INTERVIEW: Telenor bides its time in dispute with Russia's Alfa

By bne IntelliNews May 18, 2007

Ben Aris in Berlin -

The Norwegian telecommunications group Telenor increased its voting stake in Russia’s second-largest mobile operator VimpelCom from 26.6% to 29.9% this week, paying $745m for the extra shares. However, it's in "no rush" to settle a long-running dispute over control with fellow VimpelCom shareholder Altimo, part of Russia's Alfa Group.

"We have taken the shares onto our own balance sheet so we can vote the shares," says Kjell Morton Johnsen, chairman of Telenor, Russia. "Previously these shares were held in a swap arrangement so we enjoyed the economic exposure but didn't have the voting rights."

Kjell Morton Johnsen

Telenor has increased its voting shares in the hope of raising the number of its representatives on the board to three, but continues to have preferential shares that give it 34.2% economic exposure to the company. Under Russian law, Telenor cannot own more than 30% of the company without triggering a mandatory offer to buy out the other shareholders at market prices.

VimpelCom's other key shareholder is Altimo, the telecom arm of the Russian industrial and financial holding Alfa Group. The two have been at war over the Alfa owner Mikhail Fridman's desire to merge VimpleCom with Ukraine's biggest mobile phone company Kyivstar, in which both companies also own stakes.

And the stakes are getting higher with every day that passes. VimpelCom's net profit soared 80% on the year to RUB30.2bn (€868m) in 2006, as calculated under Russian Accounting Standards (RAS), the company said Tuesday.

Telenor says that as long as Altimo does not secure a majority, VimpelCom's shareholder agreement guarantees that Telenor can nominate five of VimpelCom's nine board members. But if Altimo's stake in VimpelCom exceeds 44%, it will be able to nominate four executive board members directly. Below that threshold, it can propose three executives and one independent director.

Altimo currently holds a 42.4% voting stake in VimpelCom, but only has 35% of economic exposure to the company – the reverse situation to Telenor.

"Telenor gets to vote less than its economic exposure, whereas Altimo gets to vote more," says Johnsen. "We are not complaining, this is what was agreed during the negotiations."

The alternative age

Telenor entered the Russian market in 1992 and was an early contender in the digital overlay network business. In the first half of the 1990s, business was desperately searching for an alternative to the Soviet-era phone system. Those were the days when two apartments still shared one phone and the lines were crackly and unreliable.

Today, following investments by the likes of regional providers like MGTS, which serves the city of Moscow, most of Russia enjoys normal standards of quality, while providers like Golden Telecom have moved into "new economy" businesses like broadband and data transmission.

"If you are using the internet in Russia then there is an 80% chance you are using a Golden Telecom network," says Johnsen. "If you are making a call from a five star hotel in Moscow, then it's 100%."

But the big investments really came in the latter part of the 1990s when Telenor took its stake in VimpelCom and a majority stake in Ukraine's Kyivstar. Alfa followed it into both investments and that is when the problems started. A string of lawsuits have paralysed Kyivstar and there now exists an uneasy stalemate between two groups. Telenor posted a 27% drop in first-quarter net profits this year after it had to exclude earnings from Kyivstar, which has no audited accounts after Alfa refuse to vote for them during a board meeting.

"We did offer to give up majority of Kyivstar last year if we could agree on a transparent way to settle disputes that was bullet proof," says Johnsen. "If the deal had gone ahead, then both us would have ended up with about 30% of the company, but the terms of the deal were unacceptable to Alfa. We are not willing to invest into the company without these assurances."

It would have been a good deal for Alfa, as the Russian firm would have got hold of Kyivstar for around $5bn. Since then, prices of telecom assets have risen considerably. Telenor currently owns 56.5% of Kyivstar, which is the most valuable company in the country.

Trond Moe, the head of Telenor's Ukrainian operations, says he's been spending most of his time running between regional courts putting out fires. Alfa has launched a string of legal suits in the regional courts against Kyivstar. As soon as they get one decision overturned, another appears, often the same day, says Moe, who bemoans the fact that there are over 300 regional courts in Ukraine. He expects to visit them all.

"Often one Alfa entity sues another and then drags us into it," says Johnsen. "I don't think that Ukraine is well served by people running around district courts that are thousands of kilometres apart. But we will sort it out in the end."

"We will get through with Kyivstar. I don't know how long it will take, but we will," he says, adding that it's "disgraceful" the company doesn't have any audited accounts.

Politics and plans

In addition to the corporate headaches the company has to put up with, politics in Russia and Ukraine are both unstable, which adds more uncertainty. Russia faces a crucial vote to choose a new president in just under a year and no one has the foggiest idea of what will happen. And Ukraine is in the middle of a full-blown political crisis that will probably end in new elections sometime in the next six months, which could radically alter the country's course.

Johnsen says Telenor has seen all this before in the 1990s and is confident that the firm can navigate the political potholes on the road ahead. "Our company follows the law and doesn't play political games. A stable situation is good as it leads to predictabilities, but we have experienced political instability in many of the countries we work in – Telenor is in a total of 14 countries. As long as you follow a clean and transparent line, you will always end up in good shape."

Johnsen acknowledges that if things do go awry, politics could impact Telenor's business, but he remains quietly optimistic that everything will turn out alright. "The basis for developing a more diverse economy now exists in Russia. If things continue under the new leadership as they have gone so far, then there is a fair chance that things will continue to improve."

Ironically, the interests of Telenor and its fellow shareholder Alfa are aligned; what they can't agree about is who should be in the driving seat. Alfa's Fridman says he wants to merge all Altimo's telecom assets in the CIS to build a "Vodafone of the east" – known as the "Eurasia project" amongst Alfa employees.

"It makes a lot of sense – considering we gave him the idea in the first place," says Johnsen. "We discussed this with Alfa shareholders and there was even talk of Alfa coming into Telenor as a minority shareholder. But Alfa saw it as an opportunity to strengthen its hand – it got too eager and put people off."

Johnsen says that Altimo has lots of plans, but argues that the basic flaw in its strategy is that it has taken minority stakes in most of these assets. Without control, he says, it is very hard to add value and build a real integrated company.

"We know from working in our 12 counties you need to build a corporate backbone to add value or else you end up managing assets from the financial point of view," says Johnsen. "We take a major position in a company and bring all the pieces together."

Johnsen insists that a peaceful resolution to the dispute is still possible and there are several possible outcomes - Telenor could end up either buying Alfa out or be bought out by Alfa, depending on the terms.

"We are interested in both options, but it will all depend on what price and now – after the valuation appreciation of the last few years – the prices would be high," he says. "But we have given ourselves plenty of time to work this out as we believe we will get there in the end."

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