Elektrim: A Bright Light Dims

The conglomerate's bond default puts its survival in doubt

In the late 1990s, Poland's economy was booming, and investors at home and abroad were looking to grab a piece of the action. A favorite target was Elektrim, a formerly state-owned trading company. Its supervisory board had hired Wall Street financier Barbara L. Lundberg as chief executive, and she was spending $1 billion remaking the company as an energy, telecommunications, and cable-television powerhouse. Elektrim surged on the Warsaw Stock Exchange, and it was held up as a model for the free-market transformation of Eastern Europe.

Now--well, the story is not pretty: Elektrim looks more like a textbook case of corporate overreaching, managerial ineptitude, and investor folly. It lost 80% of its market capitalization last year and has defaulted on $424 million of convertible bonds. The board fired Lundberg last May. Then, after a stormy 14-hour session on Feb. 5, it also fired her successor, acting CEO Waldemar Siwak, and his deputy. There are no allegations of criminal mischief or shoddy accounting, but there is serious concern in Warsaw as to whether the group can survive. "It doesn't look good," says Bob Creamer, an analyst who follows Elektrim for Austrian bank RZB.

What went wrong? Everything. Elektrim expanded too quickly, took on too much short-term debt, and failed to exploit synergies between various parts of the group. And the machinations of major shareholder Vivendi Universal, plus rows with partner Deutsche Telekom (DT ), didn't help either. The group, which turned a $340 million profit in 1999 on revenue of about $1 billion, lost $250 million on revenue of about $1.4 billion in 2000. In the first half of last year, it lost $40 million on revenue of $700 million. The board brought in Siwak, an ABN-Amro Securities (Polska) investment banker, to clean up the mess, and he raised $105 million in much-needed cash by selling Elektrim-Kable, its steel-cable manufacturing unit. But little else he did worked. "We were planning a financial restructuring, but the banks refused to come to our aid," he says. Instead of lending Elektrim more money, four banks and an insurance company called in short-term loans late last year when it became obvious the company would default.

Siwak says he had no choice but to default. Angry bondholders--the biggest potential loser is Spanish construction company Acciona, with 30% of the securities--counter that Elektrim could have used the cable-sale proceeds to make payments due in December. On Jan. 4, bondholders went to court to have Elektrim declared bankrupt, in what would have been Central Europe's biggest corporate failure. A Warsaw judge rejected the move on Jan. 16, giving management breathing space to devise a debt-restructuring plan.

The question now is whether the new management team--headed by Jacek Krawiec, a supervisory board member who has been CEO of metals trader Impexmetal--can work out a deal with bondholders. Siwak had proposed that they write off 40% of Elektrim's debt and give it three years to pay the rest. But the bondholders insist on full payment. Ryszard Opara, an entrepreneur who owns 6% of Elektrim's stock, says repaying its debt in full will make Elektrim more attractive to equity investors. "If we sell the telecommunications assets we will have no debt," he says.

But doing that won't be easy. Elektrim is fighting with Deutsche Telekom over the ownership of the group's mobile unit, Polska Telefonia Cyfrowa. An arbitration court in Vienna isn't expected to rule before April, meaning that it could be months before Elektrim can put that asset up for sale. Meanwhile, a return to bankruptcy court looms. For this former highflier, staying aloft is going to be a real struggle.

By David Fairlamb in Frankfurt and Bogdan Turek in Warsaw

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