Ukrainian Deconsolidation, Falling Q1 Earnings: Why Telenor Must Stop Crying

The fight between Telenor (TELN) and Alfa/Altimo over Kyivstar in the Ukraine is one of telcoworlds most public partnership squabbles. Telenor last week reported falling Q1 earnings primarily due to deconsolidation of the Ukrainian venture from their accounts, so I thought I’d spend a little time examining the history of the venture.

The Second President of Ukraine, Leonid Kuchma, ruled from July 1994 to January 2005. His successor and alleged crony, Yanukovych, allegedly won the following election by fraud and was subsequently overthrown in the so-called Orange Revolution which placed Viktor Yushchenko in charge and the corruption charges that had been murmured during the latter years of the Kuchma regime became very public.

The reason this is important is because Kyivstar was issued its GSM license in 1997 in a process that cannot under any circumstances be described as transparent. Telenor was an original partner in Kyivstar with a 35% equity stake. One would assume that a state owned company from Norway, well known for its transparency and lack of corruption, would investigate as to whom the other 65% partners in the venture were. It is important to stress here that I do not mean what was the name of the companies in the partnership, but the ultimate owners of these companies. This is standard practice for any joint venture in any part of the world - you do not do serious business involving serious investments with people who you do not know. If they did, Telenor didn’t place the names of their other partners into the public domain. The Ukranian Weekly names the original partners as Telenor with 35%, Storm with 31%, Omega with 20% and Sputnik with 14%.

The CEO of Storm turned out to be no less than the brother-in-law of President Kuchma. A further clue to the connections of Kyivstar was that the Marketing Director from 1997 to 2003 was President Kuchma’s daughter, Elena Franchuk. In Western Europe any such dealings with the Head of a Country would immediately be questioned and subject to microscopic examination: no such examination is in the public domain of the dealings between Telenor, Kuchma and Kyivstar.

The Omega and Sputnik holdings are alleged to be connected to the ex-Prime Minister, Pavlo Lazarenko, who relieved of his position in 1997 and has a very interesting biography. Whatever happened to these shareholdings and who were the ultimate beneficiaries are anyones guess because again the information is deeply buried about Omega and Sputnik. Between 1997 and 2002, both Telenor and Storm steadily increased their holdings in Kyivstar by buying out Omega and Sputnik holdings in various stages.

In July 2002 another multinational, this time from Russia – Alfa/Altimo, appeared on the scene. At the time, Alfa would have been familiar to Telenor from their Joint Venture in Russia, Vimpelcom, and it is unsure whether Telenor welcomed them as a partner in Kyivstar. Personally, I seriously doubt whether Telenor would have been happy and I suspect that Telenor had pre-emption rights over the Storm, Omega and Sputnik rights – this is standard practice for Western companies. Alfa had effectively bought in with 50.1% at the Storm level and seeing that Storm was allegedly owned by the President, I guess that any Telenor complaints would fall on deaf ears.

By 2004, after another series of minor transactions the current shareholding of Telenor with 56.5% and Storm with 43.5% was established. Storm in turn was owned 50.1% by Alfa and 49.9% by Someone Else. It was hardly a state secret of the connections between Kyivstar and the Kuchma regime, because the nickname of KyivStar was KuchmaStar on the streets of the capital. There is even an ironic mention of the positive effect that KuchmaStar played in the downfall of the Kuchma regime in the Orange revolution in studies (warning: 8meg pdf – but interesting study of the potential positive role of the internet for any future revolutionaries)

In 2004, Alfa bought out the remaining 49.9% of Storm from the mystery owner and legal woes for Telenor began. Alfa stopped attending directors meetings and therefore quorums were not established. Also Alfa began pressing in the courts for equal rights with Telenor and initially gained little success.

All changed in 2005 with the Orange Revolution and the changing of the political guard in the Ukraine. In 2005 the new President, Viktor Yushchenko, had an early success against the previous regimes corruption when US$160m was seized by the Ukranian arm of Interpol in German and Austrian accounts relating to the sale of 23.8% of Storm. The ultimate beneficiary of this money was named as Leonid Kuchma. Funnily enough the other money relating to the other 26.1% sold was never recovered. Even funnily, Alfa/Altimo was never drawn into the controversy. These are the sort of deals cut to solve the Gordian Knots frequently tied in John Le Carre spy novels.

Since 2005, Alfa/Altimo has been getting the upper hand in court proceedings both in the Ukraine and New York. People have even blogged that certain court victories came about after meetings between the head honcho of Alfa Bank, Milton Fridman, and the current President of the Ukraine, Viktor Yushchenko, met over attracting foreign investment into the Ukraine.

Of course, Telenor has been crying a lot and trying to gain some public sympathy for their plight, but in my book Telenor should be wary of the old saying:

“People who live in Glass Houses shouldn’t throw Stones”