Alfa Delves Deeper Into Kyivstar

MOSCOW, Russia -- M&A Russia's Alfa Group Consortium said Tuesday, March 29, it has taken full control of a 43.5% stake in Ukraine's second-largest mobile operator, CJSC Kyivstar GSM, in what analysts said is further evidence of the improved investment climate in the country since the election of President Viktor Yushchenko.

The reformist Yushchenko in December won a rerun of the previous disputed presidential election on a platform to clean up the rampant corruption that allowed state assets to be sold to relatives and cronies of the previous regime for a fraction of their true value. Since coming to power, the new government has held talks with a number of foreign investors and launched investigations into several suspicious privatizations.

OOO Alfa Telecom, a subsidiary of Mikhail Fridman's financial-industrial conglomerate, said it has raised its stake in Storm Ltd. to 100% from 50.1%. Storm owns a 43.5% stake in Kyivstar.

Kirill Babaev, vice president for external communications at Alfa Telecom, did not disclose the price paid, though Norway's Telenor ASA, which owns the remaining 56.5% in Kyivstar, acquired a 7.7% stake in the operator in 2002 for $31 million, suggesting a total market cap then of about $400 million. Kyivstar's revenue rose 72% in 2004 to $640.7 million, so it would appear to be worth more now.

In an interview with Ukrainian business journal Kontrakty, Alfa Telecom's managing director, Pavel Kulikov, said talks to gain take full control of Storm have been ongoing since the Russian firm purchased an initial stake two years ago in the Ukrainian company, the ownership of which remains obscure.

Analysts suspect the owners of the stake in Storm that has been sold to Alfa Telecom are individuals close to the former president, Leonid Kuchma.

"The motivation for the sale was probably to secure cash before the new government launches wider probes into the wrongdoings of its predecessor," said Alexander Kazbegi, an analyst at Moscow investment bank Renaissance Capital.

Alfa's foray into Ukraine's telecom sector is testament to how much the investment climate has changed in the country, especially given that Russia's largest mobile operator, OAO Mobile TeleSystems, was involved in a murky legal dispute last year over its purchase of 51% of the country's largest mobile operator, Ukrainian Mobile Communications, from state-owned telecom OAO Ukrtelecom.

That lawsuit has since been dismissed, though analysts at the time believed the prosecutor general's office was being used by politically influential local investors as a tool to attack Mobile TeleSystems and perhaps prevent it from taking part in the planned privatization of Ukrtelecom.

Ukrtelecom is one of 27 of the biggest state monopolies that are being audited by the government ahead of sales to private investors later this year. The government has set up a special commission to carry out an audit of these companies to prevent the kind of abuses seen in prior privatizations, where they were sold off too cheaply.