Svyazinvest Poised to Make MegaFon Bid

VedomostiAnalysts believe that the government will have to talk Alfa into selling its stake.

Svyazinvest is interested in purchasing control of MegaFon, Communications and IT Minister Igor Shchyogolev said Wednesday. Talks are already under way with Alisher Usmanov, who controls a 31.1 percent stake in the mobile operator, and the government also wants to obtain Alfa Group's blocking stake.

Shchyogolev's announcement was the first official confirmation that the ministry is in talks with Usmanov for his stake.

In May 2009, a government commission approved a reorganization plan for Svyazinvest, which concluded that purchasing one of the "big three" cell phone operators was the most effective way to strengthen the state company's position in the mobile communications market. According to its own estimates, Svyazinvest had 6 percent of the market by earnings and 9 percent by subscribers as of the start of 2009.

Shchyogolev said an alliance with MegaFon would make the most sense. Svyazinvest would immediately take third place on the cell phone market, while MegaFon would get access to its powerful fixed-line infrastructure — something that its competitors already have.

AF Telecom Holding, which manages Usmanov's holdings in MegaFon, expressed interest in "cooperating with Svyazinvest" in November. The company offered to exchange its 31.1 percent in MegaFon for a stake in the merged operator created by Svyazinvest. Shchyogolev said there were a number of options for the deal, but that the state needed to know that its rights in MegaFon were safe, which would require control — not just a blocking stake.

To do so, the state could either buy shares from Altimo, the telecoms arm of Alfa Group, or from the Swedish-Finnish company TeliaSonera. But spokespeople for both companies said they were not planning to reduce their stakes in MegaFon.

Gazprombank analyst Anna Kurbatova has estimated MegaFon's fair price at $19 billion.

In November, Altimo and TeliaSonera agreed to create a joint company in a Western country that would manage their stakes in MegaFon and Turkish operator Turkcell. The partners also invited Usmanov to join, but he flat out refused, deciding that neither he nor MegaFon would benefit.

But the deal between Altimo and TeliaSonera has to be approved by the government commission on foreign investments, and the Communications and IT Ministry opposes the plan.

Shchyogolev declined to comment on why the ministry is opposed. But a source in the ministry said it was because a blocking stake in MegaFon was a strategic asset, meaning that its transfer outside Russia could harm the country's national interests.

TeliaSonera senior vice president Cecilia Edström said that under the agreement, neither of the partners would control the united company. Altimo spokesman Yevgeny Dumalkin said no decisions could be made without the Russians, adding that he was surprised that the ministry had drafted an opinion on a deal for which Altimo has not yet even formally sought permission.

It won't be easy for Russia to force TeliaSonera into a deal, since the company is controlled by Sweden and Finland, political analyst Alexei Makarkin said.

Altimo is another story, however, since it controls 25.1 percent of MegaFon and 44 percent of rival operator VimpelCom, which it shouldn't, the Communications and IT Ministry source said. Such an investor could block decisions by one company in favor of the other, he said.

Dumalkin said Altimo was a portfolio investor, and that it was interested in the successful development of both operators. To date, he said, not a single conflict of interests has arisen.

Alfa won't be convinced that easily, and as a company that's loyal to the authorities, it has good ties in the top ranks of government, Makarkin said. A compromise option would be for Svyazinvest to buy some shares from Alfa and some from the Scandinavians, he said. Gazprom took control of the Sakhalin-2 project in a similar manner, purchasing shares from Shell, Mitsui and Mitsubishi.

But the head of UralSib's analytical department, Konstantin Chernyshev, said it was possible that the state would still get full control of MegaFon. If Alfa is convinced to sell, TeliaSonera might not want to remain a minority shareholder in a Russian state company.

And while the state could theoretically settle with Alfa without cash (in part, by writing off a $1.5 billion debt to Vneshekonombank), it would have to offer the Scandinavians a serious sum to get their MegaFon stake, an analyst at a major state bank said.

The state has some levers to make Altimo more willing to compromise. One of them is the state commission on foreign investments, chaired by Prime Minister Vladimir Putin. In addition to approving the deal with the MegaFon shares, it must also sign off on the transfer of 73.9 percent of VimpelCom — the stakes held by Altimo and Norway's Telenor — to the Bermuda-registered Vimpelcom Ltd.

The Communications and IT Ministry also considers that deal risky, the source there said. In part, the ministry is worried because the partners' agreement allows for control of Vimpelcom Ltd. to be handed over to the Norwegians if Altimo's stake drops below 25 percent. Under the agreement, Altimo would receive 43.89 percent in the holding, compared with Telenor's 35.42 percent.

Altimo is not planning to reduce its stake in Vimpelcom Ltd. if the deal with Telenor goes ahead, Dumalkin said, adding that a Russian, Alexander Izosimov, has been appointed its CEO.

Altimo chief executive Alexei Reznikovich told reporters in November that the company had already discussed both deals with the government and received preliminary approval.

Putin's press secretary Dmitry Peskov, Svyazinvest first deputy chief Alexander Provotorov and an AF Telecom spokesperson declined comment.


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