(Adds Portfolio.hu viewpoint) Magyar Telekom, the leading Hungarian telecommunications service provider, has announced on Wednesday that it has signed a share purchase agreement to sell its 100% shareholding in Pro-M Zrt. to state-owned National Infocommunications Service Company. MTel did not say what sources the state will use to pay for Pro-M.
As consideration for the equity sale, Pro-M loans from Magyar Telekom and Pro-M’s working capital needs, the total price of the transaction is HUF 19.9 billion. A final breakdown of the total transaction price will be determined at closing, which is expected to take place at the end of August 2012.
Pro-M Zrt. was established by Magyar Telekom and T-Mobile Hungary in 2005 to build out and operate a national Unified Digital Radio Network (EDR) system in Hungary. EDR is a national 380-400MHz band professional mobile radio network used by the emergency services (i.e. the police, fire departments and ambulance services) and other public safety bodies. EDR runs on terrestrial trunked radio (TETRA) technology, the international standard for public safety and security mobile radio communications.
National Infocommunications Service Company Limited by Shares is responsible for operating telecommunications infrastructure in the public sector; it is owned by the Hungarian State.
What impacts will this transaction have on Magyar Telekom?
Pro-M booked annual revenues of over HUF 9 billion over the past years. Almost 99% of that were generated by Unified Digital Radio Communications System (EDR) services.
If the operation of EDR does not remain at Magyar Telekom, we can expect revenues at T-Systems Hungary to be smaller from the coming quarters. Annual evenues of T-Systems Hungary have been around HUF 120 bn over the past few years, disregarding the services Magyar Telekom and Pro-M provided for each other (of which we have no exact information). In view of this, we estimate a nearly HUF 9 bn decline in the segment’s and consequently in the group’s revenues. In case of T-Systems this would correspond to an over 7% drop, while on group level the decrease would be about 1.5%.
The transaction, however, does improve MTel’s capital position. The cash to be received will reduce the company’s net debt. The group’s net debt increased in the second quarter of 2012 to HUF 324.2 bn from HUF 295.1 bn at the end of June 2011. Calculating with a cc. HUF 20 bn sales price and disregarding other items of adjustment then the company’s net debt will drop to around HUF 304 bn, i.e. the transaction could improve MTel’s net debt ratio by up to 1.6 percentage points. The better capital position may calm investors currently worried about the sustainability of the dividend level.
Pro-M’s book value was HUF 7.6 bn at the end of 2011, which means the transaction is to be carried out at 2.6x BV and - considering the sales price and Pro-M’s revenues - at a 2.2 P/S, which is a very good deal from MTel’s point of view.
Overall we can say - assuming that Pro-M’s EDR will no longer be provided by Magyar Telekom - the group’s revenues will decline some, but its capital position will improve.
Market reaction
Investors responded to the announcements basically positively. MTel’s share price rose by more than 1% after market opening.
Charting is displayed using TradingView's technology, a platform, where you can build advanced charts,
spot upcoming trends in the stock screener, and find inspiration in multiple trading ideas
