New Phone Company Seeks Polish Connection

In rural Poland, where telephones are rare and telephone service only slowly improving, Netia Telekom SA sees a chance to profit.

Netia, a joint venture between Sweden’s state-owned telecom company and a Polish start-up with shareholders from around the world, is seeking to expand where state-owned Telekomunikacja Polska SA isn’t--in small cities and undeveloped countryside.

The hope of investors in the project, who include Sweden’s Telia AB, a Disney family investment company, the European Bank for Reconstruction and Development, and Dankner Investments Ltd. of Israel, is to become Poland’s second-biggest phone company.

The economic promise of Poland, Eastern Europe’s biggest market and fastest-growing economy, offset the regulatory and bureaucratic barriers that favor state-owned TPSA’s dominant position, they said.

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Netia’s immediate goal is to install 350,000 phone lines at $1,000 each, then eventually double or triple that number, while TPSA races to fill a multimillion telephone line backlog that is keeping Poland far behind average European standards.

“There’s so much demand for telecoms in Poland, TPSA alone cannot satisfy this demand,” said Pierre Ross, a senior banker at the EBRD, which owns 10% of Netia. “As far as the market is concerned . . . it’s not really such a challenge to do better.”

Poland has an average 15 phone lines per 100 people, with the rate in rural areas as low as 5.5, and a waiting list that tops 2 million. A recent government document sets a goal of 50 to 60 lines per 100 people by 2007; TPSA, in its multibillion-dollar investment plan, aims to achieve a rate of 27 by 2000.

Netia officials estimate Poland needs to install 12 million new lines to meet Europe’s average penetration rate of 42 lines per 100 people, a decade-long task at TPSA’s current pace of 500,000 to 600,000 new lines per year.

Netia already breaks the mold of companies fighting for part of Eastern Europe’s phone market.

Rather than limiting operations to one region, Netia approached city governments and individual entrepreneurs to acquire local licenses across Poland. In this way, it has consolidated positions in Southern, Western, Central and Northern regions, with plans to obtain more.

Other local operators have emerged in Poland, but none with the coverage area of Netia.

Netia is so confident in its ability to succeed that it has taken a $180-million loan from a group of banks, led by the EBRD, that it must start repaying in three years. It already is looking for another $150 million, and expects to finance more investment from its own revenue, Ross said.

Shareholders, he added, expect to sell shares in the company on the Warsaw stock exchange and perhaps later in New York after it has a track record of “at least a couple of years.”

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Persuading hundreds of thousands of phoneless Poles to buy, and use, a telephone--no matter who the provider is--may be tougher than Netia envisions.

People may not be able to afford a phone, and if they have one, they may not use it a lot, said Reena Patel, a telecom analyst at Kleinwort Benson Securities in London.

The company’s success also will depend on how quickly Poland opens up competition in long-distance and international services, both of which still are controlled by TPSA, she said.

“The only way you can justify it is that they’re waiting for something,” she said.

That’s exactly what Netia President Jan Guz, a former Polish diplomat and finance ministry advisor, is prepared to do to establish a foothold in the nation’s telecommunications market.

Guz said he expects the government to end TPSA’s long-distance monopoly within two years and its sole franchise on international service by 2003.

“The market is developing quite fast,” Guz said. “What about long-distance in the future? Why not? Who knows about international in the future?

“We are sure we will be a profitable company,” he added. “Of course, it’s not easy to get this profitability.”

Netia, a joint venture of R.P. Telekom and Telia, Sweden’s state-owned phone company, is counting on financial and technical expertise provided by its shareholders.

Polish entrepreneurs began R.P. Telekom six years ago to buy local phone licenses and take advantage of post-Communist changes in the nation’s telecommunications law.

The company lured such international investors as Tel Aviv-based Dankner Investments; Trefoil Capital Investors, a fund set up by Shamrock Holdings Inc., a Walt Disney family company; and Goldman Sachs Group LP, the holding company that owns the U.S. investment bank Goldman Sachs & Co.

The EBRD bought its 10% share of Netia in June. R.P. Telekom owns 65% and Telia owns the remaining 25%. Netia now is developing most of R.P. Telekom’s 12 licensed areas, which include about 6 million of Poland’s 40 million people.

Using Alcatel Alsthom fiber-optic cables, Netia will begin in small Polish cities and build out into rural areas.

“Rural areas in Poland have a dramatically bad telecom situation,” Guz said. “This is not only a bad situation but a very good investment for the future.”

In the next three years, Netia plans to spend $350 million to install 350,000 phone lines, financed largely by the EBRD-led loan and further investments by Telia, EBRD and R.P. Telekom.

Raising additional funds won’t be “too difficult,” and likely will include both debt and equity financing, said Ross, the EBRD banker.

Several problems could limit Netia’s growth. It must secure interconnection agreements with state-owned TPSA, its main rival, for example. Guz conceded there have been “problems” in getting their agreements.

In addition, the government remains committed to keeping TPSA as the nation’s dominant phone company, to earn back the money it has invested in improving and expanding service, said Marek Rusin, Poland’s vice minister of telecommunications.

There are no plans to sell the state-owned company or open it up to additional competition, he added, and competitors must consider the “huge funds” required to build a phone network.

“The money might be a bigger barrier in developing their business than [it is] for TPSA,” he said, “although they claim the opposite.”