How should one judge whether the privatisation of government’s controlling stake in Maltacom has been a success, a failure or somewhere in
between?
I propose adopting three criteria for conducting such an analysis,
i.e. strategy, process and price. And
in so doing one could benchmark Maltacom’s privatisation to that of Mid-Med Bank’s sale to HSBC which by
all these measures has been a categorical failure.
From a strategy point of view one should examine whether it made
sense to privatise Maltacom
at all. I am against the privatisation of monopolies or strong dominant positions
unless the privatisation itself involves the opening
up of the market to further competition.
Maltacom’s strong dominance in the market relates to its fixed line network
which is a declining business as it gets replaced by mobile telephony. Fixed line infrastructure is in fact being
adopted to service data transmission where Maltacom
has to compete with cable TV operators that can also offer such services. Maltacom’s
monopoly over the international gateway for overseas telephony is now consigned
to history as the international gateway has been liberalised and international telephony is now available at
extremely cheap rates or indeed for free through the internet’s
VOIP.
In mobile telephony Maltacom was a late
entrant after Vodafone had a practical monopoly for
over a decade. The fact that Maltacom has gained a sizeable market share in the space of
a few years is a credit to its management.
The duopoly that exists in mobile telephony has not led to oppressive
pricing for the consumer and new suppliers are free to offer additional
competition if they consider the necessary investment worth their
while.
From a strategy point of view there was no evident reason why the
privatisation should have been avoided especially as
Maltacom is in full competition with private sector
suppliers who operate without the administrative weight of public sector
bureaucracy. Maltacom needed to be freed from this disadvantage if it is
to compete on fair basis. Furthermore
the sector is well regulated to ensure that unavoidable dominant positions
caused by our market size are not abused of to the detriment of the consumer.
The continuous investment needed to keep refreshing the technology
justified the
linkage of the privatisation to a strategic partner capable of investing substantial funds in the
business over and above those needed to pay for the privatisation price.
We have been told that Lm30 million would be so invested and we have to
assume that this will be new money invested by the new owners and not by using
Maltacom’s own existent
liquidity.
From a strategy point of view Maltacom’s
privatisation
made sense, much more than the privatisation of
Mid-Med Bank to HSBC which effectively reduced competition in the market through
the eventual absorption of the former operation of Midland
Bank.
The process for Maltacom’s privatisation has been clear, fair and transparent. The process was widely advertised,
interested parties were offered every facility to join the bidding process and
the decision making process has not given rise to any claims of unfair
selection. The bid selected was
reportedly the highest one available even though it came in below the trading
price of the free float of the minority shareholding that trades on the Malta
Stock Exchange.
It has been a refreshing change from the opaque manner in which
Mid-Med Bank was sold to HSBC without any bidding through private negotiations
between the Minister and the acquirer.
Whereas in Maltacom’s case government engaged
the services of internationally renowned investment banks to advise it in the
negotiations, in Mid-Med Bank’s case the Minister boasted of acting unilaterally
without feeling the need to seek reliable professional
advice.
So on the process criterion Maltacom scores very
high marks compared to the zero which is the only appropriate mark that could be
given to the process adopted for the sale of Mid-Med Bank.
Having given a comfortable pass mark to Maltacom’s privatisation on the
criteria of strategy and process how does it rank on the price criterion? When I criticised the poor price obtained by government on the sale
of Mid-Med Bank I had argued that this was the direct result of the poor process
that lacked all elements of competitive bidding. This was certainly not the case in Maltacom’s process.
So the first implication ought to be that once the process was
correct, than the price outcome was consequently equally correct, once the
highest bidder was chosen.
Yet this argumentation is tempered by the fact that whilst Mid-Med
Bank sale was concluded at a 7% premium on the last market price before the sale
was announced, the price for Maltacom was at a
substantial discount to the last trading price. Such comparisons are however unfair. Whereas the market price of Mid-Med Bank
shares in no way reflected the efficiency gains expected from privatisation as effectively the privatisation was conducted behind everybody’s back, the
share price of Maltacom in the free float quotation on
the Malta Stock Exchange included substantial premium for such expected
efficiency gains as the privatisation process was
public knowledge. So much so that even
after the announcement of the privatisation price the
market price of Maltacom’s shares continued to trade
at a substantial premium to such privatisation
price.
This does not however completely convince me that from a price point
of view we should not have done better, I would say considerably better. The argument that the price of Lm1.55 per
share is at a slight premium to international valuation of similar companies
based on profitability criteria, indicates that no premium was included in the
price to take into account the substantial assets that not essential to the
company’s profitability.
The most obvious candidate here is the substantial liquidity of Maltacom including substantial cash balances and
receivables. Should not these have
been distributed to present shareholders before the share transfer was concluded
at a price that was not arrived by asset valuation but by discounting future
profitability? Should other assets,
not essential for the company’s core business, including some valuable real
estate, have been sold before the privatisation and
profits there from distributed before executing the share
transfer?
So in conclusion, whilst a much better affair then the privatisation of Mid-Med Bank, Maltacom’s privatisation has its
own blemishes too.
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