Mergers: the only alternative
The Economist, October 22, 2005
GTS emerged as the largest regional alternative telco after agreeing to acquire rivals Aliatel in the Czech Republic and Slovakia in December 2004 as well as Energis Polska in July 2005, which collectively doubled the firm's revenue to an expected EUR300m in 2005. "These acquisitions increased our blue-chip client base and enhanced our product portfolio, providing a source of competitive advantage that allows us to ensure higher quality of services to our customers," said Tamás Polgár, CEO of GTS to The Economist.
Take GTS Central Europe (GTS), whose existence is a testament to the relatively stability of the region's telecom market. Orphaned by the bankruptcy of its US-based parent in 2001, GTS's business was strong enough to survive on its own, eventually finding a new owner in the form of GML Limited, an international diversified holding company. GTS now operates alternative telecom networks in the Czech Republic, Poland, Hungary, Romania and Slovakia and provides services in Ukraine, Latvia, Slovenia, Bulgaria, Croatia and Serbia.
GTS emerged as the largest regional alternative telco after agreeing to acquire rivals Aliatel in the Czech Republic and Slovakia in December 2004 as well as Energis Polska in July 2005, which collectively doubled the firm's revenue to an expected EUR300m in 2005. "These acquisitions increased our blue-chip client base and enhanced our product portfolio, providing a source of competitive advantage that allows us to ensure higher quality of services to our customers", says Tamás Polgár, the firm's boss, who indicates that it still has a healthy appetite for acquisitions.
While GTS's increased scale enables synergies, market power and access to infrastructure, other challenges remain. One issue is the terms under which it can connect calls to networks of incumbent and mobile operators. "Even if incumbents 'unbundle the local loop' in line with EU recommendations, the detail of charges and timing of payments - which are generally left to negotiation - impact the economics of alternative operators significantly", says Gerald Grace, GTS's chief financial officer, adding that this drives the need for economies of scale.
Another issue is the convergence of fixed and mobile telephony, particularly relevant in Central Europe, where incumbents control mobile providers and the two operations could be integrated. First is the question of whether fixed line alternative operators could compete with firms offering both services in one package. Second, if the alternative operators would like to offer mobile services, the issue becomes if and under what terms licensed for so-called mobile virtual network operators would be granted. These questions are particularly relevant in a region where regulators are perceived to be less vigilant than in the more competitive European telecom markets, such as the UK or Scandinavia.
The roll-out of broadband internet access remains a growth opportunity for GTS as PC penetration in Central Europe increases. In addition, the firm's focus on business clients has thus far insulated it from voice over internet services. "We emphasise security and quality, which are of paramount importance for business", concludes Mr. Polgár. Another doubling of the firm's size would not hurt either.
