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Alfa, Telenor Asset Merger Approved

February 4, 2010

A commission chaired by Prime Minister Vladimir Putin on Wednesday approved a deal between Alfa Group and Norway’s Telenor to merge their telecommunications assets in Russia and Ukraine, opening the way for $4.5 billion in investment over the next four years.

“This will lead to a very big impulse for the development of these assets in Russia and Ukraine,” Federal Anti-Monopoly Service chief Igor Artemyev said while announcing the commission’s decision.

The commission on foreign investments was meeting to discuss an array of deals involving companies registered abroad, and it followed a meeting hosted by President Dmitry Medvedev a day earlier on how to lure back foreign capital after a 41 percent decrease last year.

Artemyev did not give a breakdown for how much Alfa and Telenor would invest or where the money would go, saying only that the total would amount to 137 billion rubles, or $4.5 billion, from 2010 to 2013.

The companies agreed to merge their stakes in VimpelCom and Kyivstar in October after a protracted legal battle, triggered by Telenor’s refusal to approve the expansion of VimpelCom into Ukraine, where it would compete with their other jointly owned operator, Kyivstar.

New York-listed VimpelCom, Russia’s second-biggest mobile operator, operates under the Beeline brand.

Under the deal that ended the standoff, Alfa and Telenor agreed to merge their stakes into a Dutch-registered and U.S.-listed company called Vimpelcom Ltd. Alfa Group’s telecoms arm, Altimo, and Telenor will hold almost equal stakes in the new company, with 38.84 percent and 38.46 percent, respectively.

Alfa will own more voting stock, with 43.89 percent, than Telenor’s 35.42 percent. Even so, the companies will wield equal voting power in the board of directors, each having three directors to represent them on the nine-member board. The remaining three seats will go to independent directors.

Former VimpelCom chief Alexander Izosimov was tapped to head Vimpelcom Ltd.

But the deal still requires anti-monopoly approval in Ukraine, as well as agreement from minority shareholders. Altimo and Telenor have said they would start an offer to VimpelCom minorities in February.

Shares in Telenor jumped as much as 5 percent on the news and settled with a gain of 2.8 percent in Oslo. VimpelCom’s shares in New York were down 2.3 percent.

Approval of the merger could also put new pressure on Alfa to divest its stake in rival mobile operator MegaFon. The government has indicated that it would like to buy control of the country’s No. 3 mobile company as part of its reorganization of state-run Svyazinvest, and it is already in talks with another major shareholder, Alisher Usmanov.

Altimo says its blocking stake in MegaFon does not present a conflict of interest. Altimo and Sweden’s TeliaSonera are looking to merge their joint telecoms holdings — in MegaFon and Turkish operator Turkcell — in a deal similar to the one approved Wednesday.

The IT and Communications Ministry, which is overseeing the Svyazinvest reorganization, opposes the deal, and Artemyev indicated that he was also less than enthused.

“It would be a dream come true for the Federal Anti-Monopoly Service if Alfa did this,” he said in response to a question about whether Alfa would have to abandon the TeliaSonera deal.

The service will look into the planned merger, he said during a news conference, without elaborating.

The government commission on foreign investment, which was set up to regulate purchases in strategic industries, also approved a deal to fold two television media assets owned by Usmanov — 7TV and 75 percent of music channel MuzTV — and regional media outlets owned by Ivan Tavrin into a single UTV Russia Holdings company, Artemyev said.

In addition, the commission backed several “technical” deals that remove a handful of links in the chain of offshore companies that Russian businessmen use to control their assets in Russia. In one of these deals, Mikhail Prokhorov will straighten up his hold on a stake in miner Polyus Gold, Artemyev said.

Despite the commission’s name, the majority of its hearings focus on deals involving Russian businesses owned through offshore holding companies.

The body also asked Oleg Deripaska to formally revoke his request to buy Russneft because it had learned that the deal to buy the oil producer from Mikhail Gutseriyev was reversed, Artemyev said.

The anti-monopoly service, he said, will also look into a planned merger of aviation assets that would see state-run Aeroflot double in size. Putin agreed on a plan proposed Tuesday by Transportation Minister Igor Levitin to have state corporation Russian Technologies hand over several airlines to Aeroflot instead of creating a rival carrier with the Moscow city government.

Levitin had told Putin that the arrangement, which could see Aeroflot’s share of the domestic market rise to between 30 percent and 35 percent, could be accommodated within the existing anti-monopoly law.

The service will issue instructions to Aeroflot to allow more competition on certain flights if the deal goes through, Artemyev said.

He also said amendments to the law on foreign investments were presented to foreign investors for study last month and that his service was taking recommendations on how to improve them.

The government frequently meets to discuss ways to encourage foreign investment, although perceived political interference in business — most recently the seizure by court bailiffs of Telenor’s $1.4 billion stake in VimpelCom before a settlement was reached with Alfa — has hurt the investment climate.

Putin said foreign investment in Russia amounted to more than $40 billion last year. “We need to think about how to create the most favorable, maximally favorable conditions for foreign investments, and for all investments into our economy,” he told the meeting, proposing tax cuts to stimulate innovation and also removing bureaucratic barriers.

Speaking at Troika Dialog’s annual Russia Forum, Finance Minister Alexei Kudrin said foreign direct investment fell by $30 billion last year and that the country had a net capital outflow of $52 billion. But he also said foreign investment could jump to between $60 billion and $70 billion in the next two to three years as the global economy improves.

Medvedev said Tuesday that foreign investment fell by 41 percent last year and that at least half of what was invested came from Russian-owned companies registered abroad. He also appointed First Deputy Prime Minister Igor Shuvalov to oversee Russia’s investment climate, saying he would have the authority to seek cancellation of decisions by state agencies that would make life harder for investors.

 

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