Due to what some analysts call "political games," Ukrainian Mobile Communications could soon find itself under state control again if prosecutors succeed in legally dismantling one of the largest privatization deals in Ukraine's history.
Russian telecommunications giant Mobile TeleSystems first took control of UMC in 2002 with the purchase of a combined 57.7 percent stake in the company: MTS bought 25 percent of UMC shares from Ukrtelecom, Ukraine’s state-owned telecommunications monopoly, and 16 percent each from Dutch phone company KPN and Deutsche Telekom. MTS paid $194.2 million in total.
Last year, MTS completed the deal, purchasing the remaining 26 percent stake from Ukrtelekom and 16.3 percent from Denmark’s TDC. In the end, it had paid a total of $373 million for UMC, the country’s largest provider of mobile services.
MTS paid $171 million for the 51 percent of shares it acquired from Ukrtelecom, and $202 million – $31 million more than what it paid Ukrtelecom – for the remaining UMC shares, purchased from foreign companies.
In response to accusations made by Ukraine’s Prosecutor General’s Office on June 9 that MTS’ purchase of the 51 percent stake in UMC – acquired from Ukrtelecom – was illegal, MTS said that its acquisition of the company was transparent and legal.
“Any actions that question MTS ownership in UMC are very negatively perceived by the international investment community,” MTS’ Public and Investor Relations Director Andrey Braginski said June 29.
“If Ukraine is looking to attract international money into the economy, it should create a positive precedent,” he said.
But Ukrainian prosecutors plan to challenge MTS’ purchase of UMC in the Kyiv Economic Court on July 12, arguing that it violated Ukrainian privatization laws and hurt the nation’s economic interests.
Speaking to the press on June 9, PGO spokesman Serhy Rudenko said that in August 2000, Ukraine’s government included Ukrtelecom on the list of strategically important state-owned companies, meaning that according to legislation of that time, the sale of any Ukrtelecom asset worth more than 14,000 euros was prohibited.
Yet, Rudenko said, the government issued a resolution in May 2001 obligating Ukrtelecom to sell its stake in UMC, “which is clearly worth much more than 14,000 euros.”
Rudenko said that in 2003, the government updated its resolution that Ukrtelecom sell UMC.
Andry Dmytrenko, head of research for Dragon Capital, a Kyiv-based investment firm, said that a separate law from 2000, which specifically details Ukrtelecom’s privatization, includes no limitations on the value of assets that could be sold.
Dmytrenko said that the government’s resolutions also contain no restrictions on UMC’s sale.
“Because the UMC sale was authorized at the highest government level, we believe that the Prosecutor General’s claim will not lead to the stripping of UMC’s 51 percent stake from MTS,” Dmytrenko said.
However, Oleksandr Sandul, a research analyst with the Kyiv office of U.S.-based investment firm Foyil Securities New Europe, said that the Ukrtelecom privatization law calls for preserving all of Ukrtelecom’s property as an integral whole during the company’s privatization.
He said that is a sufficient legal reason to block the sale of UMC to MTS, unless it can be argued that UMC was an independent network unrelated to Ukrtelecom.
Meanwhile, the Wireless Week Web site reported on June 24 that Ukrtelecom’s board chairman, Hryhory Dzekon, said that he is against the sale of UMC because Ukrtelecom’s value has dropped since it lost the mobile operator, and foreign investors have since told Ukrtelecom that they are not interested in the company.
The Moscow-based investment firm Renaissance Capital said in a June 10 report that Ukraine’s government estimates the initial price of a 43 percent stake in Ukrtelecom that it plans to sell this year at $1 billion, while the market currently values the stake at $700 million.
But some telecommunications analysts have concluded that the PGO’s move is not motivated solely by the need to return the money in lost value to Ukrtelecom with the sale of UMC, since the PGO’s charges come just months before presidential elections in Ukraine.
“We see the political games rather than economic interests behind the investigation into the UMC sale to MTS. Obviously, these political games are connected with the forthcoming presidential elections and the ongoing reshuffling within the major industrial and financial groups,” Sandul said.
Dragon Capital reported in its June 10 newsletter that UMC’s main competitor, Kyivstar GSM, has long been losing market share to UMC and wants to undercut MTS’ investment program.
Dragon Capital said that the PGO’s lawsuit would make sense for a foreign investor, in partnership with a Ukrainian group, eyeing the Ukrtelecom stake together with UMC as Ukrtelecom’s mobile unit.
“The attempt to revoke the UMC sale may have sense only if the 43 percent stake is being readied for sale to a local business group with a foreign partner,” the investment firm said.
The Wireless Week Web site reported on June 24 that the obvious frontrunner for the Ukrtelecom stake is the consortium of Ukraine’s Digital Cellular Communication and Turkcell, Turkey’s largest GSM mobile operator, adding that the former head of DCC, Leonid Netudykhata, is currently on Ukrtelecom’s supervisory board and serves as the chairman of the State Telecommunications Committee.
In April, Turkcell signed an agreement with DCC for a 51 percent stake in the Ukrainian mobile provider’s business.
Turkcell said in a statement that the deal marks the start of DCC’s GSM operations in Ukraine. The Ukrainian company acquired the rights to a GSM 1800 license in 2003 by purchasing a smaller operator, Astelit.
Until now, DCC has been operating in the D-AMPS standard.
UMC and Kyivstar both operate in the GSM 900 and 1800 standards.
