In recent years, I wrote various articles covering developments at Forthnet and the wider Greek telecoms market due to Go’s indirect investment in Forthnet via the holding company Forgendo Ltd.

Forgendo is equally owned by Go plc and Emirates International Telecommunications Malta Ltd (EITL) – Go’s majority shareholder.

In my most recent articles on the subject in August 2013 and March 2014, I had explained a number of changes in Forthnet’s shareholding structure and the importance of following developments closely due to the inevitable consolidation that needs to take place in the Greek telecoms market.

Go and EITL commenced investing in Forthnet in 2008 and they purchased additional shares in the following three years.

However, as a result of the very challenging economic conditions in Greece arising from the international financial crisis, Forthnet ran into severe financial difficulties largely due to the excessive borrowing that was taken out to acquire the pay TV business which took place shortly after Go and EITL first invested in Forthnet.

The escalating losses at Forthnet led to a significant negative impact on Go’s financial performance with the recognition of ‘share of losses’ and large impairments recognised in 2010 and 2011. The final impairment was taken in 2012 when the Go board of directors decided to fully write-off their investment.

As a result of the financial difficulties, Forthnet required a fresh capital injection and the long-awaited €30 million rights issue took place in December 2013.

On January 3, 2014, Go announced that its board of directors instructed Forgendo to participate in the share capital increase of Forthnet by directly exercising in full its pre-emption rights as an existing shareholder of Forthnet and also exercising its oversubscription rights to the extent required in order to ensure that Forgendo retains control of Forthnet.

Go provided funding to Forgendo for its 50 per cent stake through an interest-free loan of €6 million which may be converted into shares of Forgendo within a 6-month period from January 16, 2014. As such, Go has until July 16 to decide whether it will convert this loan into equity. If Go elects not to exercise this option, EITL shall be obliged to repay the outstanding amount due to Go and Go’s stake in Forgendo and consequently its indirect shareholding in Forthnet will be diluted significantly.

Go and EITL, through Forgendo and another holding company, currently hold just under 45 per cent of the total issued share capital of Forthnet.

During a meeting with financial analysts in March and a few weeks later at the Go annual general meeting, the senior executives of Go indicated that their decision must be based on the latest developments in Greece. Since then, a number of important events took place which should be taken into consideration when a final decision is made in the coming days.

On June 10, Forthnet announced that it was informed about an agreement between two of its shareholders. The announcement explained that Vodafone-Panafon SA (Vodafone Greece) has been granted an option to acquire 14,584,853 shares of Forthnet (equivalent to 13.25 per cent of Forthnet’s issued share capital) currently held by Wind Hellas Telecommunications SA If this option is exercised, the shareholding of Vodafone Greece in Forthnet, coupled with the indirect participation of Vodafone Group plc and its subsidiaries, will increase to 19.75 per cent from 6.51 per cent. Meanwhile, the shareholding of Wind Hellas in Forthnet will decrease to 19.75 per cent.

Moreover, the Greek incumbent operator Hellenic Telecommunications Organisation (OTE) revealed through an announcement via the Athens Stock Exchange that it is in preliminary talks with Forgendo regarding Forthnet’s pay-TV operations. OTE, which is 40 per cent owned by Germany’s Deutsche Telekom and bundles satellite and IPTV-based pay-TV channels with its fixed, broadband and mobile services, explained that “OTE has been developing its pay-TV operations as it believes that pay-TV is an area with growth potential’’.

Forthnet would help OTE grow its TV base rapidly given Forthnet’s customer base amounting to 482,433 connections.

However, a Greek newspaper reported that during OTE’s annual general meeting on June 24, their CEO indirectly confirmed that OTE was considering making a bid for the entirety of Forthnet, rather than just the pay-TV business. The CEO of OTE was also reported to have said that the Greek telecoms market was in need of further consolidation and only two or three robust players were expected to remain in the long term.

A further announcement on July 1 confirmed that OTE submitted a non-binding offer for the acquisition of Forthnet’s pay-TV operations. The announcement revealed that the offer is within a range of €250-€300 million on a debt free/cash free basis. Most local investors would not be accustomed to such terminology. It basically represents the value of the business without debt. The financial statements of Forthnet as at March 31, 2014 indicate total debt of circa €325 million with the majority attributed to the pay-TV business.

These announcements within a short period of time sparked speculation that a bidding war may ensue between OTE and Vodafone Greece/Wind for Forgendo’s sizeable equity stake in Forthnet.

In fact, the share price of Forthnet has been rather volatile in recent months. The equity rallied to a high of €2 at the time of the rights issue when it transpired that the Vodafone Group had been acquiring shares on the market. In fact, Vodafone accumulated a stake of 6.5 per cent of Forthnet.

Based on the recent market price of Forthnet of €1.63 per share, this would imply a gross cash inflow for Go of circa €40 million

After dropping below the €1 level, the recent announcements regarding the cooperation between Vodafone and Wind as well as the interest shown by OTE sent the share price of Forthnet back up to the €1.63 level. At this price, Forthnet’s market capitalisation amounts to €180 million which implies that the shares held indirectly by Go and EITL are currently valued at €80.6 million.

Go’s executives always indicated that Forthnet is an important player in the telecoms industry and the inevitable consolidation could present opportunities to claw back some of the write-offs incurred in previous years.

Although until some time ago I had voiced concern over additional investments in Greece due to the serious financial difficulties faced by Forthnet, given recent circumstances, I now believe that Go should convert their loan into additional equity of Forgendo in order to preserve their shareholding and protect the potential value of the entire investment.

In this way, a potential sale of the shares held by Forgendo to any of the interested parties (whether OTE, Vodafone/WIND or other possible suitors) could represent a significant cash inflow to Go.

A bidding war between OTE, Vodafone/Wind or other possible suitors interested in the Greek telecoms industry is the best scenario for Go and EITL since this will present Forgendo with a unique opportunity to maximise the value of its investment following many painful years.

Based on the recent market price of Forthnet of €1.63 per share, this would imply a gross cash inflow for Go of circa €40 million. While this is substantially below the amount invested over the years, Go shareholders should understand that full recovery is very unlikely to ever materialise, given the financial difficulties and substantial losses incurred by Forthnet to date.

However, this inflow would represent a handsome recovery in the circumstances and could be used by Go to distribute a special dividend to shareholders as well as to finance other investment opportunities.

As a matter of fact, Go recently also announced another international investment in the telecoms industry by acquiring a minority shareholding of a telecom operator in Cyprus, Cablenet Communications Systems Ltd. Go also has an option to acquire majority control in the future.

During Go’s AGM a few weeks ago, Go’s senior executives justified this acquisition by claiming that this decision was taken after they evaluated a number of other local and international investment opportunities to enhance shareholder value. It was also revealed that Cablenet is a profitable company and indications are that this momentum will be sustained in the future. Unfortunately, the extent of the profits being generated together with other pertinent information for analysts and shareholders alike has not been made available.

Furthermore, some of the proceeds from a possible sale of the shares in Forthnet could be utilised to fund an eventual property development initiative. Go owns a portfolio of properties valued at around €50 million held by its fully-owned subsidiary Malta Properties Co. Ltd.

This subsidiary was set up some years ago with the sole purpose of managing the properties independently. Go is currently centralising its technical operations in the Mosta and Żejtun premises thereby freeing other properties from technology. This will enable Go to sell or develop such properties. Go is expected to reveal further details in this respect later on this year or early in 2015.

In a recent meeting with Go’s senior executives, it was revealed that the Sliema and St Paul’s Bay exchanges were identified as the first properties that are likely to be sold in 2016. Additionally, Go could also develop some of the other properties (most notably the previous head office in Marsa) and lease this to one or more tenants. This would translate into a new rental income stream for the Group in the years ahead.

Following the very challenging and disappointing times for Go shareholders in recent years, the fluid situation in the Greek telecoms market and other possible upcoming developments should lead to more rewarding times ahead.

Rizzo, Farrugia & Co. (Stockbrokers) Ltd, “RFC”, is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the company/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. RFC, its directors, the author of this report, other employees or RFC on behalf of its clients, have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent, and may also have other business relationships with the company/s. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither RFC, nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report.

© 2014 Rizzo, Farrugia & Co. (Stock-brokers) Ltd. All rights reserved.

Edward Rizzo is a director at Rizzo Farrugia & Co (Stockbrokers) Ltd.

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