energy market

Akhmetov in for Alfa test

21.06.2013 | Roman Kabachiy

The future of the nations telcom giant depends not only on Rinat Akhmetov, but also on the position of the Russian Alfa Group controlled by Mikhail Fridman

The official statement about the purchase of Ukrtelecom by Rinat Akhmetov´s SCM has generated many assumptions about the future of the telecommunications giant. At the same time, critical factors that determine the development of the situation around the new star in the crown of the most influential tycoon in Ukraine remain out of sights.

Failed merger

The talks on possible synergies from the co-existence of Astelit (TM life :) and Ukrtelecom companies play a central role in the predictions of the possible impact of the transaction on SCMs telecom business: the presence of both fixed and mobile networks can help providing a wider range of services and create a greater value for customers.

Meanwhile, it is worth reminding that since the very beginning SCMs mobile business had an opportunity to practice synergy with closely-related company known as telecom group Vega. Until the controversial privatization of the state monopoly, Vega was the largest private operator of fixed-line networks, serving approximately 500,000 telephone subscribers and 150,000 Internet users. However, during the eight years of cooperation between Astelit and Vega, they failed to achieve any significant results. In recent years, SCM tried to sell the fixed-line operator and focus on developing its mobile company, but in the end failed to find a suitable buyer and gave up the idea to better times.

The official version of the lack of convergence and synergy is the distinctive features of the ownership structures. Of the two companies, SCM single-handedly owns only Vega, in which it controls 100% of the shares. In the case of Astelit, Akhmetovs management company acts as a minority shareholder with a share of 45.2%, the remaining shares belonging to the Turkish company Turkcell. A merger agreement has not yet been possible. Meanwhile, many potentially interesting services and business models require the presence of only one legal entity.

Akhmetovs purchase of Ukrtelecom does not change anything in this scenario. Similarly, it may be impossible for SCM to combine its telecom assets and the need to adapt. In this case, the benefits of combining services of mobile and fixed network connection is no longer viewed in this sector as self-evident. A good example is the merger of Russias VimpelCom and Golden Telecom. Spending US $4.3 bn of borrowed assets, the top management of the merged company was able to draw only a couple hundred millions of synergy effect over the five-year period.

Alfa factor

The informal explanation of the failure of the alliance between Astelit and Vega is even more interesting. Supposedly, the main reason was the position of Turkcells management, which was forced to consider the position of one of its shareholders, the infamous Altimo (it manages the telecom assets of Alfa Group, formerly known as Alfa Telecom), which recently purchased the blocking shareholding package of the Turkish company. In the near future, the Russians may become the major shareholder. A London court has already ruled that Cukurova (Turkcells main shareholder) has to either pay Altimo a part of its shares in lieu of the previously issued loan or pay compensation. But the Turks have no funds for this as their accounts were frozen by the ruling of a court in the Southern District of New York.

Over the past ten years, co-owner of Alfa Group Mikhail Fridman and his colleagues have successfully expropriated or set operational control over half a dozen telecom companies. It suffices to recall the scandal with Kyrgyz Bitel or the debilitating corporate war in Ukraines Kyivstar and Russia´s Vimpelcom. The attempt of Norwegian Telenor, which was one of the shareholders in the Ukrainian company, to protect itself from indomitable partners by creating a holding in the European jurisdiction, brought about no results. Indeed, Russian telecom companies are unequaled when it comes down to corporate conflicts.

In Ukraine, VimpelCom owns Kyivstar and, de facto, half of the revenues from mobile communications in the country. For the last few years Kyivstar has been VimpelComs the cash cow, whose financial and operational health was seriously undermined by the predatory policies of one of its shareholders. The company has slipped to third place in the strategically important Moscow region and is at risk of dropping to fourth place as a result of the alliance between Rostelecom and Tele2. Expansion beyond the borders of the former Soviet Union has resulted in a series of epic failures, the losses from which are more than US $1 bn.

It is inconceivable that the Alfa Group did not use the available connections and levers to lock the division of the Ukrainian mobile communications market. On this note, it is worth recalling infamous company McKinsey.

Effective managers

The very idea of developing the telecom business was pitched to Akhmetov in 2005 by consultants of McKinsey as a strategy of diversifying his business. In fact, offsprings of that company manage SCM in general and control its telecommunications assets in particullar. It is worth mentioning that many top managers at the Alfa Group have worked at McKinsey.

However, there is a more important factor here. SCM still needs to form a center of competence in terms of telecommunications. Until recently, the company had to rely on outside experts, including McKinsey and the old guard in the telecom business. As a result, the case with SCMs assets appears to be a story of missed opportunities.

In 2010, the company had a chance to radically alter the situation in Astelit. At the time, there was a merger of Kyivstar and Ukrainian Radio Systems as part of an unsuccessful attempt to resolve the long-standing conflict between Alfa Group and Telenor. Altimo owned shares in both companies. In addition to that, the company owned a small package in Turkcell (Astelits majoritarian). Tansu Yeğen, then head of Astelit, tried to draw the attention of the anti-monopoly committee to such a nuance. Well-grounded objections of the regulator could have forced Alfa to make a difficult choice: give up its share in Turkcell or complete the mega-merger.

The development of events according to the first scenario would save SCM once and for all from the permanent threat of sabotage by the Turkish partners. In addition, in exchange for a valuable service getting rid of hyper-aggressive Russian partners the majority shareholder Turkcell could be offered a revision of its shares in Astelit. However, SCMs team failed to play this card. Having received no support from the Ukrainian side and feeling serious pressure from Turkcell, Tansu Yeğen slammed the door. In short, this rare opportunity was missed.

Now all this could come back to haunt SCM in the most unpleasant way. Attempts to predict the fate of Ukrtelecom as Akhmetov´s property are unrealistic without considering the fact that there are at least four subjects of decision-making on the future of SCMs telecommunication assets (Akhmetov himself, his managers, management at Turkcell and Russias Alfa Group). Moreover, soon the structures controlled by Mikhail Fridman have all the chances of becoming major shareholders in Turkcell. As it was previously mentioned, a London court passed down a ruling, according to which Cukurova (the main shareholder of the Turkish company) was obliged to pay either part of the shares in lieu of the previously issued loan or compensation. In such a situation, the development of Astelit taking into account a number of unique features of Ukrtelecom (the country´s only licensed 3G) from Akhmetovs point of view looks at the very least quite risky.

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