EURASIA BLOG: TeliaSonera loses its appetite for risk

By bne IntelliNews September 23, 2015

Jacopo Dettoni in Almaty -


TeliaSonera, the Nordic telecommunications group with a sweet tooth for risky bets in emerging markets, is done with Eurasia. After months of speculations over the bribery allegations raised by American, Dutch and Swedish investigators, the board has announced its decision to leave the region altogether to refocus with a clean sheet on its core markets in the Nordic and Baltic regions.

Its Eurasian assets did gain TeliaSonera leading market positions and double-digit growth rates across the region, but they came at the cost of taking high risks over transparency, profit repatriation and currency exchange rates. The board tried to cope with all that for years, but as corruption allegations hit the headlines and market conditions quickly deteriorated, it eventually decided business opportunities were not enough to offset the risks any more.

Although specific factors played a big role in TeliaSonera’s sudden decision, it still represents another big setback for the investment climate in the region, which had already become less attractive because of declining growth rates and depreciating currencies.  

“The current situation, with low oil prices and the weak ruble putting pressure on local currencies, which negatively affects local economies as a whole, comes at a time when there is increased awareness of the entrenched corruption in the region,” Kate Mallinson, partner and Central Asia expert at business intelligence firm GPW, tells bne Intellinews.  

“Western companies are on a different footing because of the increasingly demanding and punitive anti-bribery legislation in the West. It’s become increasingly difficult for them to do business where the nexus between politics and business is so tight. All these factors are deterring investment across the region – we haven’t seen any major deal in the region for years.”

Unidenitified beneficial owner

TeliaSonera’s CEO, Jonah Dennelind, left little room for doubt over the reasons that pushed the board to announce its intention to exit Azerbaijan, Georgia, Kazakhstan, Moldova, Nepal, Tajikistan and Uzbekistan.

“In Uzbekistan and Azerbaijan we have a couple of partner relationships where we still don’t know the ultimate beneficial owner (UBO),” Dennelind said in a conference call on September 17.

“At the same time, we have problems with cash repatriation from Uzbekistan and Nepal, with close to SEK5bn (€535mn) of trapped cash with no clear solution in sight. By now, we exhausted our options to fix these issues.”

TeliaSonera established a footprint in the region in the late 1990s when Turkish mobile operator and partner Turkcell set up subsidiaries providing GSM services in the Caucasus and Central Asia. These local subsidiaries were then regrouped under the umbrella of Dutch holding Fintur in 2000. To date, TeliaSonera retains a 58.55% majority stake in Fintur.

Over the years, the board used Fintur to increase control over local subsidiaries, and also acquired direct control of new assets such as Uzbek mobile operator Ucell, previously known as Coscom.

Eurasian subsidiaries have represented the group’s “growth engine” for years, and they represented 23% and 33% of, respectively, consolidated revenues and ebitda in the first half of 2015.

“These are very profitable subsidiaries, but profit on paper doesn’t mean we have got cash in Stockholm because of repatriation problems,” CEO Dennelind bitterly admitted.

At the same time, the group paid a high toll for its achievement in the region. Public prosecutors in the US, the Netherlands and Sweden put the company under investigation for allegedly paying dozens of millions of dollar to a Gibraltar-based shell company called Takilant in 2007 to acquire operating licenses and frequencies in Uzbekistan. Investigators and whistleblowers connected Takilant to Gulnara Karimova, the daughter of Uzbek President Islam Karimov.

These allegations forced out former CEO Lars Nyberg, although TeliaSonera has always denied any wrongdoing, claiming it was unaware of the company’s link to the Uzbek ruling elite.

At the same time, a recent report by the Organised Crime and Corruption Reporting Project claims Teliasonera handed a valuable stake in Azeri mobile operator AzerCell to Turkish company Cenay Iletisim, which is allegedly linked to Azerbaijan President Ilham Aliyev’s daughters, Leila and Arzu, in 2008. Again, the company claimed to be unaware of the company’s ultimate beneficial owners.

“The telecommunications sector is particularly vulnerable to corruption practice, owing to the strong interplay between the private and public sector,” GPW’s Mallinson says. Russian telecommunications group MTS and Netherlands-based peer Vimpelcom are also under investigation for obtaining Uzbek licenses through Takilant.

“The licensing process in particular is the corruption Achille’s heel for companies in the sectors. Besides, once they acquire phone licenses, they have to oil the corruption wheel not to lose market shares […] Unfortunately the whole region seems to have become tainted; by now “the Stans” as a whole have a reputation for corruption and lack of transparency, which now coupled with ailing economies means there are no high revenues and profits to be made as it was back in the 90s.”

Not an easy process

Yet TeliaSonera’s assets remain strong assets with good margins, at least on paper, and there is space for new long-term investors to step in, Ivàn Palacios, senior credit officer at Moody’s, tells bne Intellinews. Any investors, however, must be willing to stomach the risks – both reputational and financial – of doing business in Eurasia.

TeliaSonera’s historic partner in the region Turkcell has already launched the process to mandate a strategic and financial advisor in order to evaluate options to acquire TeliaSonera’s 58.55% stake in Fintur, the company disclosed.  

“Turkcell has the financial flexibility to do that as they have relatively low leverage. Turkcell comes across as a natural buyer, but I believe that TeliaSonera will try to maximise the value of these assets and speak to as many different interested parties as possible,” Moody’s Palacios says.

There is also an ongoing legal battle for control over Turkcell, in which TeliaSonera holds a 38% stake, which may make it difficult for the Turkish operator to reach a deal to take over Fintur. Instead, it may be easier for TeliaSonera to divest from its directly controlled assets in Uzbekistan, Tajikistan and Nepal.

“Russia’s Alfa Group, which is seeking to gain control over Turkcell, may be interested in expanding its presence the region, although its ownership of a 47.9% stake in VimpelCom, which has an extensive Eurasia presence, may complicate matters,” Julian Watson, head of telecommunications operators at IHS Global Insight, wrote in a note. "Among the other potential bidders for assets are Russia’s Mobile TeleSystem (MTS), which lacks a presence in Kazakhstan and Tele2, which is present in Kazakhstan.”

So far, Chinese investors have been locked out of local telecommunications sectors, but “it is going to be interesting to see whether or not they will allow them in this time, although it’s more likely to see a continuity of Russian and Turkish investment”, GPW’s Mallinson says.

For sure it is not going to be an easy sale process, given the large number of assets to be sold at the same time and “because clearly some of these economies are under pressure and valuations may be lower than a few months ago”, Moody’s Palacios says. “[For TeliaSonera] the disposal of Eurasian assets is a positive development as long as they can raise funds through the sale of these assets, and use part of that to reduce debt and improve the credit ratios."





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