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. Last Updated: 07/27/2016

Alfa, Telenor Agree to $23Bln Merger

Alfa Group and Norway’s Telenor on Monday agreed to end a long-running feud by combining their telecom assets in Russia and Ukraine in a deal that requires Telenor to cede control of Ukraine’s leading mobile operator.

Under the agreement, Alfa Group’s telecom unit, Altimo, and Telenor will have until the middle of next year to create a new venture — a Bermuda-registered Vimpelcom Ltd. — that will incorporate their stakes in VimpelCom and Kyivstar.

“We managed to overcome the main problem, that of mutual mistrust,” Alexei Reznikovich, chief executive of Altimo, said at a news conference. “Trust is often key in business.”

The partners announced the deal, which will establish a company worth more than $23 billion, after Prime Minister Vladimir Putin last week met with Telenor chief executive Jon Fredrik Baksaas and invited more foreign investment in Russia at a conference in Moscow.

Altimo and Telenor went on the warpath after Telenor voted down VimpelCom’s expansion in Ukraine in 2005. The dispute — seen as a test for investor rights in Russia — came up during talks between Putin and Norwegian Prime Minister Jens Stoltenberg in March.

Altimo and Telenor will hold almost equal amounts of equity in Vimpelcom Ltd. — 38.84 percent and 38.46 percent, respectively, they said in a joint statement.

Altimo will own a 43.89 percent voting stake, more than Telenor’s 35.42 percent. Even so, each company will be able to nominate three directors to represent them on the nine-member board. The remaining three seats will go to independent directors. Neither Telenor nor Altimo will have veto power.

The partners appeared unsettled about one key detail that has marred their relations in the past months: the lawsuit against Telenor filed by Farimex, a tiny VimpelCom investor.

On orders from a regional Siberian court that ruled in favor of Farimex, bailiffs have seized Telenor’s stake in VimpelCom and are preparing to sell it to compensate VimpelCom to the tune of $1.7 billion for having lost a chance to capture the Ukrainian market.

Farimex claimed that Telenor-appointed board members hindered VimpelCom’s expansion into the Ukrainian market in 2005 by blocking its purchase of Ukrainian Radio Systems, an asset that VimpelCom later acquired anyway. Ukrainian Radio Systems, or URS, has been loss-making for VimpelCom through 2008.

Alfa has denied any connection to Farimex, but the case is widely seen as a tool to put pressure on Telenor to either unite its assets with those of Altimo, or fully divorce them.

Reznikovich said the Farimex case was not part of the deal. Telenor chief executive Jon Fredrik Baksaas reiterated Monday that Farimex must cancel its complaint before the deal with Altimo could be concluded.

The next hearing of Telenor’s appeal in the case is scheduled for March. Lawyers have said the Siberian court ruling in favor of Farimex defies the law in that shareholders cannot be held legally responsible for decisions made by board members.

An upsetting aspect of the deal for Telenor is that it will surrender its 56.5 percent stake in Kyivstar and also likely its strong operational influence on the leading Ukrainian mobile operator, said Martin Hoff, a telecoms analyst at Arctic Securities, an investment bank in Oslo, Norway. This means that Telenor will no longer consolidate Kyivstar earnings into its accounts, starting next year, he said. Even so, Kyivstar may derive additional profits from a potential merger with URS, Hoff said.

Reznikovich said there were no current plans to combine the two firms.

If Kyivstar and URS merge, it will mean less competition on the Ukrainian market and allow for cost savings, Hoff said. In addition, Telenor, which has been good at supporting growing operations, will not be able to apply this advantage in Ukraine, one of the countries worst hit by the recession, Hoff said.

The deal also valued the unlisted Kyivstar at $5.2 billion, which is a good number for Telenor, Hoff said. VimpelCom’s latest market valuation was $18.2 billion, he said. “My conclusion is that the pressure Altimo and Farimex have put on Telenor has not resulted in Telenor having to accept poor terms on the deal,” Hoff said.

Konstantin Belov, a telecoms analyst at UralSib, agreed that the deal was fair. “It’s a good result for everybody. The terms are quite reasonable,” he said. “Evidently, both sides initially counted on a more favorable outcome for themselves.”

Telenor’s Oslo-traded shares surged ahead 14.6 percent on the news to close at 72.45 krones. VimpelCom’s New York-traded American Depository Receipts reacted in kind, closing up 9.14 percent at $19.58.

The deal will put the heavily indebted VimpelCom on a stronger financial footing because Kyivstar has virtually no debt, Alexander Torbakhov, VimpelCom’s general director, said at the news conference.

The partners chose to settle any disputes in London under New York law, they said in a statement.

Vimpelcom Ltd., headquartered in Amsterdam, will be listed on the New York Stock Exchange. Partners will select a chief executive for the new company by the end of December, Reznikovich said. Vimpelcom Ltd. will consider expansion in Asia and Africa, he said.

Telenor currently holds 30 percent in VimpelCom, while Alfa has 44 percent of the voting stock. Alfa is a minority shareholder in Kyivstar.