11. 3. 2019

KGI Releases Open Letter to Hrvatski Telekom Board of Directors

Deutsche Telekom, the majority owner of Hrvatski Telekom, has long been applying non-standard financial operations in the management of Hrvatski Telekom, which leads to a deliberate reduction in the value of the company and a significant impairment of the interests of minority shareholders. Krupa Global Investments (KGI) therefore calls on the management of Hrvatski Telekom and the current management of Deutsche Telekom in an open letter to make the financial flows transparent and to stop purposeful drawing of finances from Hrvatski Telekom. KGI also initiates the company’s shareholders to actively address the non-standard activities of the management. KGI Group companies own a significant share in Hrvatski Telekom and belong to one of the ten largest shareholders of Hrvatski Telekom.

Through its management and a representative in the board of directors of Hrvatski Telekom, Deutsche Telekom, which holds a majority share in Hrvatski Telekom (51%), has long been reducing the value of Hrvatski Telekom. Hrvatski Telekom is the only telecommunication company in the region that has a clean cash position, so it doesn’t use any debt financing. This takes place in the conditions of record low interest rates and under the pressure of the majority shareholder, Deutsche Telekom, which uses the positive cash position as a source of cheap financing for its projects with a non-transparent asset structure and to improve consolidated debt indicators of Deutsche Telekom. According to the company’s latest annual report for 2017, at the end of 2016, Hrvatski Telekom was forced to buy corporate bonds of Telekom International Finance B.V., registered in Maastricht in the amount of EUR 125 m, with a yield of only 0.024% p.a. at the time when the yield of Croatian government bonds, free of any FX risk, was around 3% p.a.

KGI considers it very unusual that Deutsche Telekom uses ways to harm minority shareholders and avoid its tax duty in the country, where it is active, where it has very above-standard operating conditions and where it generates very high profits for a long time. The possibility of tax optimization announced by the Croatian government in 2013 led to a reduction of in the dividend to its half, resulting in a sharp fall of the share price of Hrvatski Telekom, along with a significant reduction in value for minority shareholders. Although the tax optimization program ended in 2017, the management of Hrvatski Telekom has not proposed to increase the dividend to its original level, and Deutsche Telekom has not taken any action in the interest of all shareholders, and it continues to force Hrvatski Telekom to keep a significant surplus of cash on its balance sheet. At the end of 2018, the cash on Hrvatski Telekom accounts exceeded HRK 3 billion, which corresponded to 24% of the market capitalization of the company. Even more non-standard is the absolute absence of debt financing at the time of record low interest rates. It is a fundamental lesson that the use of debt financing reduces the weighted average cost of capital, optimizes the capital structure of the company and increases its value for shareholders. According to KGI calculations, Hrvatski Telekom could increase the dividend to HRK 20 and keep it at this level for at least ten years, so that in ten years it would gradually reach a debt equal to the sector average (net debt / EBITDA 1.8x).

KGI therefore addressed an open letter on 11.3.2010 to the management of Hrvatski Telekom and also to the leading members of the Deutsche Telekom management bodies, calling for these non-standard operations to be stopped. “We request the management of Hrvatski Telekom to take steps leading to the transparency of the financial flows and to stop purposeful drawing of funds and depreciation of the company. We call on Deutsche Telekom, the majority owner of Hrvatski Telekom, to act in a transparent and orderly manner for the benefit of all shareholders of the company. In this case we see up to twice the growth potential of the company, “says Pavol Krúpa, Chairman of the Board of Directors of KGI.

At the same time, KGI addressed an open letter to the shareholders of Hrvatski Telekom, pointing to non-transparent management activities, and calling for an active discussion and opening the issue of addressing these damaging activities at Hrvatski Telekom’s General Meeting on 6.5.2019.

The KGI is also ready to take further steps to stop the management’s disadvantageous financial operations and stop favouring the financing Deutsche Telekom’s projects instead of paying-out dividends of Hrvatski Telekom. We are ready to address the Croatian government representatives who need to be notified about the management activities leading to the avoidance of tax obligations. Another disturbing fact is, that one of the main shareholders of Hrvatski Telekom is the War Veteran`s Fund and the whole case therefore has a very strong social background. KGI also plans to approach relevant regulators and other institutions. In the event that these non-transparent purposeful financial transactions are stopped, KGI sees a great growth potential in Hrvatski Telekom, with the possibility of reaching HRK 300-350 per share, also due to the confirmation of the company’s results in 2018. Our group is one of the ten largest shareholders of Hrvatski Telekom with a position worth several tens of millions of euros. It holds its share through shares and CFD.

See the open letter here.