March 18, 2011

Ukrtelecom message: Closed to investment?

Ukrtelecom message: Closed to investment?

Today at 00:54 | Vlad Lavrov Critics say Ukrtelecom was sold for far less than its worth.
President Viktor Yanukovych’s commitment to holding transparent privatizations is being challenged anew after government sold one of its remaining gems – the nation’s fixed-line telephone monopoly – in a deal derided as uncompetitive
“We sold the last state asset that could have potentially attracted a major strategic investor in a blatantly non-transparent way,” said Oleksandr Bondar, a lawmaker and former head of Ukraine’s state privatization agency, of the government’s sale of Ukrtelecom this month.

If these types of sales continue, Bondar said, the nation has no hope of attracting much needed foreign investment. “No matter what is put up for sale in the future, no serious foreign investor would come,” Bondar said. “It’s simply a signal to foreign investors to stay away from Ukraine, as everything has been already divided up amongst the nation’s elite. I think the real buyer is someone very close to Yanukovych.”

Prominent economist Alexander Paskhaver, president of the Center for Economic Development, agreed. “Basically, it’s a sign to foreign investors that they are not welcome in the country. Many are probably wondering why they come here if they are not wanted,” Paskhaver said.

Oleksandr Ryabchenko (L), head of Ukraine’s State Property Fund, on March 11 signed off on the $1.3 billion privatization sale of a nearly 93 percent stake in state telephone company Ukrtelecom to Vienna-based investment house Epic. Signing the sale agreement from Epic’s side was Wolfgang Herritsch, the firm’s representative in Ukraine. (UNIAN)

The cost of selling state assets below their market value, a tradition of Ukraine’s post-Soviet privatization, is easily measured in billions of dollars of lost tax revenue to the state. Critics like Bondar suspect that, like in previous uncompetitive privatizations, insiders close the administration are profiting handsomely in the deals.

Ukraine’s State Property Fund on March 11 inked a sale agreement transferring the government’s 93 percent stake in Ukrtelecom to Epic, a Vienna-based investment firm, for $ 1.3 billion.

But this, the biggest privatization deal held one year under Yanukovych’s leadership, has a big dark cloud hanging over it. The tender that preceded it has been labeled as rigged because it barred some of the world’s leading telecom giants from participation.

Yanukovych’s political opponents, analysts and stock market participants argue that the bidding rules were set up to give an edge to Epic, the sole bidder in a December tender. Some are suspicious that the Austrian firm is acting as front for Ukrainian oligarchs.

Critics also allege that Ukraine’s budget, kept financially afloat thanks to billions of dollars in International Monetary Fund loans, was deprived of hundreds of millions of dollars in extra revenue that a competitive, transparent bid might have netted in this single transaction.

Some, in fact, believe Ukraine could have fetched closer to $2 billion or more for Ukrtelecom, a cool $700 million higher than the March 11 sale price.

An Epic deal

Epic emerged as the sole bidder in a December tender after tender rules introduced by Ukraine barred many potential buyers from taking part. Rules prevented participation from companies that are more than 25 percent state-owned, as well as firms that have more than a 25 percent stake on Ukraine’s telecom market.

This closed the door to a handful of top telecoms that have expressed interest in Ukrtelecom over the years, including Germany’s Deutsche Telekom, Norway’s Telenor, Russia’s Alpha Group and its affiliated Vimpelcom, Moscow-based Sistema and its subsidiary MTS, as well as domestic mobile phone company Kyivstar.

In the absence of competition, Ukraine’s government asked a domestic appraiser, Ostrov, to set a final price. Epic ended up paying just $10 million more than the starting price for the monopoly that controls nearly 80 percent of Ukraine’s fixed telephone market.

“The [$1.3 billion] sale price can by no means be described as the objective market price,” Bondar said, nothing that the tentative starting price under the previous government was $2 billion in 2009. Back then, up to 10 bidders from Russia, Germany and Japan expressed interest, he said. But the tender was eventually postponed by ex-President Viktor Yushchenko and the dominant Yanukovych-led Party of Regions, against the wishes of then Prime Minister Yulia Tymoshenko, Bondar said.

Adding to the controversy surrounding the sale, experts said the debacle marks the first time Ukraine privatized a strategic asset in a manner in which the beneficiary ownership remains unclear. Bondar questioned whether Epic is big and powerful enough to have bought Ukrtelecom on its own.

“It’s clear that these Austrians cannot buy this company on their own, as they cannot even imagine such money, and no investment bank would provide them with a such loan. I think the real buyer in this deal is someone very close to President Yanukovych,” Bondar said.

Ahead of the tender, officials – including Presidential Administration Chief Serhiy Lyovochkin – defended the restrictive tender rules. Ukraine cannot afford to allow foreign governments to own the nation’s main telecom system, Lyovochkin said. Officials, however, could not explain why sale rules would not prevent the new owner from reselling to a company with more than 25 percent ownership by a foreign government.

Paskhaver, the economist, was also caught by surprise by the fact that the state phone company was sold without an open tender and at a lower price.

“In the atmosphere of total distrust to the government, selling Ukrtelecom to a company and [de facto] openly admitting they are intermediaries and would resell it is definitely a bad idea” and bad sign about the overall state of the investment climate in Ukraine, Paskhaver said.

Bondar said the Ukrtelecom privatization will be investigated by a parliament committee with the aim of discovering the identity of the new beneficiary owners.

Unanswered questions

Ukrtelecom’s new owner describes itself as a full-service investment house focusing on Central and Southeast Europe, Turkey, Russia and CIS countries.

It claims to have been active in voucher privatizations held in Ukraine in the 1990s, and says its subsidiary in Ukraine has been active in providing services to Ukrtelecom.

Epic’s top executives have said that their company plans to finance its acquisition of Ukrtelecom with bank loans, but they refused to name which banks.

Asked at the time of the sale about the identity of Ukrtelecom’s new beneficiary owners, State Property Fund chief Oleksandr Ryabchenko admitted that he did not know. “Do you think we can get to Austria and investigate who is behind whom?” he asked on March 11.

Peter Goldscheider, managing partner with Epic, refused to disclose any details regarding the deal before its closure in two months.

Goldscheider denied, however, any connection to people close to Yanukovych. "We do this deal on our own risk and do not plan to leave the company in the short term. We want to create value first...and then 4-5 years down the road, we might consider an exit," Goldshcheider said.

A highly bureaucratic and inefficient telecom dinosaur, Ukrtelecom employs about 80,000 Ukrainians. That’s double the staff of peers in Europe. It has lost much of its value in the past decade as Ukraine repeatedly delayed its privatization.

The company earned only $6 million in the first half of 2010. It has steadily lost market share to fast-growing mobile telephone service providers, but still has around 10 million fixed-line subscribers, holds the country’s sole 3G license and is expanding into broadband internet services.

While it remains unclear for now whether Epic will, itself, pump the massive investments into Ukrtelecom that are needed, experts say the damage Ukraine faces from holding such nontransparent sales is already weighing in.

“I am very surprised that Ukrtelecom was sold to a single investor and the tender conditions were drawn in such a way as to even exclude [major bidders.] There are a lot of questions to ask the president about this sale,” Paskhaver said.

Looking ahead to future privatizations under Yanukovych, Oleksiy Blinov, head of research at Kyiv-based investment bank Astrum, said: “We all know there are more big privatizations to come – such as energy generation companies and Odessa Portside Plant. But it is clear now that access to take part in them will also be limited. And I am afraid we all know who the buyers will be.”

Kyiv Post staff writer Vlad Lavrov could be reached at

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