakeholders’ interests. Whether through restructuring, strategic partnerships, or other innovative approaches, the goal is to foster a competitive and sustainable telecommunications environment that benefits both businesses and consumers.