Polish Court Blocks Deutsche Telekom's Purchase of PTC Stake

The French media conglomerate, Vivendi, won its appeal against the sale of the disputed 48% stake in Poland's number-two mobile operator, PTC. The Warsaw District Court issued an injunction blocking the sale of PTC shares to Deutsche Telekom by the national power conglomerate, Elektrim, which took place in July last year. The German telco, which had already owned a direct 49% stake in PTC, exercised its call option on the PTC shares following a ruling by the Arbitration Court in Vienna in November 2004, which validated the move.

The Warsaw District Court's injunction obliged Elektrim to restore four representatives of Elektrim Telekomunikacja (ET), its joint venture with Vivendi, as members of PTC's supervisory board with voting rights at shareholder meetings. ET is 51%-owned by Vivendi, which will restore the French company's shareholder rights. The injunction also forbids Elektrim from any negotiations with Deutsche Telekom regarding a final sales price for PTC shares. However, Deutsche Telekom claims that its call option does not require it to negotiate with Elektrim as the terms of the option were established when Elektrim and the German telco drew up the company charter. Deutsche Telekom, which claims that it had the legal right to exercise its call option to acquire the 48% stake in PTC from Elektrim last year, as validated by the Vienna Arbitration Court, may file an appeal against the injunction. The ruling of the Vienna Arbitration Court was questioned by the Polish Supreme Court in January this year when it ordered that the lower courts in Poland should consider whether the Vienna Arbitration Court had the right to investigate the case and whether it has jurisdiction over the territory of Poland.

Elektrim, in turn, is claiming an additional payment from Deutsche Telekom for the disputed 48% stake. It expects the Vienna Arbitration Court to rule on the case in June this year (see Poland: 23 March 2007: Elektrim Counts on Additional Payment For PTC Stake From Deutsche Telekom). Separately, Elektrim has filed a lawsuit against Vivendi with a court in Warsaw, alleging that the French company is responsible for its financial loss on the sale of the disputed 48% in PTC to Deutsche Telekom and is claiming 2.2 billion euro in damages. Elektrim blames Vivendi for a delayed implementation of the Vienna ruling, which in turn postponed the initial payment from Deutsche Telekom, thus precipitating the power conglomerate’s financial loss. Vivendi, in turn, wrote down its PTC assets by 496 million euro, which affected its end-2006 net profit. This indicates that Vivendi has readjusted the value of its ET stake. In June last year, Vivendi valued its ET stake at 4.9 billion zloty (US$1.7 billion). In September last year, Vivendi was willing to accept 2.5 billion euro from Deutsche Telekom as the dispute settlement, an offer that was, however, rejected by the German telco.

Outlook and Implications

The move signals yet another turnaround in the eight-year ownership dispute over the 48% stake in PTC as Vivendi has not given up the fight for its rights to PTC shares. The French company expects to re-establish its ET joint venture with Elektrim as the legal owner of the 48% stake in PTC as soon as May 2007. According to the Polish shareholder register, Elektrim currently remains the owner of the 48% stake, while Deutsche Telekom is still awaiting to be registered, an option that may be now overturned. This would mark a victory for Vivendi, which owns 51% of ET, as it has been seeking justice in its rift with Elektrim. Earlier this month, Vivendi said that it was planning to launch a legal suit against Deutsche Telekom under U.S. jurisdiction, alleging that the German telecoms group colluded with its Polish partner, Elektrim, to steal its PTC shares, wiping out Vivendi's US$2.5-billion investment. Already in 2006, Vivendi sued the German telco in the federal district court in Seattle (U.S.) under the Racketeer Influenced and Corrupt Organizations (RICO) Act, which is designed to combat organised crime (see Poland: 2 March 2007: Vivendi Accuses Deutsche Telekom of Stealing Its PTC Shares in U.S. Court). Vivendi claims that it purchased its 51% stake in ET for US$2.5 billion in 1999 solely on the basis of ET's ownership of PTC shares, which were transferred to ET by Elektrim.

The court's injunction puts Deutsche Telekom's control of PTC in doubt and may effectively overturn its purchase of the disputed stake. After a down-payment of 2.45 billion zloty (US$797 million) to Elektrim in October last year, the German telco has already started to consolidate its 97% stake in PTC in its balance sheet from November 2006 (see Poland: 23 October 2006: Deutsche Telekom Deposits PTC Call-Option Payment to Elektrim with Court). The company has retained management control of the cellco, but wisely withheld from any strategic moves involving extra capital expenditure, like the rebranding of PTC into T-Mobile, amid several unresolved lawsuits from Vivendi (see Poland: 1 February 2007: Deutsche Telekom Delays PTC Rebranding as T-Mobile). Deutsche Telekom obtained recognition of the Vienna Arbitration Court ruling under Polish law from the District Court in Warsaw in February 2005. It then enabled the German telco to place its executives on PTC's management and supervisory board, exercising effective operational control over PTC. The mobile operator posted 7.02 billion zloty in revenue in 2006, with earnings before interest, tax, depreciation and amortisation (EBITDA) at 2.2 billion zloty and net profit at 753 million zloty. Deutsche Telekom, however, booked 380 million zloty in net loss from PTC, which affected its bottom line, which may include the costs of its purchase of the 48% stake last year. According to Deutsche Telekom, total costs of the takeover amounted to 1.6 billion euro, of which 600 million zloty has already been paid to Elektrim. Deutsche Telekom's ownership of the disputed 48% stake in PTC is now in the hands of the lower courts in Poland, which are expected to rule on the validity of the Vienna Arbitration Court's ruling.