A long-awaited privatization auction for a 5 percent stake in Ukraine’s fixed-line telecommunications monopoly turned sour on May 22
After a failed attempt to auction a 1 percent stake in state telephone company Ukrtelecom last week, the State Property Fund went forward with plans to auction off another stake this week, but the May 29 sale flopped due to a lack of bids, signaling rising investor reservations about the sale altogether.
A long-awaited privatization auction for a 5 percent stake in Ukraine’s fixed-line telecommunications monopoly turned sour on May 22 after a last-minute court ruling on a claim filed by an obscure plaintiff halted the sale of the first 1 percent stake in Ukrtelecom to be auctioned off on the Ukrainian Stock Exchange.
The SPF plans envisioned that five auctions offering investors 1 percent stakes on the Ukrainian Stock Exchange and the PFTS electronic trading platform would raise more than $200 million for state coffers and serve as a teaser for an initial public offering of a larger stake to be auctioned off on a major Western stock exchange. All five auctions were to be conducted this summer.
In recent months, investor interest was said to be high, with bids expected from Western portfolio investors, institutional investors as well as leading business groups in Ukraine and Russia. The Ukrtelecom stock auction was expected to be the largest privatization sale by Ukraine’s government since the 2005 landmark repeat privatization sale of a controlling stake in the country’s flagship steel mill, Kryvorizhstal. Then, in a showcase auction, the government raised a whopping $4.8 billion for the steel mill, which was acquired by Mittal Steel in what is highly regarded as Ukraine’s most transparent privatization sale.
But now that the first two Ukrtelecom stock sales have flopped, investment banks that have voiced displeasure with what they view as excessively high starting prices on bids are expressing doubt that the SPF will manage to collect anything close to the amount originally planned.
What went wrong
Last week, SPF chief Valentyna Semenyuk was admittedly surprised by the May 21 Kyiv Commercial Court ruling, which was announced by a court official only five minutes before the auction was scheduled to begin. The SPF said it would appeal the court ruling blocking the sale, but that it would likely put the sale off to “study the issue,” Semenyuk said.
“Nobody knew about this court case, neither the stock exchange, nor the SPF,” she said.
Formally, the lawsuit was filed by Dotrin-2002, an advocacy group for the disabled in Khmelnytsky Region. Insiders suggested that the advocacy group was merely used as a front for powerful business interests. But a week later, it remained unclear which business or political interests stood behind this court ruling.
The May 29 auction was cancelled, as “no applications were submitted,” the SPF said in a statement.
The initial auction on May 22 attracted three bids from Kyiv-based brokers, said Peter Keller, head of research at Millennium Capital.
“These brokers have now decided not to participate anymore,” he said, adding that the highly politicized nature of the tender and looming uncertainty over the lawsuit blocking the first sale have eroded investor appeal.
Investors could be scared off to enter again, feeling that there is too high of a risk that the auction could be cancelled by another claim, according to Keller.
“The auction’s failure indicates the loss of investor confidence in this privatization process,” Keller said, adding that the sales are likely to be postponed until after the September 30 parliamentary elections.
Experts called the starting price of Ukrtelecom’s shares for both auctions quite high.
Aleksey Danilin, an analyst at the Ukrainian affiliate of iKS-Consulting, a Moscow-based telecom think tank, said, “the longer the government puts off the sale, the more difficult it will be to get the money they want from it.”
Danilin considers the state fixed-line telecommunication monopoly to be not as attractive for international and domestic investors as presented by the government.
“International investors are, first of all, interested in Ukrtelecom as the country’s only holder of a third-generation mobile network license,” said Danilin.
While, third-generation services offer strong growth opportunities, they also require large investments.
Currently, Ukrtelecom controls about 78 percent of Ukraine’s fixed-line telecommunications market. But its traditional fixed-line services are bringing in less revenue, as more Ukrainians are opting for increasingly affordable mobile telecommunications to make phone calls.
In buying Ukrtelecom, investors expect to receive constantly decreasing revenues from fixed-line communication, and large social obligations to a massive 120,000 workforce, Danilin added.
To make Ukrtelecom’s privatization successful, the government will have to guarantee the right of new owners and ensure the privatization process is clean.
Western portfolio and institutional investors were said to be eyeing the stakes, as were influential Ukrainian billionaires, such as Rinat Akhmetov. Comstar-UTS, a fixed-line operator in Russia controlled by Moscow mogul Vladimir Yevtushenkov, has also expressed interest in Ukrtelecom.
The state-owned company lost control of mobile communications provider UMC when it was privatized for $100 million by Yevtushenkov’s Sistema in 2002-2003. Today UMC is valued at billions of dollars. Ukrtelecom has desperately tried to rebuild a mobile telecommunications business and recently announced plans to invest hundreds of millions of dollars into developing a costly third-generation, or 3G wireless network.
Ukrtelecom is 92.86 percent state-owned. A 7.14 percent stake was privatized on privileged terms to employees and top management in 2006. Many of these shares are currently traded on Ukraine’s main stock trading platform, the PFTS.
The governing coalition of Prime Minister Viktor Yanukovych has backed the SPF’s plans to auction off minority stakes, while President Viktor Yushchenko’s Secretariat has pushed for a majority stake to go on the bloc.
Semenyuk, a Socialist Party member, has pledged to keep a controlling share of the multi-billion-dollar company in state hands.
