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Even Vimpelcom Isn't Shenanigan Proof


In a country notorious for its culture of crony capitalism and weak corporate governance, Russia's No. 2 mobile-phone operator, VimpelCom (VIP), has long stood out as the definitive example of a Russian company that got it right. In 1996, it became the first Russian company to list on the New York Stock Exchange, attracting international investors who today own 40% of the shares. VimpelCom proved to be a wise investment. Today it has 33 million subscribers, up from 45,000 in 1996. Last year revenues jumped 61%, to $2.1 billion, while earnings rose 68%, to more than $1 billion. "The company [is] living proof you can build a normal, open business and still be successful in Russia," says Alexander V. Izosimov, VimpelCom's chief executive.

Yet these days even VimpelCom doesn't seem to be immune to intrigue. Last year it ran into problems with regulators and the tax authorities, temporarily spooking investors. The latest controversy is a bitter dispute between VimpelCom's two main shareholders, Norwegian telecom Telenor (TELN) and Alfa Group, a Russian conglomerate owned by tycoon Mikhail Fridman.

At the heart of the feud is VimpelCom's strategy in neighboring Ukraine. Alfa Group, a 33% shareholder, wants VimpelCom to acquire WellCom, a small cellular operator, to gain a foothold in the Ukrainian market. But Telenor, a 27% shareholder in VimpelCom, is blocking the plan. The Norwegians argue that it is too late to enter a market with two strong incumbents -- Ukrainian Mobile Communications, owned by VimpelCom's chief Russian rival, Mobile TeleSystems, (MBT) and Kyivstar, which is 54% owned by Telenor. Under VimpelCom's charter, two votes on the nine-strong board of directors can block acquisitions, giving Telenor, with three votes, an effective veto.

DUKING IT OUT IN COURT

Alfa is threatening to bring the issue to a shareholder vote at the annual meeting in July. Telenor, a flagship foreign investor, with $2 billion invested in the Russian telecom sector, has even hinted that it might pull out of the company. In a letter to shareholders on June 6, Telenor CEO Jon Fredrik Baksaas warned: "Alfa Group has been executing an aggressive, self-serving campaign to take effective control of VimpelCom." In a bizarre twist, an obscure shareholder brought a suit against VimpelCom in a regional court, which ordered VimpelCom to change its charter. Such a move would have ended Telenor's effective veto. Alfa denies it was behind the suit. Telenor successfully challenged the judgment in the Russian Supreme Court.

Minority shareholders in VimpelCom are divided, yet many are siding with Alfa. They believe Telenor's actual motive for keeping VimpelCom out of Ukraine is to shield Kyivstar from competition. "They don't appear to see VimpelCom as a completely independent company," says Mattias Westmen, CEO of Prosperity Capital Management Ltd., a VimpelCom minority shareholder. Telenor rejects such criticisms, denying any conflict of interest. "We believe the business case regarding the acquisition of WellCom was unacceptable and could have destroyed shareholder value in VimpelCom," says a Telenor spokesman.

The obvious solution would be a merger of Kyivstar and VimpelCom. Yet a share swap would reduce Telenor's stake in Kyivstar to below 51%. "Telenor is behaving very rationally. They are protecting [their] business interests, and we are protecting VimpelCom's interests," says Alexei Reznikovich, CEO of Alfa Telecom.

Rational or not, the dispute has delayed VimpelCom's entry into Ukraine by several months just when mobile-phone ownership there is taking off. And despite its recent misfortunes, the company's explosive growth makes it a corporate success story in Russia, a country that could badly do with some good public relations. A shame if that good news is drowned out by the sounds of discord coming from the company's boardroom.

By Jason Bush in Moscow


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