Poor Business Environment Threatens Invitel Sale


Private equity fund Mid Europa Partners, is looking to sell Invitel, its fixed line operator in Hungary, with a formal sales process expected to begin in Q214 or Q314. The company is valued at EUR200mn-EUR300mn, although Mid Europa could look to break up its assets into smaller pieces to attract more interest in the sale. BMI expects to see one of larger Hungarian operators target Invitel, as its small market share combined with our negative macroeconomic outlook would dissuade outside investors from looking to enter the market.

Invitel offers fixed voice, broadband and IPTV services in Hungary but has seen its position in the market decline since Mid Europa acquired a controlling stake in the company in 2009. It had previously been the second largest fixed provider behind Magyar Telekom (MTel) but was overtaken in March 2013 by UPC, owned by Liberty Global. Invitel retains its strongest subscription share in the fixed line telephony sector, which continues to experience an overall lack of demand in Hungary, with net losses reported every quarter by regulator NMHH. In the more attractive markets for broadband and pay-TV, Invitel has a smaller presence, as the fourth largest provider behind MTel, UPC and DIGI. As its position in the market has declined, so too has its financial performance, with the company reporting total revenue fell by 7% to EUR119mn in the first nine months of 2013, while EBITDA dropped by 29% y-o-y to EUR36.9mn.

Invitel Strongest In The Least Attractive Sector
Invitel Market Share By Sector, December 2013 (%)

The Hungarian economy is set to continue on a slow path of economic recovery in 2014, given the country's sizeable external imbalances, precarious fiscal position and the poor business environment. Real GDP growth is unlikely to prove spectacular in relation to regional peers, and the government's imposition of punitive taxes on banks and foreign-owned firms has led to a lack of foreign investment and as a result we forecast real GDP growth of 1.7% and 1.9% in 2014 and 2015, respectively. The telecoms sector has not been immune from these taxes, as the government continues to take an interventionist approach to public utility rates, passing 'crisis taxes' in 2010, and further tax measures in May 2012 applying to every voice call minute and every SMS. Invitel reports that it has paid over EUR46mn in sector taxes between 2010 and 2013, averaging around EUR12-13mn per year. While there have been EU-level legal challenges against the taxes, they have proved unsuccessful, and we do not expect the burden to change significantly.

We therefore do not expect to see a new player enter the Hungarian fixed-line market to acquire Invitel, and consolidation with MTel or UPC the more likely option. Even this may be a difficult proposition, given the poor financial state of Invitel and its declining subscriber base and ARPU figures. Deutsche Telekom and Liberty Global have both shown an appetite for acquisitions over the past year and therefore we expect to see one of them emerge as the winning candidate.

This article is tagged to:
Sector: Telecommunications
Geography: Hungary