Sazka could face insolvency

The fate of betting company Sazka, the largest, nongovernment contributor to sports organizations in the country, is in the balance as the company scrambles to pay off debt while its creditors threaten to start insolvency proceedings.

Today's problems can be traced to 2004, when the company issued bonds to raise 10 billion Kč to build the multipurpose Vysočany arena now known as the 02 Arena in Prague 9. The company has struggled to repay that debt, and now creditors who bought the company's debt from banks are trying to recoup the money. Sazka executives admitted in mid-December they did not have enough money to pay debts due in January but denied their company is insolvent.

"[Sazka's] economic situation is stable, and the value of assets is higher than obligations," Zdeněk Zikmund, a spokesman for Sazka, told The Prague Post.

The company may be facing an even bigger bill, however, as the firm could be slapped with back taxes. After joining the European Union, an exemption from VAT for betting companies was annulled. However, a loophole was created in Parliament to allow for a partial exemption.

Finance Minister Miroslav Kalousek has contested the exemption, and the Supreme Administrative Court has found that although there were procedural problems with a lower ruling that required the VAT to be paid back, they did agree that Sazka owes at least 23.1 million Kč.

At the forefront of the company's problems is a battle with its main creditor, Radovan Vítek, who currently owns about 950 million Kč of debt bought from Raiffeisenbank and Komerční banka.

Vítek is in talks with J&T Bank to buy another 500 million Kč of that debt. Vítek has said he expects to reach a deal with the bank soon, but Petr Málek, a spokesman for J&T, said he could not comment beyond confirming the talks were indeed underway.

Vítek insists Sazka is behind on paying back debt and has threatened to pursue insolvency proceedings if the company does not repay his full 950 million Kč of debt by Jan. 17. If the deal goes through with J&T for the additional debt, Sazka will owe him 1.45 billion Kč.

"I would like highlighted for shareholders and management the fact that all of Sazka's debts I own are long overdue and ... bear a high penalty interest rate of 20 percent," Vítek said in a statement.

The company said in a release that they were ready "to pay - as in the past - any undisputed obligations toward its creditors and partners."

Since Vítek's demands became public, other rumored deals have been reported, including a 5 billion Kč offer by Synot, another gaming company, for 66 percent of company shares, according to news site Aktuálně.cz. A spokeswoman for Synot declined to comment to The Prague Post on the matter, while Sazka said in a release about a shareholders' meeting that they "considered offers that they have, as owners of the company, received from various financial entities."

Sazka executives have said they can get company finances under control through restructuring, and some say a legal complaint filed by Sazka against Komerční banka for nearly 1 billion Kč in damages to Sazka's reputation is a tactic to gain negotiating time with creditors and potential partners.

"I don't think they can seriously claim their reputation was damaged because, from a financial point of view, it was already damaged in the media, so it's a technique to delay," said Martin Hrodek, a partner at Baker & McKenzie in Prague who works in dispute resolution. "Even just one or two days can make a difference."

Also in dispute is Sazka's value. Zikmund said the company was currently valued at 15.1 billion Kč, of which 3.8 billion Kč comes from subsidiaries of Sazka, but others have quoted lower numbers. Penta Investment, in a confidential letter to Sazka's shareholders, said company shares were worth nothing, according to Aktuálně.cz, which obtained the text.

Penta, which owns the gaming company Fortuna, was involved with Sazka from 2006 to 2009 when it issued bonds for the company and acted as an adviser, according to its spokesman, Martin Danko. In mid-December, Penta approached Sazka shareholders about providing 2 billion to 3 billion Kč in financial assistance under conditions the company be restructured, the O2 Arena sold and the leadership replaced. That deal was rejected by Sazka after the company said Penta had used corrupt and threatening tactics in negotiations, as well as defamed the company, for which Sazka is seeking billions in damages against Penta. Penta denies the allegations.

"We are a financially strong partner with strong competence and know-how in restructuring, thus we can guarantee Sazka shareholders that if they decide to cooperate with Penta, we could avoid the threat of insolvency, stabilize the company and would be able to provide sports associations their regular annual payments to support their sports activities," Danko said.

Under insolvency law, an insolvent company can go one of two routes, according to Hrodek. They can reorganize under the auspice of a trustee appointed by the court, or they can enter bankruptcy.

The most likely route, if all goes Vítek's way, would be reorganization. Vítek is preparing a restructuring plan for business continuity of the company in partnership with Josef Lébr, president of the soccer club Sigma Olomouc, and has talked about creating a new method for financing sports.

"We would like to see Sazka's board include representatives of the Finance Ministry and the Education, Youth and Sports Ministry, which would guarantee public control and transparent management as well as the allocation of money to sports," Lébr said.

Sports associations that depend heavily on Sazka money would suffer significant losses if Sazka were to go under. Already, the flagging finances of Sazka have caused a sharp decrease in the company's contributions to sports organizations outside of its obligations to associations that are shareholders. Sports association officials have said there are fears that if the company were to go bankrupt, there would be no money to cultivate new sports talent, and Kalousek has said the ministry would not make up for Sazka's contribution should it go under.

Whether a creditor would have the power to go through with its plans is dependant on other creditors and on the agreement of the trustee selected to lead the company through its insolvency, Hrodek said.

"If the majority agrees, they can consent to recall the trustee appointed by the court, and they can make recommendations to the trustee," he said. "If the reorganization route is approved, creditors will begin to be paid parts of their claims. Upon completion of those payments, ... the creditors will disappear, and it will be back to running like a normal company."

- Filip Šenk contributed to this report.

Cat Contiguglia can be reached at
ccontiguglia@praguepost.com