Jacopo Dettoni in Almaty -

Beleaguered Nordic telecommunications group TeliaSonera is in the sights of American activist investor Carson Block, who has announced that he is short selling its shares. In an open letter to the telecom’s board, Block’s research firm Muddy Waters alleged that TeliaSonera had carried out massive bribery to establish its Eurasian operations and faces huge penalties from US regulators.

“Despite TeliaSonera quite possibly holding the all-time record for corrupt payments by a western company, you and the new management have given no indication to investors that Uzbekistan was almost certainly the rule, rather than the exception, in TeliaSonera’s emerging market businesses,” Muddy Waters Research wrote on October 15.

The stock fell by over 8% in Stockholm intra-day trading on October 15, to then recover and close down by 3%. On Friday it rose 0.9% to close at SEK42.42.

“TeliaSonera does not recognize the conclusion [of the letter],” the group replied in a statement. “As previously reported TeliaSonera fully cooperates with ongoing investigations in Sweden, the Netherlands and the United States. TeliaSonera is as open and transparent as possible with respect to listing requirements and the investigations.”

TeliaSonera, a publicly listed company controlled by the Swedish and Finnish government through an overall 49% stake, has built a valuable portfolio of assets spanning the Eurasian region over the last 20 years. The group has leading market positions and double-digit growth rates across the region, but the investments came at the cost of taking high risks over transparency, profit repatriation and currency exchange rates.

The company is under investigation in the US, the Netherlands and Sweden for allegedly paying hundreds of millions of dollars to a Gibraltar-based company linked to Gulnara Karimova, the disgraced daughter of Uzbelkistan’s President Islam Karimov, to acquire licenses in the Uzbek market. Competing telecommunications groups Vimpelcom, which is part-owned by Nordic group Telenor, and Russian MTS are also facing similar allegations.

TeliaSonera has also been accused of handing 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.

TeliaSonera has always rebutted all the allegations, claiming it was unaware of the ultimate beneficial owners of these companies.

However, as Eurasian economies slow down, and bribery allegations mount, the board announced on September 17 its intention to sell the Eurasian assets, which include directly and indirectly-controlled subsidiaries in Azerbaijan, Georgia, Kazakhstan, Moldova, Nepal, Tajikistan and Uzbekistan.

“We estimate – perhaps conservatively – that TeliaSonera could have made corrupt payments throughout its Eurasia and Nepal operations that exceed SEK17bn (€1.8bn),” the letter by Muddy Waters Research reads, therefore calling the company’s financial statements “misleading” and full of “material misstatements”. It also added that this could lead to legal liabilities, including to the United States Department of Justice, in the tens of billions of SEK, quite possibly well in excess of US$1bn. Besides, “TeliaSonera is potentially obligated to make additional payment to a problematic partner in Azerbaijan of up to SEK7.6bn.”

This could jeopardise the group’s financial equilibrium at a time when its core markets in Nordic countries are stagnating and debt levels remain high – large debt levels feature among the main reasons that gained the group a negative outlook on its A3 rating by credit rating agency Moody’s.

The massive damage claims TeliaSonera faces may have been the main reason that prompted the board to hastily announce its decision to pull out of the region.

“Just think of how this kind of operations work,” Peter Utterström, a leading expert on US corruption law, told Swedish newspaper Svenska Dagbladet on October 5. “Normally companies go public when the sale is completed. But they just held a press conference and said ‘Now we sell’,” he added, hinting that the board wants to show the US Department of Justice its real commitment to cleaning up the company and avoid any more allegations linked to its Eurasian operations. The board of Telenor, which is controlled by the Norwegian government, announced its decision to sell its stake in VimpelCom in a similar fashion a few days later.

Swedish journalist Patricia Hedelius arrived at a similar conclusion in her book “Telia – Alliance of Government and Corruption”, published on October 16. “For Chairman Marie Ehrling and CEO Johan Dennelind it is important to do away with Eurasia quickly, before a new scandal bursts out and they themselves have to take responsibility,” she wrote.

If TeliaSonera’s announcement of its intention to sell its Eurasian assets is designed to please US authorities, it may also drive down the sale prices.

“TeliaSonera likely made its chances of receiving only fire sale valuations greater by announcing its intention to dispose of the businesses at such an early stage,” Muddy Waters Research writes in its letter, reflecting the doubts raised by a number of analysts during a conference call in September.

In any case it is not going to be an easy sale process “because clearly some of these economies are under pressure and valuations may be lower than a few months ago”, Ivàn Palacios, senior credit officer at Moody’s, told bne IntelliNews on September 23.

Eurasian economic growth is falling amid falling oil prices, depreciating local currencies and the slowdown of major trade partners such as Russia and, to a lesser extent, China. This is hitting the telecommunications sector – in the first half of 2015, organic service revenue growth fell in all the group’s Eurasian subsidiaries expect for Uzbekistan and Nepal.

Still analysts agree that TeliaSonera’s assets remain valuable assets with leading market positions and positive long-term perspectives. Currently Turkish and Russian companies appear to be leading the race to acquire them. Turkish Telecom, a historic partner of TeliaSonera in the region, has already announced it is carrying out due diligence on the assets on sale, which have a book value of around SEK20bn.

Selling them as fast as possible, even at a discount, will cause a writedown in Teliasonera’s financial accounts, but it may also improve the group’s position at the eyes of US authorities and, eventually, reduce any potential fine.