Vodafone of the East

Mikhail Fridman has always set his sights high. The Russian oligarch started his working life cleaning windows in the early 1990s, but a decade on and he is one of the most successful businessmen in Russia. The Alfa Group that he built up has interests in oil, finance, real estate and even tea, but in April he cleared away the last obstacle to fulfilling his dream: to build a “Vodafone of the east.”

Russia’s leading oligarch spent most of the chaotic 1990s wheeling and dealing, when many of his rivals didn’t survive. Of the original seven oligarchs who rose to prominence under Boris Yeltsin, Fridman is one of only two still in the game. After Vladimir Putin became president in 2000, things settled down and business became more civilised. Most of these oligarchs then stepped back from the day-to-day running of their companies and spent more time building up their empires. Fridman set his heart on telecommunications early on. “Fridman always made it clear that everything in the group was for sale – but not the phone business,” says a former Alfa executive, who didn’t want to be named talking about the group’s strategy.

Alfa was supposed to be a member of the MustCom Consortium that was put together by Vladimir Potanin (the other surviving Yeltsin-era oligarch), which included a 25% stake in the state’s fixed-line operator Svyazinvest bought by international financier George Soros in 1996. “But we were pushed out by Potanin at the last minute,” Fridman told this correspondent in an earlier interview (he refused to be interviewed for this article). It was years later that Fridman began to work on his dream to lead the Russian telecom sector.

Fridman’s chubby figure and jolly demeanour is deceptive – in business he can be ruthless. He said in the same interview that one of his companies put Potanin’s Sidanko into bankruptcy during the crisis partly out of pique. And trouble has tended to follow in the wake of many of Alfa’s purchases in the telecom sector.

The jewel in the crown in the group’s telecom holdings is the stake in Russian mobile operator VimpelCom, which was set up in the early 1990s. With a sign-up fee of $5,000 and usurious per-minute rates, it was profitable from day one and the company has been a driving force in developing mobile telephony across Russia’s 10 timezones.

However, one the very first reforms that Putin made on taking office in 2000 was to completely remake the telecom sector and create a level playing field. The reforms were so successful and went off so smoothly that its success has got very little attention – a lot less attention than subsequent reforms to sectors like oil and banks that have gone less well. The upshot is that Russia’s telecom sector today is easily the most sophisticated of all the parts of the economy and doesn’t look much different from those of Russia’s peers in the West. And the growth of the sector has gone much faster than most analysts were expecting; from a standing start in 1993, the Sim card penetration rate passed 100% several years ago.

As the Russian market reaches maturity, the game is already starting to change, with the leading companies casting their eyes across borders to other emerging European markets that are still playing catch-up to Russia’s lead.

In September last year, Fridman took the opportunity to increase his stake in Uzbek subsidiary Unitel to 100%. With a 25m strong population, Uzbekistan is the biggest country in Central Asia and a very interesting market despite its distant location. As economic prosperity begins to arrive in Uzbekistan, people have been purchasing mobile phones, making the republic the fastest growing market in the world in 2008. At the same time, as one of the few countries on the Eurasian continent with a growing population, the World Bank says Uzbekistan will become more populous than Ukraine in the next 20 years.

Fridman also picked up a minority stake in Russia’s third-largest mobile phone operator Megafon in another long-running corporate governance tussle, as well as doing a deal two years ago to acquire a stake in Turkey’s leading mobile company Turkcell. Alfa said in January that it wants to merge Megafon and Turkcell into a holding company called Altimo, but Russia’s regulator is not happy with the idea. Antimonopoly chief Igor Artemiyev told the press he would be happy to see Altimo exit one of VimpelCom or Megafon, but has not formally ruled on the issue yet.

Altimo has made it clear it has no intention of giving up either asset for the meantime. Yevgeny Dumalkin, a spokesman for Altimo, told newswires in January: “The potential of the telecommunications sector inside and outside of Russia is far from exhausted. In this regard, Altimo does not plan to part with its current assets in this sphere and will actually work to consolidate assets in the telecommunications sector.”

But it is VimpelCom that holds the greatest promise and will be the cornerstone of Fridman’s vision to build a mobile phone company covering the entire territory of the former Soviet Union and beyond.

Battle lines drawn

Altimo owns a 44% stake in VimpelCom and has effective control of the company. It is joined by leading Norwegian telecom company Telenor, which holds another 29.9% stake in the company. The two are also partnered in the leading Ukrainian mobile phone company Kyivstar – except their roles in that are reversed, with Telenor in control with a majority 56.6% stake and Altimo in the minority with a 43.5% stake in Kyivstar.

Fridman tried to persuade Telenor to merge the two companies, but according to sources in Alfa the Norwegians refused, afraid to give up their control over Kyivstar. Relations between the two partners steadily worsened as lawsuits flew that crippled the operations of Kyivstar, which ended up in a sort of corporate limbo, as its board was unable to meet for several years. The row came to a head in 2008 when a previously unknown company called Farimex, registered in the British Virgin Islands and owning a 0.002% stake in VimpelCom, brought a new lawsuit against Telenor.

Farimex, which Telenor has repeatedly alleged is a vehicle for Altimo, claimed $1.7bn in damages – roughly the market value of Telenor’s stake in VimpelCom – from Telenor, which it said delayed VimpelCom’s entry into the Ukrainian market. A court in the Siberian region of Khanty-Mansiisk found in favour of Farimex and arrested Telenor’s shares to be auctioned off to pay off the fine.

Facing the loss of their entire stake in VimpelCom, Telenor finally cried uncle in March and agreed to the merger. In April, Farimex dropped its claims against Telenor and on the same day the minority shareholders in both companies agreed to the creation of VimpelCom Ltd that will combine the Russian and Ukrainian assets.

A glitch appeared at the end of April when Ukraine’s Antimonopoly Committee reversed an earlier decision to approve the merger at the request of Astelit, the third-largest player in the Ukrainian mobile phone market. However, analysts are sanguine and don’t expect the review to change anything. “It is common for competitors to request an anti-trust review of M&A deals by the relevant authorities,” says Elena Mills, a telecoms analyst with Alfa Bank. “Given VimpelCom’s very modest mobile market share in Ukraine, we do not anticipate material changes to the original approval.”

Asked about the merger, a Telenor spokesman would only say: “The transaction is closed. Any further questions should be addressed to the new CEO of VimpelCom Ltd.” Game, set and match to Fridman.

Where next?

The deal marked the end of one of the nastiest corporate battles in Eastern Europe and has done Russia’s image a lot of damage. One of the first Russian companies to list abroad, VimpelCom is listed on the New York Stock Exchange.

So far, VimpelCom Ltd has said little on what its next step will be, but the merger means the company is already the leading operator in the two biggest markets in Eastern Europe with a combined population of 188m people – equivalent to a quarter of the entire European population. And clearly it is in the market to add more assets in the region. “VimpelCom Ltd says it doesn’t have a strategy for now, but that it will be developed and announced in the summer,” says Victor Klimovich, a telecom analyst at VTB Capital in Moscow. “The only hint given is that the new CEO, Alexander Isozimov, said in February the company will probably concentrate more on mergers than acquisitions.”

Fridman still has a clear field in most of the countries that the new company can expand into for the meantime, but to really make his telecom dream come true, Altimo will have to go up against the world’s largest companies at some point. “There’s a rumour in the market that VimpelCom may bid for some of [the Middle East's mobile powerhouse] Orascom’s assets – one of the biggest emerging market operators with operations in Africa as well as Pakistan and Bangladesh,” says Klimovich. “It’s thought VimpelCom is interested in the latter, but Telenor already has strong positions in those two countries – so that could see a problem again.”

(c) Ben Aris, bne

With the world’s economy in tatters, the future for telecom companies is now in the fast growing economies of the emerging markets and Fridman has already placed himself in a strong position to emerge as one of the leaders in the race that is just getting going.

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