GREECE'S LARGEST BALKAN INVESTOR: THE HELLENIC

C O N F I D E N T I A L SECTION 01 OF 03 ATHENS 000454

SIPDIS

SIPDIS

E.O. 12958: DECL: 02/12/2016
TAGS: ECPS EFIN PREL GR
SUBJECT: GREECE'S LARGEST BALKAN INVESTOR: THE HELLENIC
TELECOMMUNICATIONS ORGANIZATION (OTE)

REF: ATHENS 365


1. (SBU) Summary. At a time when many Greeks tout their
country's expanding economic influence in the Balkans, it is
worthwhile trying to pin down exactly what this means. At
the official level, the GoG has pledged USD 550 million for
the Balkan Reconstruction Fund. As a subsequent message will
detail, only a small percentage of this money has actually
been disbursed. Instead, the real action is in the private
sector, where a wide range of Greek firms have made major
Balkan investments over the past 15 years. We have already
reported on Hellenic Petroleum's $220 million investment in
the Macedonia's OKTA refinery (reftel),which has made HP the
largest provider of petroleum products in Macedonia and
Kosovo.


2. (SBU) This cable outlines the Balkan investments by the
Hellenic Telecommunications Organization (OTE). At over USD
1.5 billion, these represent by far the largest such
investment by any single Greek company and have made OTE
either the largest, or second largest telecommunications
provider in Serbia, Romania, Bulgaria, Macedonia, and
(somewhat farther afield) Armenia. According to the man
responsible for managing these investments, OTE's Michael
Tsamaz, OTE probably paid too much for what it obtained, and

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went through a number of difficult years learning to manage
its newfound international operations. Under the leadership
of its current Chairman, however, OTE seems to have stepped
up to the challenge of the rough and tumble world of Balkan
business, becoming more nimble on its feet, and perhaps even
helping it become more efficient in its home market.
Unquestionably, it has reinforced OTE's position as a major
force in Balkan telecommunications now and in the future.
End Summary.

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First, A Bit on OTE
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3. (U) OTE, established in 1949, was the monopoly provider of
telecommunications services in Greece until the 1990s. It
remains the largest fixed-line provider, with 84% of outgoing
call minutes. OTE's cellular provider, COSMOTE, holds
approximately 52% of the mobile phone market by the same
measurement. In spite of holding 36% of OTE's shares, the
Greek government maintains management control over the
company. Until it made the overseas investments outlined
below, starting in 1997, OTE was a purely domestic company.


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Original Hopes of Fast Growth Lead Starry-Eyed OTE Astray
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4. (SBU) According to Tsamaz OTE looked to the Balkans as a
perfect way to break out of its purely domestic Greek
operations base. The company found these countries'
relatively fast growth rates irresistible, and assumed its
management experience in the Greek market would translate
seamlessly to operations elsewhere. Unfortunately, Tsamaz
noted, OTE's complete lack of international experience at the
time resulted in a host of managerial problems, which the
firm has only slowly overcome. He highlighted the firm's
initially poor management of its acquisitions, which resulted
from a monopoly mindset combined with a total lack of
international experience. "Engineers ran OTE and had no
interest in what their customers wanted, nor in cost
control." He said OTE originally went into Balkan states
with the objective of "wiring an entire country", even if
that meant years of losses. He also admitted that, in many
cases, OTE had also paid far too much for what it had gotten;
essentially, the firm been "taken to the cleaners" in a
number of cases.


5. (C) Tsamaz credited OTE's turnaround in the region
largely to the firm's realization that it could not continue
operating as it was. Tsamaz himself was brought because of
his extensive private sector expertise at firms such as
Proctor and Gamble, Parker-Davis, Philip-Morris, combined
with his telecom-sector background at Vodafone. He said
OTE's management had given him a free hand in making things
work, which he capitalized on by bringing in new country
managers in each of its Balkan operations. He also
renegotiated many of the original agreements OTE had made
when it had bought its Balkan daughter firms.


6. (C) Speaking more generally about OTE's outlook, he said
the firm had slowly begun to focus on the bottom line as a
result of its gradual privatization over the past years, as
well as the introduction of competitor firms (such as

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Vodafone) into the Greek market. This new attitude was given
a boost by OTE's new General Manager, Panagis Vourloumis:
"He's decisive, he covers your ass when you make a difficult
decision, and he's willing to break eggs." The GoG's 2005
reform of OTE's personnel system, offering early buyouts to
older employees and discontinuing lifetime employment
contracts with new hires, was also important to furthering
free-market principles at the company.

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The Investments: A Country-by-Country Summary
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7. (C) Tsamaz provided the following country-by-country
overview:

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Armenia
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OTE's 1997 purchase of 90% of Armenia's Armentel for 120
million Euros was the Greek firm's first overseas investment.
The Armenian government retains a 10% stake in the firm,
which provides both fixed and mobile services. Tsamaz said
OTE's original share purchase agreement obliged OTE to
digitalize the entire country, while providing for no tariff
increases. Tsamaz estimated it would have taken 40 years for
OTE to have realized a profit under these conditions. Tsamaz
renegotiated the agreement upon entering OTE so that, while
Armentel remains committed to connecting all of Armenia's
towns to the company's network, it will not have to provide
digitalized services to all towns. Armentel will also be
allowed tariff increases. Tsamaz said Armentel will begin to
roll out new services based on profitability. Through its
investment in Armentel, OTE is now Armenia's largest telecom
provider.

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Serbia
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OTE purchased 20% of Telecom Serbia (TS),a provider of both
fixed and mobile telephony, in 1997 for 312 million Euros.
Tsamaz noted that OTE had arranged for the purchase in an

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alliance with an Italian company, which had bought another
29% of TS. According to the purchase agreement, the two
firms obtained management control of TS. After the war in
Serbia, however, the Italians sold their share of the firm to
the Serbian government, which ended up with an 80% share of
the company and removed OTE from management control. OTE
legally disputed the loss of management control, and reached
a compromise with the GoS in which OTE now has first right of
refusal on the future sale of any part of the GoS's share of
the firm. Tsamaz noted the war also hurt OTE's investment as
TS lost its presence in Kosovo. At this point, OTE believes

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the Serbian telecom market has good growth prospects and is
considering increasing its share in TS. OTE is Serbia's
largest international investor in telecoms. (Note: Some
readers will recall that OTE/Telecom Italia's purchase in
1997, supported politically by both governments, bailed
Milosevic out of a jam and allowed him to buy another
election. Over the long run, the investment has proved less
disastrous for Greece/OTE than it was for Italy.)

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Romania
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OTE purchased 35% and management control of Rom Telecom in
1998 for USD 675 million. It purchased a further 19.1% of
the firm in 2002 for $231 million, further cementing its
management position in the firm. OTE's cellphone arm,
COSMOTE, has purchased 70% of one of Romania's three mobile
providers, COSMOROM, along with Rom Telecom. Tsamaz said
OTE's most important reform at the company was reducing staff
from 54,000 at the time of purchase to 13,000 now. It has
also embarked on a more rational, profit-oriented expansion
of the company's network. Combined with improved marketing,
and renegotiated contracts with suppliers, Rom Telecom had
emerged from a difficult period as a strong company, and is
now on the way to being listed, probably in London. Through
its Rom Telecom investment, OTE is Romania's largest telecoms
provider.

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Bulgaria
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COSMOTE purchased one of Bulgaria's three mobile licenses
along with associated infrastructure in 2001 for 250 million

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Euro. It is now Bulgaria's second largest mobile phone
provider.

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Macedonia
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COSMOTE purchased one of Macedonia's two mobile phone
licenses in 2001 for 120 million Euro. The other license,
Tsamaz said, was held by Matav, the Hungarian branch of

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Deutsche Telecom, which also held Macedonia's fixed line
company. COSMOTE is the smaller of the two providers.

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Albania
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Tsamaz said COSMOTE had purchased one of the two mobile

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licenses in Albania, although he did not provide details.
This made COSMOTE Albania's largest mobile phone provider.

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Ukraine/Jordan
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Tsamaz did not go into details, but said OTE had decided it

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could never make a profit in its Jordanian and Ukrainian
operations, and had written off both investments.

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Comment
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8. (C) Perhaps the most interesting aspect of OTE's work in
the Balkans is how this has pushed the formerly staid,
statist company to learn new, more efficient ways of doing
things. Tsamaz made it clear that, when he came to the firm,
it was seriously thinking of selling its stake in a number of
Balkan operations. Indeed, it was ill-prepared for the
intense competition represented by the entrance of other
European companies into the Balkans. Instead, OTE
successfully applied free-market principles and is now
finally making money. It is worth noting that Tsamaz
credited his introduction of "American style" management
techniques he had learned through his years at U.S. firms as
an essential element in turning around OTE's Balkan
operations.


9. (C) OTE's Balkan experiences generate a number of broader
questions, however, such as whether the firm will begin to
apply them to its major market, Greece. According to Tsamaz,
this is slowly starting to happen. Even more broadly, will
OTE begin to follow the model of U.S. firms, which work with
the USG to promote transparent business practices
internationally as a way to bolster their position in foreign
markets? If so, this might lead to the GoG becoming a more
useful regional partner in our efforts to promote such
practices in the Balkan region.
RIES