THE PRIVATIZATION TWO STEP: UPDATE FROM SLOVENIA

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E.O. 12958: DECL: 06/15/2016
TAGS: ECON EINV ETRD SI
SUBJECT: THE PRIVATIZATION TWO STEP: UPDATE FROM SLOVENIA

REF: A. LJUBLJANA 0132


B. 05 LJUBLJANA 0766

C. 05 LJUBLJANA 0546

D. 05 LJUBLJANA 0489

Classified By: COM Thomas B. Robertson, reasons 1.4(b) and (d)


1. (C) Summary: The Government of Slovenia (GOS) has
announced it will soon begin privatizing two of its
significant assets: telecommunications operator Telekom
Slovenije; and the country's second largest financial
institution, Nova Kreditna Banka Maribor (NKBM). Though
somewhat ill-timed coming on the heels of the failed further
privatization of Slovenia's largest bank, Nova Ljubljanska
Banka (NLB),at first glance this move is encouraging. The
government of Prime Minister Janez Jansa came to power
promising to act on privatization. Preparations for doing
so, however, have taken longer than expected. Indeed, there
are growing concerns that despite the stated GOS commitment
to privatization, with the smoothly growing economy and broad
public skepticism about selling prime Slovenian business
assets to foreigners, the political costs of privatization
may be too high. If that is the case, the privatizations of
NKBM and Telekom could end up following the model of previous
impotent efforts by past Slovenian governments to extract the
state from its influential role in the economy. End summary.

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NLB
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2. (C) As reported in March 2006 (ref A),Finance Minister
Andrej Bajuk told COM that his plan for privatization was for
the GOS to maintain no more than a "golden share" of state
ownership (presumably 25 percent or less),and only in
certain key industries. It is unclear, however, how Bajuk
intends to implement this model in the case of NLB. In
mid-May, long-term investor in NLB, Belgian bank KBC,
announced that it would "reconsider" its ownership role in
the bank. KBC, a 34% owner of NLB, said that it intends to
move from the role of a strategic investor to a financial
one, indicating a decrease in a long term role in Slovenia.


3. (C) Since the purchase of its initial, minority stake in
NLB, KBC had long made clear its interest in becoming the
majority owner. In recent weeks, when it became clear that
the GOS was unwilling to allow KBC to take over NLB, the
Belgians conceded and offered to increase their stake to only
49% on the condition of receiving effective management
control. The GOS rejected this offer also, at which point
KBC decided to change its relationship with NLB. As Post
understands it, Belgian management board members of NLB have
resigned and KBC is interested in selling its stake.
Contacts tell Econoff that despite Bajuk's stated preference
for only a "golden share," selling a controlling interest in
Slovenia's most important financial institution was a
politically untenable proposal.

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NKBM
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4. (SBU) Long-promised but never executed, the GOS's recent
announcement to privatize NKBM could be the first step in
Bajuk's much touted plan to build a "second financial pillar"
around NKBM to provide a competitive and compelling
alternative to NLB. In mid-May, the GOS announced that it
intended to privatize NKBM in two phases. In the first
phase, 20% of the bank will be offered for sale to a
strategic investor through an international public tender.
(Note: The GOS, in its announcement, failed to define
"strategic investor." End Note.) Another 5-10% will be
offered to Slovene citizens, and a further 20-25% will be
sold to institutional investors in a public tender. At the
end of phase one, the government will retain a 51% share. In
phase two, the GOS will pare down its holdings to 25% by
selling the balance to institutional investors.


5. (C) The Jansa government has made previous attempts to
sell off its stake in NKBM. These attempts failed, however,
largely due to overpriced offerings and NKBM's lack of reach
beyond Slovenia reducing its attractiveness (ref D). The

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government has not been forthcoming about a pricing strategy
but has indicated a 24 month timeframe to complete the
process. Even baby steps towards privatization of NKBM are
welcome given that the GOS declared its intention to do so
more than 18 months ago. What remains unclear, however, is
whether the government will be able to find a partner
interested in purchasing a bank with less than half the
market share of NLB, no foreign operations, and limited
presence outside of northeast Slovenia. Moreover, in light
of KBC's difficulties in obtaining a majority stake in NLB,
the GOS may have difficulty finding a foreign investor
willing to buy a minority share of the number two banking
institution at a price that makes financial sense.

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Telekom Slovenije
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6. (SBU) On the same day it announced plans to move forward
with privatizing NKBM, the GOS also prsented its strategy for
the privatization of Telekom Slovenije and its subsidiary
companies, cellular provider Mobitel and ISP SiOL. In the
first phase (planned for Fall 2006),5% of Telekom's stock
will be listed on the Ljubljana Stock Exchange. The price at
which the stock trades will be the valuation used to offer an
approximate 40% stake in the company to a strategic partner
to be chosen through an international tender (although the
timeline for this has yet to be finalized). The GOS intends
to retain a stake in Telekom of 25% plus one share. Post
understands that any potential strategic partner will be
required to submit a development plan for Telekom and that
the owner must hold the shares it purchases directly, not
through a subsidiary. Another key requirement would be that
the partner retain existing equipment sourcing relationships
that Telekom Slovenije has with Slovene suppliers.


7. (SBU) One of the largest business entities in Slovenia,
the sale of Telekom Slovenije has the potential to generate
significant revenue for the GOS. It is unclear, however,
whether the sale of the company in its entirety will be
sufficiently attractive to a foreign investor. Some
observers have noted that Telekom subsidiary Mobitel has far
greater growth prospects and therefore a potentially higher
valuation as a separate entity. Attached as one piece of the
parent company, some would argue, makes Mobitel less
attractive. Still other pundits note, however, that while
the optimal time for sale of a fixed-line phone company may
have passed, Telekom's infrastructure and cash-generating
potential will attract interest from high quality investors.

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Comment
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8. (C) The announced privatizations of both Telekom and NKBM
are, on the surface, welcome. The Jansa government has taken
steps to privatize these businesses where governments in the
past have not even tried. Despite the announced
privatization plans, however, the current GOS has made little
progress on its economic reform agenda. In office over 18
months, there has been almost no measurable progress on
privatization or any other area of economic reform, key
elements of the campaign platform on which this government
was elected. The only privatization that has occured, the
sale of retailer Mercator by state-owned funds to other
state-controlled businesses was, at best, dubious in nature
(ref B). Moreover, the GOS has yet to show any real
difference from previous coalitions who also announced, but
never followed through on, plans to extract the state from
its ownership role in a wide swath of Slovene businesses.


9. (C) Slovenes often note that the privatization process of
domestic companies began in the late 1980s, as shares in
companies that were "socially owned" by citizens of
Yugoslavia were distributed to employees, managers, and the
general populace at values that were often well below the
intrinsic value of the firms assets. The state-owned funds
that were set up to distribute these shares, KAD and SOD, are
still two of the larger owners of Slovene companies today.
At the time of Slovenia's independence, there was little
interest in allowing foreigners to participate in the
privatization of the country's successful enterprises, as for

LJUBLJANA 00000378 003 OF 003


the first time in its history, Slovenia was a truly
independent nation. This resistance to foreign ownership
continues today, with Slovenia having one of the lowest
levels of foreign direct investment in Europe. As an EU
member state, though, the GOS realizes that any privatization
process will almost certainly have to be done through an
international tender, risking takeover of domestic entities
by foreign firms.


10. (C) In light of the failure to move forward on further
sale of NLB to a significant owner, pundits and outside
observers question the feasibility and seriousness of the GOS
in its stated plans for NKBM and Telekom. There is little
indication in any of the privatization plans that the GOS
truly intends to remove itself from a position of influence.
Rather, the view of some contacts is that the GOS hopes to
cash-in through these sales without really giving up a
significant amount of control.


11. (C) The links between the state and the business sector
are as strong in the current center-right government as they
were in center-left governments of the past. With the
replacement of the management of nearly all state-owned
businesses since the election of the Jansa government in
October 2004 (ref C),lack of movement on privatization seems
to indicate that the current GOS is no more inclined than its
predecessors to decrease the role of the state in the
business sector now that it has the power to steer the
economy in the manner it sees fit. Moreover, the current GOS
appears unwilling to take the political risk of selling off
part or all of its stakes in companies that are often seen as
the crown jewels of Slovenia. In addition to fear of
takeovers by foreigners, successful, if not robust, economic
growth causes many Slovenes to wonder why change is
necessary. Serious steps toward improving the operation of
state-owned businesses by sales to those more inclined and
trained to run them in the most efficient manner possible
could well be a long time in coming. End comment.
ROBERTSON