The New Owner — A Russian German
The privatization of “strategic” property in Ukraine follows a rather simple scenario; first, announcements are made nationwide that large Western companies are showing an interest in such-and-such a property, then there is a free-for-all to get the alleged chief seller’s status. This scares away the Western investor, reducing the competition and price of the property. In the end the block of shares is sold to Ukraine’s closest neighbor; Russian capital is best adjusted to the specifics of Ukrainian privatization.
Russia’s largest mobile telephone operator, Mobile Telecommunications Systems (MTS), is stepping onto the Ukrainian market, as evidenced by the signing in Kyiv of a number of agreements whereby MTS bought a 57.7% interest in the Ukrainian Mobile Communications (UMC) joint venture for $194.2 million. According to MTS President Mikhail Smirnov, his company’s appearance on the Ukrainian market is part of its strategy to expand its business in CIS countries. Under the agreements, MTS is buying 16.3% held by the Dutch company KPN for $55 million, Deutsche Telekom’s 16.3% for $55 million, and Ukrtelekom’s 25% for $84.2 million.
In addition, MTS signed an option to take over UMC’s remaining 16.3% interest held by the Denmark’s TDS for $55 million (deadline: November 5, 2004) and 26% Ukrtelekom’s stock for $87.6 million (November 5, 2005). If and when all the option clauses are implemented, MTS will have a 100% interest in UMC. MTS credit guarantees for the current UMC stockholders, to the tune of $58.1 million, are part of the deal. The company’s market value was agreed between the contracting parties as each evaluated it using its own resources. At present, its statutory fund (UMC has 1.5 million subscribers) amounts to $15 million and capitalization is estimated at $335 million. Mr. Smirnov stressed that it is a tentative agreement (as only the structure and time frame have been agreed upon). Its completion requires approval from the relevant regulatory authorities in Ukraine and Russia.
Previously, one of the giant operators of the telecommunications market, Deutsche Telekom, showed an interest in buying UMC corporate rights, but financial problems made it change its plans. Ukrtelekom CEO Oleh Haiduk says it was then an MTS affiliate with 40% held by Deutsche Telekom decided to buy an interest in UMC.
The Ukrainian government then decided that 30% of the proceeds from the sales of the Ukrtelekom interest in UMC (51%) will be invested in the development of a domestic telecommunications operator and upgrading of networks and services; the remainder will be transferred to the state budget. Mr. Haiduk notes that such an investment by the new UMC proprietor will add some two billion hryvnias to the state budget in the next five years.
Selling the government interest in UMC to the Russian company draws out Ukrtelekom’s pending privatization, albeit indirectly. It is generally known that Deutsche Telekom is the principal interested party to the Ukrtelekom privatization project. Many experts correctly wonder about the UMC deal as a preview of the Ukrtelekom scenario. Pulsar President Oleksandr Narbut, when asked by The Day about the possibility (which is anything but hypothetical), said that the best buyer was one whose bank statement, rather than identity papers, were checked and who was prepared to pay the maximum price. Regrettably, he added, the low investment ratings made Ukraine an unwelcome partner for large Western investors.
State property could be privatized, using a single pattern, with the State Property Fund acting as the seller. The fact that UMC was sold by Ukrtelekom, according to experts, could have influenced the final acquisition price. The government can count on the best terms when the tenders use transparent procedures, making it possible to attract a large number of potential buyers. Another negative aspect of the UMC deal, in Mr. Narbut’s opinion, is that Ukrtelekom loses one of its most tangible customer assets. This is sure to affect the company’s value in the course of subsequent privatization.
