Complicated Divorce

Economic News

22 Jul 2010
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After months of legal cases and seemingly irreconcilable differences, the battle between the Russian and Norwegian shareholders of Ukraine's leading mobile operator seems to be edging to a conclusion.



Norway's Telenor had recently set an April 14 deadline to resolve the conflict with Russia's Alfa Group over Kyivstar by offering to sell its stake in the company to Vimpelcom - the second-largest Russian operator, also jointly owned by Telenor and Alfa Group.



Telenor has a 56.5% majority stake in Kyivstar and 26.6% in Vimpelcom, while Alfa Group - through its wholly owned Altimo - has 43.5% in Kyivstar and 32.9% in the Russian mobile operator Vimpelcom.



Dag Melgaard, Telenor's chief press spokesman, told OBG on April 14 - the day of the extended deadline - that the two parties have now entered talks and that "constructive discussions between the two shareholders have begun. The deadline is therefore no longer an issue."



Although Melgaard was unable to say how long the negotiation process could take, he confirmed to OBG that Telenor wants to consolidate its stake in Vimpelcom by selling off its stake in Kyivstar.



However, it is not yet clear who will take ultimate control of the new structure, the Russians or the Norwegians. There is a key clause in Telenor's proposal that in addition to $5bn in cash for 100% of Kyivstar's shares, the sale could trigger a tender for Vimpelcom's shares if one of the parties so decides.



The move is based on the so-called market-based separation principle that, analysts say, is similar to a family divorce. Vimpelcom's shares will be sold to the highest bidder through a tender process, leaving just one principal owner of the company and thus effectively ending the partnership between Telenor and Alfa Group.



Although this mechanism would help to sever the unhappy marriage ties between the Russian and Norwegian investors - which some market-watchers say has all the hallmarks of an East-West clash of business cultures - the offer may carry a high price for Alfa Group, which would have to either part with a large pile of cash or exit the company.



Telenor, on the other hand, according to Melgaard, is quite happy to exit both Vimpelcom and Kyivstar if it cannot secure control of one of the entities.



"It is Telenor's strategy to have controlling stakes, and we have in the past left markets where we were unable to achieve our goal," he said.



Meanwhile, the relationship between the two investors is now almost certainly beyond repair, with both companies locked in a prolonged bitter legal battle over management practices and over voting rights on Kyivstar's board of shareholders.



Alfa's subsidiary company in Ukraine, Storm, has used the Ukrainian courts to challenge what, it claims, was domination of the decision-making process. Alfa also questioned the service management agreement, according to which a Telenor-owned company gets paid a fee for management services.



In a press statement last year, Alfa said: "Kyivstar pays millions of dollars a year for overpriced management services that do not meet with the professional standards of the market."



Telenor, on the other hand, has accused Alfa of sabotaging the company's decision-making process by not attending board meetings and relying on a less than perfect Ukrainian legal system to damage Telenor's interests in Ukraine. Telenor insists that the dispute should be settled outside of Ukraine in an arbitrage court in New York.



The most painful move against Telenor's interests in Ukraine was Vimpelcom's recent acquisition of Ukraine's fourth-largest operator Ukrainian Radio Systems (URS) - which is set to compete against Kyivstar. Alfa Group managed to force through the $231.1m acquisition, despite Telenor's protests and threats of further legal action.



Vimpelcom entered the Ukrainian market in November last year and has recently launched its well-known Russian brand Beeline, with a view to acquiring 15% of the Ukrainian mobile phone market. This has targeted especially the Russian-speaking areas in the east of Ukraine, such as Donetsk.



Telenor's executive vice-president, Jan Edvard Thygesen, told reporters recently that the company was bewildered that Vimpelcom was investing large amounts money and effort, while there were still discussions going on between the Russian and Norwegian shareholders regarding the purchase of Kyivstar.



Some market-watchers say the move is clearly designed to put the Norwegian shareholders under pressure and that Alfa Group may well have to exit its investment in URS if the deal goes the Telenor way.



Originally, however, Alfa Group wanted to merge the Russian and Ukrainian mobile operators - a move that was fiercely resisted by the Norwegians. Telenor has 26.6% of voting shares in Vimpelcom as opposed to Alfa Group's 32.9%, and has made it apparent that it does not want to be diluted out of Kyivstar, where it enjoys a majority stake of 56.6%.



A merger of Vimpelcom and Kyivstar would not just give Alfa group the upper hand, but would flush out Kyivstar's revenue performance from Telenor Group's consolidated financial statements - a rather significant loss for a listed company, where Kyivstar revenues account for around 10% of total revenues.



Meanwhile, Kyivstar continues to enjoy stellar growth, largely unfazed by the shareholder dispute. According to the latest reports, Kyivstar has added another 457,000 subscribers since the beginning of 2006, bringing the total very close to 15m - some 120% up on last year - claiming just over 50% of the total mobile phone market.



But with total mobile penetration levels in the country still under 60%, the existing players are counting on even better times ahead. Against this background, it is perhaps not surprising that the shareholders of Kyivstar are at loggerheads over how to tap into this superlative growth market.



Ultimately though, analysts say, it is a battle of foreign shareholders on Ukrainian ground. Yet whoever emerges victorious in an anticipated market-based divorce, the spat is unlikely to dampen the prospect of growth for Ukraine's leading market operator, Kyivstar.

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