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Kārlis Krastiņš, Managing Partner of Prudentia

The discussion regarding the possible merger between, Latvian telecommunication giants, Lattelecom and LMT, which has become even more dynamic in the last few months, has been emotional and that is understandable. The question is undeniably important, whether the current division of shareholders and the segregation between the businesses of both companies offer the best possible return to its shareholders and is this segregation sustainable?

The financial indicators and the investment policies of both companies have displayed certain signs of stagnation over the last few years. There is serious competition in the telecommunications market at the European level that has only grown and is threatening the positions of both companies. If we look at the 2014 and 2013 unaudited data, it can be seen that the dynamics of revenue and EBITDA are negative – LMT -12,4% in 2013 and -19,7% last year; Lattelecom -8,57% and +1,01% respectively.

At the moment telecommunication companies have to be able to follow the newest trends within the industry, for example, development of LTE 4G network, expansion of wideband fiber optic, development of cloud computing. Significant investments are required; as a result, active consolidation of the telecommunication industry, at the European level, is observable already for a while.

The possible merger between both companies and the arising benefits have to be carefully evaluated. As some cases in Europe have already proven the positive synergies that would arise from this type of merger are important. It would allow to decrease the costs of the newfound company by eliminating the doubling functions and gain from the combined sales of services within the mobile and fixed segments.

With the help of the integrated service portfolio the new company would be able to increase its market share more efficiently. Based on the synergy estimates, calculated by the Latvian government and both players, the synergies that would arise from the theoretical merger could reach up to 70 million euros, which is around 10% from the combined value of both companies in accordance with the results of the TOP 101 most valuable enterprises.

The merger of LMT and Lattelecom is beneficial for the clients of both companies and current shareholders, including Latvian government. However, there are aspects that would be an obstacle to this transaction or at least require lengthy discussions. One of the aspects is associated with the ownership rights and the division of control between Latvian government and TeliaSonera – taking into account the publicly available information regarding financial indicators and ownership structure the Latvian government can lose control over the merged company.

This question has to be solved and it cannot be postponed, it has to be discussed. If the Latvian government and TeliaSonera do not make a decision regarding this important matter in 2015, consequences could be severe for both telecommunication companies in the years to come.

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