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. Last Updated: 07/27/2016

Alfa Wins Options in Turkish Gambit

bloombergAlfa's $3.3 billion deal over Turkcell gives it a hold in the Turkish market and could help it increase its MegaFon stake.
Alfa Telecom's landmark $3.3 billion financing deal with Turkey's Cukurova Group represents a bold advance in Alfa's battle with Sweden's TeliaSonera for control over Turkey's largest telecoms company, analysts said Thursday.

But it remains to be seen whether Alfa's move is an aggressive advance into a new market or merely a Turkish gambit in Alfa's struggle to strengthen its grip on Russia's second-largest mobile phone operator, MegaFon -- in which TeliaSonera is also a shareholder.

"The main goal here is for Alfa to get leverage in its dispute with TeliaSonera over MegaFon," said Konstantin Chernyshev, telecoms analyst at the UFG brokerage. TeliaSonera owns 44 percent in MegaFon, while Alfa Telecom has a 25 percent stake.

Alfa announced Wednesday it had agreed to buy an option for 13.2 percent in Turkcell, Turkey's biggest mobile phone provider, from heavily debt-laden Cukurova in the form of $1.6 billion worth of convertible bonds.

Alfa also gave Cukurova a six-year, $1.7 billion loan, which many analysts say Cukurova is unlikely to be able to repay.

Yelena Bazhenova, a telecoms analyst at the brokerage Aton Capital, said that the combined package put Alfa within striking distance of a 27 percent stake in Turkcell, or exactly the stake that Alfa had announced it would buy in March.

At that time, Alfa declined to give details on the purchase, saying only it had bid more than the $3.1 billion previously agreed by Teliasonera and Cukurova for a 27 percent stake in Turkcell.

Teliasonera, which owns 37 percent in Turkcell, on Thursday called the Alfa-Cukurova deal illegitimate and said it would push Cukurova to honor its previous agreement.

TeliaSonera has already taken legal action against Cukurova over Turkcell in a Geneva court.

"Alfa has been looking to expand abroad, but I think TeliaSonera is the reason why Alfa chose Turkey," said Bazhenova.

Turkcell is a reasonably attractive asset in its own right, Bazhenova said, pointing out that Turkey's subscription rate was similar to Russia's.

But other Russian telecoms, like AFK Sistema, have been seeking out less developed markets with more growth potential, such as India and Africa, Bazhenova said.

"If not for TeliaSonera, Alfa would probably have looked somewhere else," said Bazhenova, pointing out that Alfa had agreed to pay 25 percent over market value for the 13 percent option, which can be converted into shares 18 months after the purchase.

Alfa is already locked in a bitter dispute with TeliaSonera over MegaFon.

TeliaSonera has thrown its weight behind co-shareholders IPOC and Telekominvest, which are challenging Alfa's purchase of a stake in MegaFon from LV Finance in 2003.

Analysts say that Alfa may be planning to expand its 25 percent stake in MegaFon and merge it with Russia's No. 2 mobile phone firm VimpelCom, creating a new giant that could displace Russia's top telecoms company, Mobile TeleSystems.

In the wake of Alfa's announcement, the Swedish government, which owns 45 percent of TeliaSonera, appeared to tie the dispute to Turkey's bid to join the European Union.

Swedish Industry Minister Thomas Ostros told Reuters that the handling of the affair was a test of Turkey's economic and legal system.

"This is, I think, the largest foreign investment in Turkey ever, and it is followed by a lot of European actors that are looking into the system," he said. "It is troublesome for Turkey."

Alfa Telecom is the telecommunications arm of Mikhail Friedman's Alfa Group.