Government’s Ukrtelecom Sale Plans Continue To Flop

KIEV, Ukraine -- The Ukrainian government has repeatedly failed in its bid to raise more than $200 million within recent weeks by privatizing minority stakes in fixed-line telephone company Ukrtelecom, one of the country’s most prized assets.


The tender, intended to showcase the multi-billion-dollar company to investors ahead of the sale of a larger stake to strategic investors, has gone sour. Investors have refused to show up for tenders organized in recent weeks, alleging that the starting price was too high.

And the failed tenders have given Ukraine’s pro-Western president, Viktor Yushchenko, another reason to criticize the governing coalition of his arch rival, Prime Minister Viktor Yanukovych.

Yushchenko has over the years repeatedly called for a majority stake in the aging telecom giant to be privatized to a strategic investor capable of infusing fresh capital needed to compete with fast-growing mobile telecommunications companies that have gradually eaten away at Ukrtelecom’s potential clientele.

A longstanding debate

On July 4, Yushchenko’s administration once again urged the government and State Property Fund (SPF), headed by Socialist Party member Valentyna Semenyuk, to quickly privatize Ukrtelecom to a strategic investor rather than wasting time with failed minority auctions.

Such a strategy has in the past year been widely opposed by Yanukovych’s government and Semenyuk. But the failed auctions of recent weeks have essentially proven them wrong, and the president right.

On July 4, Yushchenko’s administration criticized the idea of selling minority stakes in Ukrtelecom and emphasized the idea of attracting a strategic investor by selling a controlling share. Deputy administration chief Oleksandr Shlapak said there was no need to postpone the privatization of a majority stake in Ukrtelecom.

The failed auctions for a minority stake have shown that there is no other realistic strategy for the company’s future, he suggested.

Debates over whether to sell off minority shares or a majority stake in Ukrtelecom have carried on for almost 10 years. During this period, the telecom giant has seen one of its most prized assets, mobile telecommunications leader UMC, sold off to Russia’s Sistema telecom group.

Left without a promising mobile phone business, Ukrtelecom has struggled to keep up with customer demand in a market that has seen mobile phone penetration rise above 100 percent.

Western portfolio and institutional investors were said to express their interest in buying stakes in Ukrtelecom, as were Ukrainian billionaires, such as Rinat Akhmetov.

Comstar-UTS, a fixed-line operator in Russia controlled by Moscow tycoon Vladimir Yevtushenkov, the majority owner of Sistema, was also interested in the company.

This March the SPF approved a plan to privatize Ukrtelecom. According to the plan, a 50 percent stake plus 1 share would remain in state ownership, while 37.86 percent was to be placed among foreign investors on international stock exchanges.

According to the plan, 5 percent was to be auctioned off on five Ukrainian stock exchanges, a move intended to raise more than $200 million for state coffers and tease Western investors ahead of larger bids on foreign exchanges.

Originally, the SPF planned to complete the sale of Ukrtelecom’s share to foreign investors by the end of the year, within a period from August to December.

The sale of a 5 percent stake was to have been implemented from March 28 through June 23, but repeated auctions failed to attract bidders. Only one auction found a buyer, granting the investor 0.072 percent of the company for almost $3.1 million.

The failed auctions and upcoming early parliamentary elections, scheduled for Sept. 30, threaten to put off the government’s bold privatizations plans altogether.

Currently Ukrtelecom is 92.778 percent state-owned. A 7.14 percent stake was privatized on privileged terms to employees and top management in 2006.

A debacle of a sale

The first 1 percent stake in Ukrtelecom was supposed to be auctioned on the Ukrainian Stock Exchange (UFB) on May 22. However, on May 21, a Kyiv Economic Court ruling imposed a ban on the planned sale.

The lawsuit was filed by Dotrin-2002, an advocacy group for the disabled in Khmelnytsky Region. The court ruling also banned the sale of a 1 percent stake scheduled to take place on the PFTS, Ukraine’s main trading platform, on June 8. The SPF and UFB challenged the court decision, but the damage was already done.

Market insiders suggested that the advocacy group was merely used as a front for powerful business interests. Their aim could have been to scare off bigger foreign bidders, increasing their chance to get shares in the prized company for less.

Later, an auction scheduled for May 29 at the UFB was cancelled. No bids were submitted.

Then, auctions scheduled to take place at the UFB on June 5, 12, 19 and 26, and July 3 and 10 also failed due to a lack of bids.

Auctions scheduled to take place at the Kyiv International Stock Exchange on July 5 and 12 were cancelled due to a lack of bids.

Analysts say an exaggerated starting price on bids has chased away potential investors. They doubt Ukrtelecom will be privatized this year as originally planned.

Also, on June 19 the Kyiv Economic Court imposed a ban on the sale of Ukrtelecom’s shares at auctions scheduled to take place on June 21 on the Kyiv International Stock Exchange, July 11 on the Ukrainian Interbank Currency Exchange and Aug. 1 on the Inneks exchange.

The court issued the ruling according to the solicitation of a private company, Transcom.

What’s next?

While market analysts continue to stress that procrastination in selling a controlling share in Ukrtelecom drives the value of the whole company down and scares potential investors, stubborn SPF leadership continues to unsuccessfully push forward its ill-fated privatization plans for the company.

Nina Yavorska, head of the SPF’s press service, said recent court decisions that banned sales of the company’s stakes frightened off potential investors. Nevertheless, she said that “we offer stakes for sale almost every day.”

Currently the SPF is also preparing to offer 37.86 percent of the company on the London Stock Exchange.

“This will be a unique project. The State Property Fund has not yet entered international markets,” Yavorska said.

Few analysts actually expect a tender for a larger stake on the LSE to go forward, given the failures to auction off minority stakes in recent weeks.

Oleksandr Ryabchenko, director of the Kyiv-based International Institute for Privatization, Asset Management and Investments, said that the strategy the SPF chose to privatize Ukrtelecom was doomed from the very beginning.

The company faces deep challenges and needs a strategic investor fast, he added.

Currently Ukrtelecom controls about 78 percent of Ukraine’s fixed-line communications market. But with the increasing availability of mobile communications, the company’s profits are thinning.

The company has big plans on paper, but none will go forward without strategic private management. One of the plans Ukrtelecom has developed to catch up with mobile telecommunications operators entails the launching of a 3G network, or third-generation technology that offers customers fast audio and video communications using mobile telephones.

After many years of poor management, it’s a big step in the right direction, but “development of a 3G mobile communications network, for example, requires big investments,” Ryabchenko said. And big investors are not likely to pour their cash into such big and potentially risky plans in return for a minority stake.

Ryabchenko said the state could raise $2-2.5 billion by selling off a controlling share in the company.

“The current way [of selling the company’s stakes] – first to sell small stakes on the stock market, to sell everything, except for the controlling share – automatically leads to decreasing of [stakes’] prices on the stock market…This is the wrong strategy,” he said.

Bickering between the political camps of Yushchenko and Yanukovych are expected to shift into high gear ahead of the Sept. 30 elections. The Ukrtelecom privatization debate is not expected to be settled during this turbulent period. It could also become one of the issues for debate.

“The situation will not change before the elections,” predicted Ryabchenko.

Source: Kyiv Post

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