Hedge funds and Private Equity - PES

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There are three countries where there is experience with PEF takeovers of incumbent telecom
operators. Ireland historically has had a relatively inefficient telecom infrastructure and was
hoping that privatisation would stimulate significant improvement. Denmark has always had one
of Europe’s leading telecom infrastructures. As a still developing country, Bulgaria’s telecom
infrastructure needs major investment in network development. More detailed information about
developments in these countries is provided in the Annex of this report dedicated to Case
studies.
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The three country case studies of private equity involvement in the infrastructure providers in the
telecom sector in Europe suggest the following:
1) private equity ownership can be attracted to incumbent telecom operators that are efficient
(Denmark), inefficient (Ireland), and still in need of fundamental reform and network development
(Bulgaria);
2) private equity ownership is not likely to foster a demonstrable efficiency improvement in a relatively
inefficient operator, the network modernisation and expansion needed in a still
developing country, or the maintenance of the leadership of one of Europe’s most efficient
operators (Denmark);
3) long term investment in network development is not an evident priority of the private equity
owners of the operators in any of the countries. Short-term gains from cash payouts and profitably
turning around their investments are the priority;
4) the levels of debt left with the companies after the leverage buyout severely constrains long
term investment capabilities for the future, and are incompatible with efficient long term investment;
5) private equity ownership is an exercise in disinvestment, the removal of capital, not new investment
in growth and development;
6) the management of the utilities may be presented with a serious conflict of interest. Their
personal rewards are greatest if they engage in inefficient practices to build cash and cashable
assets that will invite private equity owners, facilitate the takeover and share in the very
substantial payouts. In some circumstances, this could be a violation of their fiduciary responsibilities
to the original public stockholders.