Hungarian Telephone And Cable Corp. Business Information, Profile, and History

Company Perspectives:

With competition fully in place in Hungary, the Company faces new opp ortunities and challenges. The Company's goal is to provide the broad est array of telecommunications services with exceptional quality and service at reasonable prices by becoming the most efficient full ser vice telecommunications provider in Central and Eastern Europe.

History of Hungarian Telephone And Cable Corp.

Hungarian Telephone and Cable Corp. (HTCC) is a holding company for s ubsidiaries involved in providing local and long-distance telephone s ervice and Internet access to businesses and residences principally i n Hungary. Through Hungarotel Tavkozlesi Rt., HTCC provides local and long-distance telephone service to a population base of 668,000 in t he regions of Bekes, Nograd, and Papa/Sarvar. Hungarotel also offers broadband and dial-up Internet access under the name "Globonet." The company's other primary operating subsidiary is PanTel Tavkozlesi Rt. , which provides voice, data, and Internet services to businesses thr oughout Hungary. PanTel's network, through a combination of owned and leased capacity, extends beyond Hungary's borders into Austria, Bulg aria, Croatia, the Czech Republic, Romania, Slovakia, Slovenia, and U kraine. A third, smaller subsidiary, PanTel TechnoCom, provides telec ommunications services to the Budapest-based oil firm Mol Magyar Olaj -es Gazipari Rt., the country's largest company. HTTC is majority own ed by the Danish telecommunications company TDC A/S.

Origins

HTCC was created to seize a business opportunity created by the colla pse of a centrally planned economy in Hungary. Shortly after World Wa r II, the Hungarian communist party, with Soviet support, established a communist dictatorship patterned after the Soviet model, setting i n place one-party rule, land collectivization, and the nationalizatio n of banks, industrial concerns, utilities, and scores of private fir ms. The country joined the Council for Mutual Economic Assistance, a Soviet-bloc economic organization, in 1949 and for the next four deca des adhered to the precepts of Soviet-style communist rule, including the nationalization of any private industrial firm with more than te n employees. When the Eastern European bloc severed its ties to the S oviet Union between the late 1980s and early 1990s, Hungary led the w ay, becoming the first satellite nation to transition to Western-styl e parliamentary democracy and a free market economy. Hungary also enj oyed what was considered to be the smoothest transition of all the So viet-bloc countries, easing relatively trouble free into a private-en terprise-based economy that attracted the likes of HTCC and other fir ms seeking to take part in the country's large-scale privatization ef fort.

Beginning in 1988, Hungary began establishing the foundation for a ma rket economy, a process that, in part, involved dismantling governmen t-owned and -operated monopolies and allowing the private sector to s tep in and take control. In the telecommunications sector, Magyar Tav kozlesi Rt. (Matav) ruled supreme during the communist era, operating as a government-controlled monopoly in charge of the country's entir e telecommunications system. In 1992, the Hungarian government began the process of privatizing the country's telecommunications industry by selling a 30 percent stake in Matav to MagyarCom, a company owned at the time by Deutsche Telekom AG, a German public telephone company , and Ameritech, a U.S. based telecommunications company. Over the co urse of the ensuing decade, Matav's ownership changed. In 1995, Magya rCom increased its stake in Matav to 67 percent. In 1997, Matav compl eted its initial public offering of stock, which reduced the interest s held by MagyarCom and the Hungarian government to 60 percent and 6 percent, respectively. In 1999, the Hungarian government sold its 6 p ercent stake. In 2000, Deutsche Telekom purchased the stake in Magyar Com owned by Ameritech's successor, SBC Communications Inc., which le ft MagyarCom, a German-controlled company, in majority control of Mat av.

The initial 30 percent stake sold in 1992 to MagyarCom coincided with two other events, one that reshaped Hungary's telecommunications lan dscape and the other, the formation of HTTC. The Hungarian government divided the country into 54 telecommunications service areas, thereb y creating a way to sell the rights, the concessions, to private inte rests and remove the service areas from Matav's network of local, wir eline telephone service. Matav was allowed to continue its monopoly i n providing domestic and international long-distance services for ano ther decade and it would continue to own the concessions to local wir eline service in some areas, but the privatization of the company and the division of the country into telecommunication fiefdoms made roo m for other interested parties to enter Hungary's telecommunications industry. HTCC was one of the interested parties that joined the fray , a company formed in March 1992 to acquire concession rights to oper ate as a local, wireline operator. Although it intended to operate on ly in Hungary, the company established its headquarters in the United States, occupying offices in New Jersey and Connecticut before movin g to its main offices in Seattle, Washington. The company's business was conducted through a Budapest-based company, Hungarotel Tavkozlesi Rt., HTCC's primary operating subsidiary.

The process of determining whom Hungary's new local telephone operato rs (LTOs) were going to be began in 1993. The Hungarian government st arted soliciting bids for concessions to build, own, and operate tele communication networks in 25 of the 54 service areas not controlled b y Matav. The government awarded 23 of the 25 concessions, allowing Ma tav to retain the rights to the two service areas for which there wer e no successful bidders. The winning bidders represented the new face of Hungary's telecommunications industry, the companies against whom HTCC would compete in the coming years. HTCC acquired the concession rights to five service areas. Matav acquired the rights to eight ser vice areas. Monor Communications Group, part of Denver, Colorado-base d UnitedGlobalCom, Inc., acquired rights to one service area. A joint venture company, Invitel Telecommunications Services Rt., controlled by AIG Emerging Europe Infrastructure Fund and GMT Communications Pa rtners Limited, acquired the rights to nine service areas.

Mid-1990s: HTCC Building Its Backbone

For HTCC, one year old when it received the nod of approval from the Hungarian government, winning the bid did not mean the company could immediately enjoy a revenue stream to offset its operating costs. HTC C began as a development-stage enterprise, a status that would contin ue for three years after its formation. The years were spent raising debt and equity financing, assembling its management team, and obtain ing the all-important concession rights. The company paid $11.5 m illion for the rights to its five service areas, a territory of opera tion comprising three regions: Bekes, Nograd, and Papa/Sarvar. Of the three regions, Bekes was the largest in terms of population, home to 391,700 of the company's total population base of 668,000. Nograd wa s slightly larger than Papa/Sarvar, with the two regions claiming 147 ,900 and 128,400 residents, respectively. For the money paid for its concession rights, HTCC received a 25-year license to provide local, wireline telephone service to its service areas and an agreement to h ave exclusive rights to its service areas for a decade, the same term s accorded to Monor, Invitel, and Matav. To become a fully operationa l company, HTCC needed the infrastructure to put its concessions to u se. In the first fiscal quarter of 1995, the company acquired 15,500 telephone access lines from the Hungarian government, the first phase of an acquisition program that saw HTCC pay $23.2 million betwee n 1995 and 1996 for existing telecommunications infrastructure, which included 61,400 access lines. The initial acquisition enabled the co mpany to generate revenue for the first time in 1995, a year in which revenues reached $4 million. The acquisition of additional acces s lines in 1996 increased revenues to $20.6 million, but the end of HTCC's development-stage period of existence did not confer profit ability to the company. HTCC lost $20 million in 1995 and $54 .7 million in 1996, which, when added to the losses incurred during t he company's developmental stage, brought total losses to more than & #36;80 million.

Although the acquisition of access lines and infrastructure assets fr om the Hungarian government put HTCC in business, much remained to be accomplished before the company could take full advantage of its ser vice areas and turn its losses into profits. The infrastructure acqui red in 1995 and 1996 needed to be upgraded, requiring millions of dol lars to replace antiquated manual exchanges and analog lines, and the telecommunications network needed to be expanded to serve all the re sidences and businesses in the company's operating areas. Between 199 6 and 2000, HTCC's capital expenditures totaled $190 million, con tributing to a net loss of $36 million in 1997 and $50 millio n in 1998, but by the end of the period the bulk of the improvement a nd expansion effort was completed. By the end of 2000, the company ha d the capacity to provide basic telephone service to all of the 283,3 00 homes and 38,400 businesses in its three operating areas, fueling hopes for a more profitable future.

HTCC began to perform encouragingly well during the first years of th e 21st century, enjoying financial success for the first time, which gave it the ability to expand the scope of its business. After record ing its first annual profit in 1999, a $3.1 million gain, the com pany lost $5.3 million in 2000, but went on to post a profit for four consecutive years. HTCC reported net income of $11.1 million in 2001, $27.3 million in 2002, $12.4 million in 2003, and & #36;16.2 million in 2004. Revenues during the period increased from & #36;42.9 million in 2000 to $60.3 million in 2004, supporting the feeling that the company, after years of investment, had established a stable business foundation. Against the backdrop of improved finan cial results, the first half of the decade included several significa nt events. In 2002, the company's exclusive operating rights to its s ervice areas expired, but the year also marked the end of Matav's abs olute control over providing long-distance service, which opened a ne w avenue of growth for HTCC. The period's most noteworthy event occur red on the acquisition front, when a new addition to HTCC's holdings substantially strengthened the company's role in Hungary's telecommun ications industry.

Acquisition of PanTel in 2005

In 2004, HTCC took the first step toward adding a new operating subsi diary. In November, the company acquired a 25 percent stake in PanTel Tavkozlesi Kft., a company founded in 1998 by the Hungarian state ra ilroad company to compete with Matav. Using the railroad company's ri ghts-of-way, PanTel built a fiber-optic telecommunications network sp anning 3,700 kilometers that was capable of carrying voice and data t raffic, as well as voice and data over Internet Protocol. PanTel, unl ike Hungarotel, served the entire country, including Budapest, where nearly one-fifth of the country's population resided. Further, once M atav's monopoly rights for long distance voice services expired in 20 02, PanTel began serving customers in neighboring countries, includin g Austria, Bulgaria, Croatia, the Czech Republic, Romania, Slovakia, Slovenia, and Ukraine. PanTel offered its telecommunications services to business customers, and through PanTel TechnoCom, provided servic e to the Hungarian oil company Mol Magyar Olaj-es Gazipari Rt. In Feb ruary 2005, HTCC completed the acquisition of PanTel, acquiring the 7 5 percent of the company it did not already own from the Dutch teleco mmunications company Royal KPN NV. The acquisition represented a majo r addition to HTCC's operations, combining PanTel's $128 million in revenues to HTCC's $60 million in revenues and giving the comp any national and international exposure to the telecommunications mar ket.

In the wake of the acquisition, HTCC stood poised to play a more prom inent role in Hungary's telecommunications industry. Belief in the co mpany's potential increased, particularly in the minds of executives at the Danish telecommunications giant TDC A/S, formerly known as Tel e Danmark. TDC had been an early investor in HTCC, increasing its sta ke in the company to 21.3 percent by 2000 before taking a 63 percent interest in March 2005. Executives at TDC were convinced HTCC had the potential to become a legitimate competitor to Deutsche Telekom's Ma tav, a belief that pitted a Danish company against a German company f or control of Hungarian telecommunications services. In mid-2005, onc e under Danish control, HTCC began integrating Hungarotel, PanTel, an d PanTel TechnoCom into a single company to be housed in the same off ices and managed by the same executive team. The process was expected to be completed by the end of 2006. As the company prepared to incre ase its stature and wage a more competitive battle against Matav, the re was much ground to be gained. Matav, with annual revenues eclipsin g $3 billion, boasted local wireline service areas covering 72 pe rcent of Hungary's population and 70 percent of its geographic area. HTCC could not expect to overtake its much larger rival in the near f uture, but the TDC-controlled company was intent on narrowing the gap separating the two telecommunications providers.

Principal Subsidiaries: Hungarotel Tavkozlesi Rt.; PanTel Tavk ozlesi Rt.; PanTel TechnoCom Rt.

Principal Competitors: Magyar Telekom Telecommunications Compa ny Ltd.; BT Group PLC; Deutsche Telekom AG.

Chronology

• Key Dates:
• 1992: Hungarian Telephone and Cable Corp. (HTCC) is formed to take part in the privatization of Hungary's telecommunications indust ry.
• 1993: HTCC acquires the rights to operate in five service area s.
• 1995: HTCC begins providing local telephone service.
• 2000: All major expansion and improvement work on the company' s infrastructure is completed.
• 2005: PanTel is acquired.