IHS Global Insight Perspective | |
Significance | The agreement will merge the Russian and Ukrainian assets of VimpelCom and Kyivstar, thus ending five years of often bitter legal disputes. |
Implications | Telenor is likely to feel relief at avoiding the loss of its stake in VimpelCom, while the agreement may help to repair some of the damage done to investment prospects in Russia. |
Outlook | The governance structure of the newly-formed VimpelCom Ltd is specifically designed to reduce the potential for any new disputes between shareholders and should also signal progress in the stagnating Ukrainian mobile sector. |
Norwegian telco Telenor and Altimo, the telecoms arm of Russian holding group Alfa, have announced a resolution to their five-year legal conflict, with plans to merge their common assets in VimpelCom of Russia and Kyivstar of Ukraine into a new, jointly-owned mobile telco, VimpelCom Ltd. Telenor will hold 38.84% economic ownership of VimpelCom Ltd, with Altimo holding 38.46% and 22.70% in free float; in terms of voting ownership, Telenor will hold 35.42% and Altimo 43.89%, with 20.69% in free float. Previously, Telenor held 29.9% of VimpelCom and 56.5% of Kyivstar, while Altimo had held 44.0% of VimpelCom and 43.5% of Kyivstar.
Subject to regulatory approval, VimpelCom Ltd will make an offer that will see VimpelCom shares and ADRs exchanged for Depositary Receipts (DRs) representing shares in VimpelCom Ltd. On successful completion of this process, Telenor and Altimo will contribute their respective shareholdings in Kyivstar for shares in VimpelCom Ltd. Completion of the transactions is expected by mid-2010. As well as merging these assets, Telenor and Altimo have agreed to suspend all their ongoing legal proceedings and will take action to withdraw or settle them prior to completion.
Outlook and Implications
- Likely Relief for Telenor After Threat of Losing VimpelCom Stake: Five years of legal wrangling that reached vitriolic levels have dissipated literally overnight into the fuzzy glow of bonhomie, according to various statements and press releases, with Telenor now having removed from its website the various pages detailing the nature of its dispute with Altimo. While Telenor president and chief executive officer (CEO) Jon Fredrik Baksaas has spoken in a press release of "an exciting venture for the future", the overwhelming reaction of the Nordic group is likely to be relief that the struggles of half a decade are now seemingly over. There had been a strong possibility that Telenor would lose its stake in the old VimpelCom after a lawsuit from 0.002% VimpelCom shareholder Farimex, claiming that Telenor had damaged VimpelCom's prospects in Ukraine, escalated into a US$1.7-billion damages claim, with Russian bailiffs freezing Telenor's Russian assets and threatening to sell them off (see Russia: 6 April 2009: Telenor Remains Defiant as US$1.7-bil. Writ is Officially Served). Telenor refused to pay the sum and accused Farimex of acting as a proxy for Altimo, describing the attempts by local Russian courts to sell its stake as "daylight robbery". The matter threatened to escalate beyond the telecoms sphere into a diplomatic incident, discussed by the country's respective prime ministers last year, given that a controlling stake in Telenor is owned by the Norwegian government. However, a meeting last week between Baksaas and Russian Prime Minister Vladimir Putin appears finally to have resulted in agreement.
- Mutually Expedient: Given the recent history of escalating tensions, the deal appears to IHS Global Insight to be mutually expedient rather than necessarily amicable. Telenor has avoided the worst-case scenario of helplessly witnessing the sale of its VimpelCom stake. It has also avoided the compromise situation of losing its VimpelCom stake as part of an asset swap, as had often been suggested, which would have seen it gain 100% in Kyivstar in exchange for its 29.9% VimpelCom stake. From the Russians' point of view, as well as ushering in a new era of co-operation with regards to the strategy of VimpelCom Ltd. in Russia, and gaining a leading asset in Ukraine, the deal may help repair some of the damage done to investment prospects in the country through the previous treatment of Telenor. With Russian courts having frozen Telenor's assets and upheld a lawsuit viewed with some suspicion in international circles, a Norwegian Foreign Ministry spokesman was quoted by Reuters as describing the Alfa-Telenor saga as "damaging to the issue of Russia as a recipient of foreign investment". The settlement now reached may help to redress some of the bad publicity caused by the dispute. After the bitter wars of words of recent years, it would be understandable if working relations between the pair were a little frosty, but ostensibly at least positive noises are being made about the resolution and future growth prospects, with Altimo CEO Alexei Reznikovich stating in a press release that the new company would be "much more attractive to investors all around the globe who are looking for stable investment opportunities".
- Reduced Potential for Future Shareholder Disputes: While Telenor has stressed that the governance structure agreed for VimpelCom Ltd is specifically designed to reduce the potential for any new disputes between the shareholders, how the decision-making process at VimpelCom Ltd works in practice will make for an interesting situation. The primary cause of the massive row between Telenor and Altimo was disagreement between the two sides regarding policy in Ukraine, where Altimo forced through the acquisition of minor operator Ukrainian RadioSystems (URS) against the will of Telenor. Altimo now owns a larger stake than Telenor in the newly-formed VimpelCom Ltd, which suggests that the Russians may wield greater power in the decision-making process. However, the nine-member board of directors will include three nominated by Telenor, three nominated by Altimo and three independents, one of whom will be chairman of the board. Previously, Telenor had nominated five of the nine members to Kyivstar's board.
- Some Clarity in Ukrainian Mobile Sector: Ukrainian mobile operator Kyivstar had been particularly badly affected by the Telenor-Altimo dispute, having been unable to make boardroom decisions and having had its financial results deconsolidated. IHS Global Insight expects the agreement between its parent companies to signal a return to normality and a chance in focus to fighting its corner in the competitive but stagnating Ukrainian market, where a new 3G licence is soon to be awarded. There may also be some degree of consolidation in Ukraine given that VimpelCom owns minor mobile operator URS.