Landline Hang Ups

Economic News

22 Jul 2010
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Ukraine's telecommunications sector is, potentially at least, in line for a major shake up, with plans to privatise a controlling stake in state-owned landline operator Ukrtelecom.



Proposals to sell off Ukrtelecom have been around since the 1990s, with different formulas and percentages being floated at various times, along with varying assessments of the company's net worth.



In the latest version of the plan to privatise Ukrtelecom, an open joint-stock company that holds a 70% market share of local landline operations, the government has proposed selling off 67.79% of Ukrtelecom's shares. Currently, the state has a 92.79% stake in the company, with the company's employees holding a further 7.14%.



The government's plan, announced in February by the State Property Fund (SPF), initially foresaw the privatisation process beginning in March, though this did not take place, casting some doubt on the timeframe for the sale.



Although it did not meet its own deadline to start the process, the government has recently put Ukrtelecom back on the agenda. During a visit to South Korea in mid-July, Prime Minister Yulia Tymoshenko called South Korean firms to place a bid for Ukrtelecom, part of the premier's push to attract Asian investment into the Ukrainian economy.



On July 17, as a step towards the privatisation, the cabinet approved a resolution on designating the Ministry of Transport and Communications as the property manager of Ukrtelecom, removing it directly from the control of the SPF.



However, the government may have missed the boat if it is hoping for a substantial cash windfall from the sale of Ukrtelecom, with the company's overall value having slipped badly in the past year. The stake in the company that is to be sold off was estimated to be worth around $3bn in 2008; current pricing puts it at around $940m, due in no small part to the sharp fall in the local currency.



Its attractiveness as an asset has not been helped by Ukrtelecom recording a $194m loss last year, compounded by a further $32m worth of red ink in the ledger for the first quarter of 2009, a turn around from a net profit of $33m at current rates in 2007.



More likely to give potential suitors pause than the telco's financial statements is the political cloud that hangs over the proposed privatisation, with President Viktor Yushchenko staunchly opposed to the sale.



In February, after the plan to privatise Ukrtelecom was unveiled, a senior official of the president's office said Yushchenko would do everything possible to block the sale.



"The president will not allow the sale of strategic state objects very cheaply to cover what is in fact an inefficient budget policy," Roman Zhukovsky, the head of the chief service for social and economic development at the presidential secretariat, told a media briefing.



Yushchenko and Tymoshenko, formerly close allies, are at loggerheads over numerous issues, including management of the faltering economy, combating corruption and ties with Russia. Having repeatedly blamed the Tymoshenko-led government of failing to protect the economy and the Ukrainian people from the fall out of the global financial crisis, it is no surprise that the president has opposed the sale of Ukrtelecom.



However, with his term ending in mid January, and polls suggesting it is unlikely he will be re-elected to office, Yushchenko's capacity to stall the Ukrtelecom privatisation appears to have a limited life span.



According to the SPF, there are at least 10 companies interested in bidding for the Ukrtelecom stake, though this assessment was made in March, and could be optimistic given the present variable political and economic climate.



Climate change notwithstanding, one interested party is Turkey's largest mobile phone operator, Turkcell, which already has a presence in the Ukrainian telecoms sector, owning a controlling interest in Astelit, the country's third-largest mobile services provider.



In mid-February, as discussions over the privatisation of Ukrtelecom again gained momentum, Turkcell's chief executive officer, Sureyya Ciliv, said his firm was considering making a bid for the landline operator.



"It is an interesting situation but we need to understand the terms of the deal, and our teams are studying that," he told the Reuters news agency on February 16. "Based on the study, we will make a decision if we are a serious interested party who is willing to bid."



With Tymoshenko favoured to replace Yushchenko as head of state after next January's presidential elections, the long road towards the privatisation of Ukrtelecom could have some of the bumps smoothed out. Perhaps only then will the terms of the deal become clear attracting foreign buyers.

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