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11.09.07
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Business By Proxy
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By Ivor Crotty
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Looking Behind the Names in Russian Telecoms
Over the summer, it was rumored peace was breaking out in the long running dispute between Altimo, the telecommunications arm of Mikhail Fridman’s Alfa group, and IPOC, a Bermuda-based fund controlled by Danish lawyer Jeffrey Galmond and widely seen as a front company for Communications Minister Leonid Reiman. Gazprominvestholding CEO Alisher Usmanov has stepped in to fill what has been a very messy breach. In August, Kommersant reported that Usmanov had brokered a deal that would resolve Altimo and IPOC‘s bitter struggle over ownership of a 25.1 percent stake in Megafon. One of Russia's “big three” mobile operators, Megafon serves about 32.3 million subscribers and generated revenues of $3.7 billion in 2006; Deutsche Bank values the company at $16 billion. Apart from his responsibilities as CEO of Gazprom's investment holding company, Usmanov's other assets include music channel MUS TV, sport channel 7 TV, industrial holding Metalloinvest and a recently acquired 14.5 percent stake in Arsenal football club. The telecom deal would add a 30 percent stake in Megafon to his holdings as well as resolve the long-running and somewhat bizarre conflict between the parties.
During the dispute between Altimo and IPOC, an ICC court based in Switzerland determined that Reiman was indeed the owner of IPOC and had abused his position as a state official to dilute the state's stake in CT Mobile. An arbitration court in Geneva found against further IPOC claims to Megafon option ownership. Cases have also been filed in New York, St Petersburg, the British Virgin Islands, and Bermuda.
In contesting ownership of the 25.1 percent stake in Megafon, Altimo and IPOC have spawned a raft of court cases which have ultimately proven counterproductive. IPOC directly held 8 percent of Megafon and controlled St. Petersburg-based Telecominvest which holds 31.3 percent of Megafon through the Luxemburg-based First National Holdings. Jeffery Galmond is also a partner with Sistema in wireless operator Sky-Link and multi-regional Transit Telecom, which holds a long-distance telecoms service license. Alfa Bank, through subsidiaries, controls the contested 25.1 percent of Megafon, but has been prohibited by a St Petersburg court from selling the stake.
Throughout 2007, pressure had been building on IPOC, which Alfa accused of money laundering and stripping state assets. In January, Prime Tass, which has consistently monitored Megafon-related events, reported that an IPOC International Growth Fund director, Swiss fiduciary David Hauenstein had sworn in an affidavit that the fund's board had determined that “the point has come when it can no longer maintain” the position that Galmond was the sole beneficiary of the fund. In response, Reiman immediately issued a statement saying: “it distresses me that because of someone's poorly thought-out, possibly unprofessional actions, my name is mentioned in a conflict with which I am in no way connected.”
Collateral Damage - The Bermuda Bond
Prime Tass, The Wall Street Journal and BusinessWeek then reported on a petition filed in February by Bermuda Finance Minister Paula Cox to the Bermuda Supreme Court to liquidate a series of Galmond-related funds respectively holding a controlling stake in Telecominvest, a 50 percent stake in SkyLink and a 50 percent stake in Multiregional Transit Telecom – in short, the liquidation of all of IPOC’s Megafon related holdings. The petition came “following an audit of IPOC by KPMG” which was part of a wider Bermuda Government investigation into the “St Petersburg Operators” Group. Here the collateral damage from the Altimo/IPOC contest starts to pile up.
BusinessWeek reported in February that the KPMG audit of IPOC and affiliates had been infiltrated by an intelligence company featuring an employee who purported to work for the British Secret Service. A KPMG staff member in Bermuda, believing he had been contacted by the British Secret Service, and agreeing to work as a “mole” in the interests of national security, began regularly dumping IPOC audit related documents in a box in a field in Bermuda, where the British agent, “Nick Hamilton,” would collect them.
Special Agent Hamilton, it turns out, was in fact Nick Day, founder of a London and Washington based intelligence firm called Diligence that has an office in Moscow. Hamilton confirmed in an interview with BusinessWeek that Diligence had been hired by Barbour Griffith & Rogers (BGR), a Washington-based lobbying firm, working on behalf of Alfa Bank, to infiltrate the IPOC audit, and denied that he or Diligence had broken any laws in Bermuda.
Among its international directors, BGR boasts former U.S. Ambassador to the Federal Republic of Germany Richard Burt who also worked as the U.S. Chief Negotiator in the Nuclear Arms reduction START negotiations in 1991. Burt also happens to be the international chairman of Diligence, and on the International Advisory Board of Alfa Group.
KPMG was eventually alerted of the contamination of their audit in October 2005 and the case became public. KPMG Financial Advisory Services sued Diligence for fraud and unjust enrichment in U.S. District Court in Washington, settling when Diligence paid KPMG $1.7 million, according to The Legal Times. One day later, on June 15, 2006, IPOC sued Diligence and BGR alleging civil conspiracy, unjust enrichment, and other misdeeds. The case is currently pending.
And the bad news kept on coming. In April, Russian business daily Vedomosti reported that Siemens employees interviewed in connection with an investigation into a bribery slush-fund testified that up to 10 million Euro ($13.6 million) per year was spent on kickbacks in CIS countries with payments often going to state officials and even representatives of special services. “In Russia, Munich prosecutors are most interested in Siemens contracts with Svayzinvest and Megafon,” Vedomosti reported, quoting Suddeutsche Zeitung.
Enter the Peacemaker
Usmanov’s intervention in the ongoing debacle seems genuinely intended to resolve the disputes, salvage the reputations of those involved while attracting international investors to the sector, now infamous for the litigiousness of powerful actors. Aton capital reported in August that IPOC was eager to divest ahead of next year's presidential election, sentiments echoed in the Financial Times.
But Usmanov’s plans could jeopardize or Mikhail Fridman’s dream to create a “Vodafone of the East” to rival the global telecoms giant. At the moment, Alfa’s Altimo holds over 44 percent of Vimpelcom, owner of the Beeline mobile network. Scandinavian holding Telenor holds 29.9 percent. Conflict between the two emerged in 2005 when Vimpelcom announced expansion plans into Ukraine’s Kyivstar, a move that was supported by Altimo but opposed by Telenor.
The eagerness of each party to secure a stronger foothold in Beeline, perhaps Russia’s strongest brand has seen the price of Vimpelcom ADR’s rise 166 percent, from $42 in June 2006 to $112 in June 2007. The company did not stand still over the summer either, initiating a purchase of the 26.9 percent stake in wireless hot-prospect Golden Telecom held by Altimo and the 18.4 percent stake held by Telenor, perhaps in an effort to shake things up between its two biggest shareholders. As Telenor Chairman Kjell Morton Johnsen told businessneweurope, “If you are using the internet in Russia then there is an 80 percent chance you are using a Golden Telecom network. If you are making a call from a five star hotel in Moscow, then it’s 100 percent.”
And the stakes in the face-off are rising every year. Vimpelcom announced at the end of August that its second-quarter net profit rose 84.3 percent year-on-year to $359.3 million, well above market expectations, posting a 59.7 percent increase in operating income before depreciation and amortization (OIBDA) to $896.8 million, while revenues rose 53.1 percent to $1.72 billion.
Telenor also owns 56.5 percent in Kyivstar while Alfa, through its affiliate Storm, owns 43.5 percent. Alfa also controls competing Ukrainian wireless operator Astelit (through which it owns 13 percent of Turkcell, Turkey’s largest mobile operator, which is currently in a dispute with Teliasonera). Telenor moved to force Altimo to divest from one or other of its Ukrainian holdings, in the hope that it could consolidate Kyivstar. On Aug. 1, a New York arbitration court ordered that Altimo relinquish its shares in either Kyivstar or Turkcell within 120 days, though this decision has been rejected by Altimo as unenforceable in Ukraine. Telenor claims that since the Kyivstar shareholder agreement was drafted in New York, the decision by the court should be respected.
The ongoing stalemate has been shaken somewhat by Usmanov’s intervention into the Megafon ownership debacle, which could be beneficial for all parties. For example, an Alfa retreat and the consolidation of Kyivstar by Telenor is bad news for Vimpelcom, since this would rule out a merger with Kyivstar and weaken Altimo’s bargaining power on Vimpelcom’s board, potentially leading to new further conflicts between Altimo and Telenor.
However, an Altimo exit from both Kyivstar and Vimpelcom in order to consolidate its holding in Megafon, where ownership issues have been resolved by Usmanov, would free up Telenor, now the sole owner of Vimpelcom and Kyivstar, to merge the companies in a value-accretive merger. It would also position Altimo positively in terms of a share swap with Teliasonera for a larger stake in Turkcell, offering Altimo the long sought after foothold with a European operator.
Given that Usmanov is CEO of Gazprominvestholding, it is not beyond the realm of possibility that he is acting as an intermediary, possibly even on behalf of Alfa. But for power players who cut their teeth in the 1990s, sometimes discretion can be the better part of valor, with the results for all being more beneficial in the long-run than continuing to fight a losing battle. |
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