In the final stage of the privatization of Iceland Telco, Síminn, yesterday afternoon the government’s Executive Committee on Privatization opened binding bids for the government’s remaining 99 per cent share in the company.
Out of twelve finalists selected in May, three made binding bids. All three were Icelandic groups of investors.
(See Iceland Review, Daily News, May 26, 2005, “Iceland Telco bidders revealed“)
The bid from Skipti ehf. came in highest at ISK 66.7 billion, the other two bidders offering ISK 60 billion and ISK 55 billion.
Skipti is owned by the investment company Exista, controlled by the two brothers that run Bakkavör; by Kaupthing bank; by investment bank MP; and by several Icelandic pension funds.
The bid values Síminn at 23 times last years earnings; the price to book ratio is 4.
Since the highest bid exceeded all other bids by more than 5 per cent, no further bidding was permitted under the process, and the government promptly accepted Skipti’s offer.
This is the second attempt of the Icelandic government to privatize the former state-run monopoly.
In keeping with its obligations under the European Economic Area, Iceland gradually liberalized its communications sector in the 1990’s. In wake of the regulatory changes, US company Western Wireless set up mobile operator Tal and local investors formed the fixed and mobile telco Íslandssími. The two later merged and now operate under the name of Og Vodafone, (ICEX: OGVODA). Together with Síminn, Og Vodafone forms a duopoly that dominates the Icelandic telecommunications market. The dominance was recently acknowledged by the Icelandic Post and Telecom Administration when it found that both companies had a dominant position in the mobile market.
This is the second attempt of the current coalition government to privatize Iceland Telco. An earlier attempt in 2001 and 2002 was scrapped. The then CEO, Thórarinn V. Thórarinsson, was fired after accusations of having a conflict of interest because of his relationships to some of the potential buyers. It also transpired that he had expensed Síminn for certain costs relating to his summerhouse at Lake Thingvellir, including trees that were planted on his lot and a phone line that was put into his house.
When Thórarinn was fired, an opposition MP board member of Síminn, Flosi Eiríksson, questioned the grounds of his dismissal and wondered if they had just been a “pretext” to get rid of Thórarinn. Flosi subsequently resigned from the board of Síminn.
In early 2002, the then chairman of the board resigned. A new board led by a new chairman, Rannveig Rist, CEO of Alcan Iceland, recruited Brynjólfur Bjarnason in June 2002. Like his predecessor, Brynjólfur is a longtime member of the Independence Party. An ex-political assistant of the then prime minister and chairman of the Independence Party, Davíd Oddsson, was also recruited soon thereafter as VP of Business Development. Although Síminn was still 99 per cent owned by the Icelandic government, the remaining 1 per cent having been sold to the public on the Icelandic stock exchange, neither position was advertised.
In 2003 it emerged that the treasurer of Síminn had secretly used company funds to finance several business ventures of his family and friends. The total amount embezzled amounted to ISK 261 million and had gone unnoticed by Síminn management and auditors. The convictions of the treasurer and his associates were recently confirmed in the Supreme Court of Iceland.
Síminn suffered substantial losses in its investments in technology start ups during the so-called internet bubble of 1999-2000. But under the new board and management, the company continued to make certain ad-hoc investments. In 2004, Síminn became a minority owner in an investment vehicle of controlled by Björgólfur Thor Björgólfsson and participated with him in the privatization of the Bulgarian state telco.
(For background on Björgólfur Thor Björgólfsson, see Iceland Review, Daily News, July 14, 2005, “Not linked to Russian mafia says Iceland’s first dollar billionaire“)
In 2004, Síminn also purchased the majority of Iceland media company Íslenska sjónvarpsfélagid. Its subsidiary, TV-station Skjár 1, was originally founded by the embezzling treasurer and his friends. For a while, they used some of funds embezzled from Síminn to prop up the finances of the TV-station. Some of the owners of Íslenska sjónvarpsfélagið have had close ties to one of the two government coalition partners, the Independence Party.
Síminn purchased Skjár 1 shortly after the government was forced to withdraw a controversial bill it had pushed through parliament restricting ownership of media companies. The bill was vetoed by president Ólafur Ragnar Grímsson, but instead of passing to the nation in a referendum as mandated by Icelandic constitution, the government parties rescinded it in a special vote in parliament. The acquisition of Skjár 1 by Síminn would have been difficult, if not impossible, if the bill had passed into law.
(For background on the president’s veto, see Iceland Review, Daily News, July 2, 2005, “Baugur CEO charged on multiple counts“)
To the knowledge of Daily News, Síminn has not made the terms of its investments in Bulgaria or in Skjár 1 public.
Earlier this year, the government came under heavy criticism concerning the proposed privatization of Síminn.
Morgunbladid business journalist Agnes Bragadóttir provoked a strong public response in April when she wrote an op-ed article demanding that the public receive the right to participate directly in the privatization. She subsequently took a leave of absence form Morgunbladid to help form a company to bid for Síminn, raising money directly from the public. Her venture eventually merged into an investment group that submitted the second highest bid yesterday.
The privatization policy of the government came under heavy criticism in May when a series of articles in Fréttabladid described the circumstances of the sale of controlling shares of two state-banks to private investors linked to the coalition parties in 2002.
(See Iceland Review, Daily News, May 31, 2005 “Privatization of banks draws heavy fire“)
In the case of Síminn, the privatization of the fixed line infrastructure has been especially criticized since it is an effective monopoly.
As described in the Financial Times on June 27 this year, lax regulation has permitted many former state owned monopolies, such as BT in the UK, to generate lucrative returns by controlling the fixed line infrastructure. Among other things, opposition politicians in Iceland warned against repeating this mistake in the sale of Síminn.
Reykjavík Energy, a utility company controlled by the City of Reykjavík, has been developing a fixed line infrastructure in the Reykjavík area in competition with Síminn, collaborating first with Íslandssími and later with Og Vodafone. Last year the chairman of the board of Reykjavík Energy, Alfred Thorsteinsson, denied requests for information about the financial affairs of its communications subsidiary, LínaNet, but the money spent by Reykjavík Energy on LínaNet is said to amount to hundreds of millions, if not billions, of Icelandic króna. In January, its communications services operations were taken over by Og Vodafone.
The fixed line infrastructure developed by Reykjavík Energy includes an extensive fiber optic backbone in the Reykjavík area, but in many neighborhoods it does not yet include the so-called “local loop”, the final leg of copper, co-axial or fiber wires that connects a residential or an office building to the fixed line communications network.
The CEO of Síminn, Brynjólfur Bjarnason, has also been criticized for his links to the “Bakkavör-brothers” Lýdur and Ágúst Gudmundsson who are the controlling owners of Exista. Until March of this year, he served as vice-chairman of their food services company Bakkavör. He resigned only after several prominent stories ran in the Icelandic media about his role at Bakkavör. His son, Bjarni Brynjólfsson, is also an employee of Exista. Just like his predecessor, Thórarinn V. Thórarinsson, Brynjólfur has denied any conflict of interest on account of his relationships with prospective bidders, but unlike Thórarinn, he has kept his job.
In parliament, the reactions of the government and opposition have been predictable. Opposition leaders have reiterated many of their prior criticisms while acknowledging that the price paid was substantial. The government has hailed the privatization as a success.
On Icelandic State Radio, RÚV, the leader of the Social Democrats, Ingibjörg Sólrún Gísladóttir, mentioned the ties of Síminn CEO to Bakkavör and questioned if all bidders had received equal treatment during the bidding process.
In response, the chairman of the government’s Executive Committee on Privatization, Jón Sveinsson, a lawyer with long standing ties to the Progressive Party, denied all accusations of preferential treatment and said all bidders had had equal access to all relevant information about Síminn.
According to RÚV, the opposition Left-Greens have demanded an investigation into the privatizations conducted by the current government. Their chairman, Steingrímur J. Sigfússon, said to Morgunbladid that the price of Síminn was high and that the investors would seek a return. “Over the coming years, the customers of Síminn – the Icelandic nation – will be made to pay,” he said.
Prime minister and chairman of the Progressive Party, Halldór Ásgrímsson, said in an interview with Fréttabladid that the price for Síminn had exceeded his expectations, not least since the buyers were also assuming debt of several billion króna and that another several billion had been paid out of the company in the form of a dividend earlier in the year. He said that the proceeds would strengthen the finances of the Icelandic state and make it better prepared to fund “social and welfare projects”.
(For coverage of a recent investigation into the role of Halldór Ásgrímsson in the privatization of the banks in 2002, see Iceland Review, Daily News, June 14, 2005, “Prime Minister’s feelings hurt but announces he has been exonerated“)
The minister of finance and vice-chairman of the Independence Party, Geir Haarde, did not wish to discuss the use of proceeds when asked by RÚV and mentioned only that one possible use could be to pay down the national debt of Iceland. According to RÚV, the proceeds of the sale of Síminn amount to one third of the national debt. His colleague, foreign minister and chairman of the Independents, Davíd Oddsson, proposed earlier this year to build a new “high-technology hospital” for the proceeds.
On Icelandic State Radio, the minister of industry and trade, Valgerdur Sverrisdóttir, explained the absence of international investors in the final bidding process by claiming that the foreigners had withdrawn because they “could not compete” with the locals. She added that the absence of international buyers was “nothing to worry about”.
The chairman of the Liberals, Magnús Hafsteinsson, said to Morgunbladid that he was “not negative” about the sale although he harbored doubts about selling the fixed line infrastructure.
According to RÚV today, the winning bid was quoted in a combination of currencies, Euro, US dollars and Icelandic króna. The foreign currencies will be converted into króna at yesterday’s exchange rates. After the Competition Authority has finished examining the winning bid, the government will transfer its shares to the new owners in return for payment of the purchase price. The result of the Competition Authority is expected in mid-September.
Correction:
Flosi Eiríksson, the former non-executive director of Síminn, is not a
Member of Parliament as we wrote. He is, however, a registered member
of the Social Democratic Alliance, and an elected member of the town
council of Kópavogur. He was appointed by the Social Democrats to serve
on the board of Síminn. We apologize for this error.
