Iceland Telecom faces criticism for proposed sale of infrastructure assets Skip to content

Iceland Telecom faces criticism for proposed sale of infrastructure assets

Morgunbladid and the Icelandic National Broadcasting Service, RÚV, reported on Saturday that Iceland Telecom (Síminn) is in discussions with the utility Reykjavík Energy (Orkuveita Reykjavíkur, OR) concerning the possible acquisition by OR of Síminn’s fixed line infrastructure assets for approximately ISK 20 billion.

Síminn is the ex-incumbent, formerly state-owned telecommunications monopoly. It was privatized in a controversial sales process last year to investment company Exista, Kaupthing (KB-Bank) and several other Icelandic investors. Síminn has an approximately 65 per cent market share in the Icelandic communications market by revenue while Og Vodafone, a subsidiary of Dagsbrún, commands approximately a third of the market. Investment company Baugur is the largest shareholder of Dagsbrún with an approximately 35 per cent stake. OR is owned by the City of Reykjavík and several other towns and municipalities.

At the time of the privatization of Síminn, considerable debate ensued concerning the sale of the core infrastructure assets of Síminn, including fiber optic cables, a cable-TV distribution network and the traditional copper phone wires. Many called for the infrastructure assets to be exempted from the privatization because they are quite expensive to develop and form a substantial barrier to entry for any new entrants into the communications market.

According to RÚV, the government’s privatization committee refused to separate the infrastructure assets from Síminn because it was said to be “difficult to define them.” The chairman of the privatization committee, Jón Sveinsson, a longtime member of the Progressive Party, also said the legal and regulatory framework ensured that all of Síminn’s competitors had access to the infrastructure assets.

According to Morgunbladid, the government’s privatization committee also claimed at the time that it would be “very expensive” to separate the infrastructure assets from Síminn and the costs would lead to higher prices for consumers and slow continued investment in the infrastructure.

For the past several years, OR has been led by the Reykjavik City Council member Alfred Thorsteinsson of the Progressive Party. During his tenure as chairman of OR, the utility invested billions of Icelandic króna in telecommunications through its now-defunct subsidiary, Lína-Net. Among other things, OR attempted to develop infrastructure assets in competition with Síminn and put in place a number of fiber optic cables in Reykjavík.

In 2004, Alfred Thorsteinsson made headlines when he refused to make public an auditor’s report of the accounts of Lína-Net after fellow city council member Gudlaugur Th. Thórdarson, an Independent, alleged that OR had lost “billions” on its investments in Lína Net. At the time, Alfred was chairman of Lína-Net and Gudlaugur served on its board of directors.

In 2005, Lína Net was sold to Og Vodafone.

Since 1995, a coalition of the Independence and the Progressive parties has formed the national government; in Reykjavík, the Progressives have ruled since 1994 in an alliance with the Social Democrats and the Left-Greens called “R-listi.” Elections for local government will be held next month, on May 27.

In its Sunday edition, Morgunbladid interviewed several candidates for the Reykjavík City Council about the proposed purchase by OR of Síminn’s infrastructure assets.

Björn Ingi Hrafnsson, the lead candidate for the Progressives, said that OR’s chairman and fellow Progressive Alfred Thorsteinsson had informed him of the discussions, and that he was in favor of them.

Vilhjálmur Th. Vilhjálmsson, the lead candidate for the Independents, said the proposed transaction “raised questions” about risk and reward. He said the possibility of Síminn purchasing OR’s fiber optic cables should also be examined.

Ólafur F. Magnússon of the Liberal Party said city council members had been “poorly informed” about the proposed transaction.

Svandís Svavarsdóttir of the Left-Greens said that the matter should be left for a new city council to decide after the elections.

Dagur B. Eggertsson of the Social Democrats said that OR had been building its own infrastructure to “stimulate competition” in the communications sector. He said there was no special reason for duplicating the communications infrastructure and added “it is certainly curious that it is now possible to separate these assets from the other operations of Síminn while was not possible to do so when the company was being privatized.”

On Saturday, Morgunbladid discussed the proposed transaction in its op-ed column Staksteinar. It said:

“If this transaction goes through, it can not be described other than as an act of unadulterated business genius.

Many thought that the purchasers of Síminn were brave to buy the company at such a high price, a price considerably higher than that offered by the other bidders.

Could it be possible that the other bidders did not think of this move?

Síminn shareholders must make deep bows to [Síminn CEO] Brynjólfur Bjarnason.

But it is another question for what purpose OR is entering into this transaction. Is this not the same company that used to sell hot water and electricity to the citizens of Reykjavík?”

The investment bank Straumur-Burdarás, which lost out in the bid for Síminn last year, recently purchased a substantial stake in Morgunbladid’s publisher, Árvakur.

The two largest shareholders of Síminn are Kaupthing and Exista with 43 and 29 per cent, respectively.

Kaupthing and Exista are intimately linked through a cross-shareholding arrangement with Kaupthing owning 19.2 per cent of Exista and Exista owning 21.1 per cent of Kaupthing through a Dutch subsidiary. In response to recent criticisms by foreign financial institutions, Kaupthing announced last month that it would divest itself of its stake in Exista.

The brothers Ágúst and Lýdur Gudmundsson are the largest shareholders of Exista; Lýdur Gudmundsson serves as chairman of both Síminn and Exista.

The current CEO of Síminn is Brynjólfur Bjarnason. Brynjólfur resigned from the board of directors of food services company Bakkavör shortly before Síminn was privatized amid allegations of conflict of interest. Exista is the largest shareholder of Bakkavör with 29 per cent. Ágúst Gudmundsson is Bakkavör’s chairman and his brother, Lýdur Gudmundsson, serves as CEO.

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