FOCUS: VimpelCom's Shareholders Don't Hurry to Resolve Conflict

MOSCOW, June 19 (Prime-Tass) -- Shareholders of Russia?s second largest mobile operator VimpelCom have been in a conflict over the company's development plans for more than a year and do not seem rushing to resolve the dispute. The conflict, which seemed to be nearing a resolution in May, saw a few new developments this month.

Telenor has signed a swap agreement with ING Bank, under which Telenor will receive exposure to 3.52% of VimpelCom's voting shares while VimpelCom's CEO Alexander Izosimov said a few days after Telenor's agreement was announced that he was tired of the long-lasting conflict and may leave the company after his contract expires in October.

The departure of Izosimov would be negative news for VimpelCom, as he did much for the company's development, analysts said, noting that a pre-emptive announcement of his departure would not reconcile the two shareholders, Altimo and Telenor, which hold 32.9% and 26.6% of VimpelCom's voting shares, respectively.

The ongoing conflict is starting to have negative implications for VimpelCom's day-to-day operations, analysts said.

The conflict between the two shareholders broke out in early 2005, when VimpelCom announced its plans to expand into Ukraine. The plan was supported by Altimo, but faced opposition from Telenor.

In November last year, VimpelCom bought minor mobile operator URS following the approval of the purchase by the company?s extraordinary general meeting of shareholders (EGM). In order to reconcile its shareholders, VimpelCom proposed in February purchasing 100% in Ukraine's largest mobile operator Kyivstar, 56.5%-owned by Telenor and 43.5%-owned by Altimo, for U.S. $5 billion in cash and equity. The shareholders held a series of negotiations but did not reach an agreement and VimpelCom withdrew its offer on June 1.

On June 8 Oleg Malis, senior vice president at Altimo, told reporters that he thought that Telenor was not serious about merging its Russian and Ukrainian assets. Malis said Telenor?s ultimate goal was to increase its holding in VimpelCom to 100%.

"Alfa (Altimo's parent company) has been suggesting merging the two companies for over a year now but Telenor was never interested until February for some reason," Malis said. Kjell-Morten Johnsen, chairman of Telenor Russia, denied such allegations. "Why wouldn't we want to do it (merge the two companies) as it increases the value of our shares? It becomes more logical to merge companies as markets get more mature, as it provides synergies," Johnsen said quoted by Dow Jones Newswires. On June 2, Telenor said in its filing with the U.S. Securities and Exchange Commission that it had signed a swap agreement with ING Bank N.V. under which the Norwegian company would receive exposure to 3.52% of voting shares in VimpelCom.

"The swap agreement provides only for cash settlement. Neither Telenor nor any of the other reporting persons shall have any voting power with respect to any underlying ADRs, and Telenor and each of the other reporting persons disclaim beneficial ownership of any such securities," Telenor said then.

However, Altimo considered the deal to amount to an indirect purchase of the stake by Telenor and said that it wanted to prohibit ING Bank from voting with the stake in VimpelCom. Altimo's Malis said Telenor was to assume "indirect control" in VimpelCom though the purchase. He said he was confident ING will use these shares to vote in Telenor's interest and said Altimo will try to do everything to stop voting taking place. However, Johnsen said that "even if we wanted to get ING to vote with these shares in our interest, we wouldn't have been able to - the cut-off date for the next shareholders meeting is May 5."

Some analysts said that Telenor has been misleading by saying that it does not want to get control over the stake. "The agreement is unlikely to have been just a financial purchase," Oleg Salmanov, telecom analyst at Prospect Investment Company, said. "It might be another argument in Telenor's dialog with Altimo," he added, admitting that Altimo may take a similar step in response to Telenor's actions.

Yelena Bazhenova, telecoms analyst at Aton Capital, sees two reasons for Telenor to enter into such an agreement. "First, Telenor wants to make money on the rise of VimpelCom's stock. The second reason is that it wants to get an option for the possible purchase (of the stake)," Bazhenova said.

Under the agreement, Telenor will compensate ING Bank if the value of the acquired stake goes down and will receive the gains from any appreciation of the stock.

VimpelCom's ADRs were traded at $42.29 as of June 16. Aton Capital has a Buy recommendation on the stock seeing an upside of 47%, while Deutsche UFG has a similar recommendation with an upside of 53%.

"If the purchase of Kyivstar (by VimpelCom) still goes through, it will allow Telenor to get voting parity in VimpelCom (with Altimo)," Bazhenova said, explaining why Telenor chose the 3.52% stake for the agreement with ING.

Meanwhile, the lack of consensus between shareholders has forced VimpelCom's CEO Alexander Izosimov to publicly announce that he may leave the company on October 1 when his current contract expires.

"My contract with VimpelCom expires on October 1 and the decision as to whether or not it will be extended will be made by the company's board of directors," Izosimov said, quoted by Kommersant business daily on June 7. "However, it will be difficult for me as the head of VimpelCom to continue working in a company where a serious conflict between shareholders is making VimpelCom's development outlook unclear," Izosimov added.

Altimo has urged Izosimov to stay. "Alexander (Izosimov) is one of the best managers in the former Soviet Union, whose good work hasn't been affected by shareholders' squabbling. He definitely should stay longer than just three years - he has only started," Malis said.

VimpelCom's Chairman David Haines said in an interview with Dow Jones Newswires June 15 that he also hoped that Izosimov would stay on as CEO. "Izosimov is the person most capable of leading VimpelCom," Haines said. "I think he's done an outstanding job together with his management team."

Analysts believe that Izosimov's departure would be a huge loss for VimpelCom.

"It is a serious negative for the company. It is one thing when a person accomplished everything and leaves and totally another thing when a successful top manager leaves due to a shareholders' conflict," Salmanov of Prospect said. "It is the first consequence of the conflict," he added.

Bazhenova of Aton Capital does not believe that Izosimov made the statement in order to put pressure on shareholders. "They can (easily) find another head for the company," she said.

Izosimov claims that Telenor does not want his contract renewed. "During the past 12 months, and as recently as four weeks ago, Telenor has been giving me direct and indirect signals that they do not wish to extend my contract," Izosimov told Dow Jones Newswires June 15, adding that the Norway-based company even said it was looking for a new CEO to run VimpelCom.

Izosimov?s statement came just a day after Telenor credited him for "contributions to the company's development, creating value for all shareholders and respecting good corporate governance practices" in a letter sent on Wednesday by Telenor to VimpelCom's shareholders.

"I don't believe in overnight changes of views. It looks much more like anything goes to win the shareholders' support and I am not OK with that," Izosimov said.

In its letter Telenor also called on VimpelCom's freefloat holders to vote for Jo Lunder as an independent director on VimpelCom's board at a annual general meeting of shareholders (AGM) scheduled for June 23 and said it wanted to see Lunder replace Haines as chairman. Lunder, a former employee of Telenor, has been CEO of VimpelCom and later chairman before Haines was elected. Telenor said it wants current board members Lunder and also Larry Zielke to be reelected in order to restore transparency, financial control and corporate governance. In the letter Telenor also blamed Altimo for having conflicts of interest by its indirect and direct holdings in three rival operators in Ukraine and VimpelCom rival MegaFon in Russia. Altimo, in its letter, asked shareholders to vote for the Altimo-supported independent nominees and claimed Lunder and Zielke were in effect connected to Telenor and not independent. Telenor argued that under the Lunder-Izosimov leadership in 2003 to 2005, VimpelCom's share price rose 65% compared to 27% under Haines and corporate governance was on a higher level. "I am concerned by attempts to discredit and undermine David Haines," Izosimov told Dow Jones Newswires, adding that "David (Haines) can hardly be blamed for volatility of the emerging markets' stocks." In early 2006, Izosimov faced a lawsuit from Telenor challenging his decision to purchase URS. Following the URS acquisition, Telenor filed three lawsuits challenging the purchase, one of which was filed against Izosimov's decision to purchase URS, claiming that it was made without the approval of the board of directors. The next hearings of the case are scheduled for June 26.

Izosimov?s future at VimpelCom is likely to be decided following VimpelCom's AGM. The newly-elected board of directors is expected to decide after the AGM whether to offer Izosimov a new contract.

Izosimov said he might stay with VimpelCom for another term if the new board extends his contract and, then, if it does, what strategic goal will be set for him as the company's top executive.

"Previously (before the shareholders conflict) I knew what my goal was. Now it's not clear at all. It's absolutely unclear how the shareholders will solve their fundamental differences," Izosimov said.

Meanwhile, the conflict between the shareholders has led to another consequence for VimpelCom. Earlier this month, Standard & Poor?s lowered its corporate governance score (CGS) on VimpelCom to ?CGS-6? from ?CGS-7? and Russia national scale CGS on the company to ?CGS-6.4? from ?CGS-7.4.? Both scores remain on Standard & Poor?s GovernanceWatch with negative implications, where they were placed on February 20.

Analysts see two options for shareholders to resolve the conflict. "First, one of the shareholders could sell its stake (in VimpelCom). The second is an agreement under which Telenor will get control over VimpelCom and Kyivstar, and Altimo will become a minority shareholder at Telenor. But the Norwegian company seems to be against having such a minority (as Altimo)," Salmanov of Prospect said. He expects the conflict to be resolved "in autumn."

Bazhenova of Aton Capital also expects a resolution by the end of this year. "They (shareholders) will be ready to quit after the (Russian mobile) market reaches saturation and we expect that to happen closer to the year-end," Bazhenova said.

End"

Posted to the site on 19th June 2006