Ben Aris in Berlin -

The long-running shareholder dispute between Telenor and Altimo over the leading mobile phone companies in Russia and Ukraine could be close to a resolution as the two company head for a divorce. With Telenor's almost 30% stake in VimpelCom seized by a Russian court on March 12, whether an amicable split can be arranged is open to question.

Norway's Telenor is a majority shareholder in Ukraine's leading mobile phone company Kyivstar, with Russia's Altimo as the junior partner. However, in Russia the roles are reversed: Altimo is the majority shareholder in Russia's most successful mobile operator VimpelCom, with Telenor as the minority shareholder.

The obvious thing to do with these two market leaders in the two biggest countries in Eastern Europe would be to merge them. However, neither side is willing to give up its majority control in their respective markets. The result has been an impasse that has gone on for years.

Shareholder disputes are never pleasant, but this one has been particularly nasty. In an effort to put pressure on Telenor to sell out, Altimo has boycotted Kyivstar annual general meetings for several years. Without an AGM, the company can't present accounts, appoint an auditor or do anything other than run the company day to day using whatever money it earns from selling its products and services.

As annoying as this must be, the dispute could have dragged on years more. But then on February 20, a Russian court in Omsk ruled that Telenor is liable for $1.7bn in damages for holding up Russian mobile operator VimpelCom's acquisition of Ukrainian Radio Systems (URS), in a case brought by minority shareholder Farimex. Farimex is registered in the British Virgin Islands and owns a mere 0.002% of VimpelCom, but that didn't stop it asking the court for a massive of $3.8bn in damages. Telenor says it believes Farimex is linked to VimpelCom's biggest investor, billionaire Mikhail Fridman's Alfa Group. "Today's court decision is a serious violation of Telenor's lawful rights and interests as a strategic investor in Russia," Telenor's vice president, Jan Edvard Thygesen, said in a statement the day the result of the case was announced.

VimpelCom bought URS, the fourth-largest mobile operator in Ukraine, for $231m in 2005. Less than a year later, Telenor sued Alfa and VimpelCom, saying the acquisition broke a minority shareholder agreement. Then in June 2007, the Ukrainian Supreme Arbitration Court dismissed Telenor's claim and VimpelCom continued to expand into Ukraine through URS, which now has a market share of 4%.

Not surprisingly, Telenor appealed against the Omsk decision on March 10, but two days later Telenor reported that its 29.9% stake in VimpelCom had been arrested, meaning the stake could theoretically be sold on the stock exchange. That would the worst-case scenario, but many analysts believe that Altimo, through Farimex, is primarily trying to use the case to get more leverage in its negotiations with Telenor "The $1.7bn lawsuit is an attempt to put pressure on Telenor and push it towards either the distressed sale of its stake or swap the assets - VimpelCom and Kyivstar - at terms favourable to Alfa," reckons Ivan Kim, an analyst at Renaissance Capital.

The Norwegian government was outraged by what they called the manipulation of the courts. Norwegian Minister of Trade and Industry Sylvia Brustad demanded the Russian government pay $1.7bn in compensation for the damages caused to Norway's interests in the form of Telenor.

Game of chicken

Telenor is still gamefully maneuvering to find a reasonable end to the saga, but without having the courts at its beck and call, the Norwegian company is fighting with one hand tied behind its back. At the end of February, Telenor offered Altimo an attractive asset swap it hopes will bring an end to the feud: Altimo would get a 4.9% stake in VimpelCom plus cash in exchange for a 44% stake in Kyivstar. If Altimo accepts the deal, then it would raise its share in VimpelCom to a clear majority stake, while Telenor would consolidate 100% control over Kyivstar, but retain a blocking stake in VimpelCom.

The boys in the Alfa Group play rough as investors in another Russian mobile operator Megafon found to their cost. Alfa was locked in a battle with the IPOC holding company over a blocking stake for years, a fight Alfa eventually won. The temptation for Altimo must be to simply wait for the courts to seize Telenor's stake in VimpelCom in lieu of the fine and buy that when it's auctioned off. Given Alfa's track record, few investors are likely to risk crossing the firm's clear ambitions in the telecom sector.

However, Altimo is short of cash. Analysts say that it's not clear where it would find the money to buy Telenor's shares in any auction. Moreover, if it did buy these shares, its stake would breach the mandatory buyout level. Altimo would then have to come up with billions more to buy out the other minority shareholders. On top of these billions, Altimo will have to come up with another $2bn by the end of this year to repay a bailout loan from the Russian development bank VEB that it got earlier this year. However, by accepting the asset swap deal, the cash part of Telenor's offer would neatly cover Altimo's debt to VEB and leave Altimo in control of VimpelCom, without having to spend any more money.

Even so, no deal is expected soon because the two companies are now locked in a game of chicken - who will have to meet their $2bn demand first? And even if the two sides agree to the swap in principle, actually agreeing on a price for the stake in the current depressed and volatile markets would be extremely difficult.

UBS says there are three possible outcomes to this dispute now: Telenor is forced to sell its VimpelCom shares, which would be good for VimpelCom shareholders, but do more damage to Russia's already poor corporate governance record; Telenor wins its appeal, which means the dispute goes back to square one; or Telenor and Altimo do a swap deal.

Analysts are hoping Altimo will accept the asset-swap deal, as everyone is a winner in this case - especially VimpelCom's shareholders. But if Alfa plays hardball and Farimex enforces the Omsk court decision, Russia could be faced with yet another corporate governance scandal at a time that it can ill afford it.

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