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. Last Updated: 07/27/2016

Telenor Makes Offer to Unwind Alfa Ties

Norway's Telenor has made an offer to Russia's No. 2 mobile operator, VimpelCom, to acquire Ukraine's Kyivstar for $5 billion in cash, in a deal that could end the Norwegian giant's rocky relationship with Alfa Group.

Telenor said Monday that it would sell its 56.6 percent stake in Ukraine's largest mobile company, provided that fellow shareholder Alfa agrees to end their VimpelCom partnership in a "market-based" divorce. The deal would allow either Alfa or Telenor to buy the other out of VimpelCom.

Telenor owns 29.9 percent of VimpelCom, and Alfa's telecoms arm, Altimo, holds a 32.9 percent of stake. Altimo also owns 43.5 percent of Kyivstar.

"We are not prepared to sell Kyivstar to VimpelCom unless there is a structure in place that will ensure that Alfa's attacks will end," Jan Edvard Thygesen, head of Telenor's operations in Eastern and Central Europe, said in a statement Monday.

Telenor's offer comes in response to VimpelCom's February bid to buy Kyivstar for $5 billion in stock, which came amid a prolonged battle between Alfa and Telenor over VimpelCom's expansion strategy in Ukraine.

To put the Kyivstar deal in motion, both Alfa and Telenor would sign a separation agreement with respect to VimpelCom. The two companies would place a value on VimpelCom, with the highest bidder gaining control of the other's VimpelCom shares, Thygesen told reporters Monday.

This "market-based separation mechanism" would put an end to the skirmishes between Alfa and Telenor and ensure that the shareholders would get a fair price for their stakes, Thygesen said.

The separation agreement is contingent on VimpelCom minority shareholders' approval. The change in VimpelCom's ownership also requires the approval of the Federal Anti-Monopoly Service, for which Telenor has already applied.

Analysts hailed Telenor's proposal as a step toward a resolution of the Alfa-Telenor stalemate, but said there are too many variables to predict whether Telenor's proposal would be accepted and which company would come out on top.

Alfa and Vimpelcom have until March 31 to respond to Telenor's proposal, which the companies are now considering. "We have received the offer and are pleased that there is a response regarding our initiatives," VimpelCom spokeswoman Yulia Ostroukhova said by telephone, adding that the offer's terms were being reviewed.

Altimo president Alexei Reznikovich said his company would support VimpelCom's cash purchase of Kyivstar shares, should an analysis reveal that this deal would not cause "economic harm to the Russian operator and its minority shareholders." Otherwise, Altimo will push for a purchase of Kyivstar for cash and VimpelCom stock, Reznikovich said in a written response Monday.

Reznikovich criticized Telenor's "market-based separation" condition, however, as "improper." "Negotiations between shareholders cannot and should not decide the possibility of VimpelCom's acquisition of Kyivstar,'' he said.

Altimo's statement may indicate that Alfa is not ready to exit VimpelCom, or that it is pushing for better terms, Troika Dialog telecoms analyst Yevgeny Golossnoi said Monday.

Oksana Pankratova of IKS-Consulting said Telenor's offer was the company's "first constructive step," showing its willingness to end the disruptive battle with Alfa.

The Ukrainian market has only about two years of growth left before approaching high penetration levels comparable to Russia's, Pankratova said Monday. The "window of opportunity" to aggressively move into Ukraine will close by the end of this year, she said.

Mobile subscribers growth was three times slower in Russia last month than in February of 2005, according to J'Son & Partners. The country's $10.4 billion mobile market reached 128 million subscribers with 87.4 percent penetration last month. In contrast, Ukraine's $2.4 billion market reached 64 percent penetration by the end of 2005.

"The offer increases VimpelCom's chances of gaining proper large-scale exposure to the Ukrainian market via Kyivstar," which has a market share of 45 percent, Deutsche UFG said in a research note Monday. If VimpelCom were to develop its Ukrainian base solely from recently acquired RadioSystems, the No. 4 operator, it would only gain about 10 percent of the market by 2010, the brokerage said.