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Svyazinvest should not be broken up ahead of privatisation, AFK Sistema will participate in tender

Svyazinvest, the Russian, state-owned telecommunications group, needs to be privatised as as a whole and not be broken up in separate parts, AFK Sistema chief executive officer Alexander Goncharuk told dealReporter.

Speaking shortly before his resignation from the CEO position at Sistema last week, Goncharuk, whose company controls a blocking 25% + 1 share stake in Svyazinvest, said that the Russian government has already approved a privatisation plan for the company. He was, however, unable to reveal the plan due to confidentiality undertakings.

Both Svyazinvest and the Russian Federal Agency for Federal Property Management (Rosimushchestvo) that controls a majority stake in the company declined to comment regarding the future privatisation of the company.

In a formal interview in his Moscow office, Goncharuk said that it was his opinion that Svyazinvest should be privatised as a single entity rather than being broken into parts. He also said that the subsidiaries of Svyazinvest would be consolidated and then merged into the Svyazinvest holding company.

Goncharuk said that breaking up Svyazinvest would entail the separate privatisation of profitable and unprofitable regional service providers that are now subsidiaries of the overall holding. Of 18 companies in which Svyazinvest owns stake, only five are profitable and are practically used to subsidise the rest.

He said that the privatisation of parts of Svyazinvest would be difficult as prospective buyers would seek to cherry pick the company’s best assets and not the company’s loss-making operations.

He also said that the divisions of Rostelecom used for strategic government services will more than likely be separated and kept under state control. Also, there will probably be limitations set for future private owners so that the communication needs of the depressed and geographically disadvantaged regions, for instance, of the far north, will still be satisfied.

Goncharuk added that Svyazinvest has urgently to be privatised because of the company’s managerial weakness and inability to keep on track with technological advances. The company’s equipment does not get renewed and becomes increasingly obsolescent. Svyazinvest needs an efficient owner and this owner could only be a private one. Besides that, without a private owner Svyazinvest would not be able to cope with its current debts and attract new loan stock, Goncharuk said.

Goncharuk stated that AFK Sistema will definitely be among participants of the privatisation process. Among others, there will probably be interest from oil companies as they tend to show interest in high-tech and media sectors. An obstacle for them may be limits set to participants of the tender.

For instance, a limitation can be set allowing only established telecommunication companies to bid. Foreign investors may be allowed to take part in the auction but are unlikely to. Recent changes in the government and the new role of former telecommunication minister Leonid Reiman do not change the situation significantly because decisions are made on a “far more senior level,” Goncharuk said.

However, a top Russian industry source said that Reiman was a key player in the government’s planned privatisation of Svyazinvest and will maintain an important role in the privatisation process.

While he no longer has a formal position in the current government, Reiman is a direct advisor to Russian president Dmitry Medvedev.

However, the deputy director general of Russian investment bank Kit Finans, Maxim Tsyganov, said he does not believe that the privatisation of Svyazinvest is currently the best option for the company. In his opinion, the privatisation must be preceded by significant improvements of the corporate governance and an overall reorganisation.

”A simple transfer of the company to a private owner is not in the interest of the government as the current shareholder,” Tsyganov said.

Svyazinvest is a unique asset that presents a good platform for telecommunication business development in Russia.

Due to the current stable economic situation in Russia, the state budget does not need additional finance, and can even make investments in Svyazinvest to increase the company’s market value. A possible scenario of the company reorganisation should start with a consolidation, followed by a business model improvement and only then should it be privatised, he said.

Still, Tsyganov did not state the probability of the government deciding not to start the privatisation process. Kit Finans would not invest in Svyazinvest if it were privatised, Tsyganov said, but it may buy shares of the company on behalf of its clients if they show interest in it.

Svyazinvest is a Russian state-owned telecom holding company that holds a majority stake in seven inter-regional fixed line service providers (CenterTelecom, North-West Telecom, VolgaTelecom, Southern Telecom Company, Uralsvyazinform, Siberia Telecom, Dalsvyaz), and holds stake in other companies mostly related to telecommunication: Central Telegraph (51%), Dagsvyazinform (51%), Rostelecom (51%), Giprosvyaz (51%), MGTS (28%), Kostroma GTS (37%), MobiTel (100%), Svyaz-Bank (1%), United registration company (9%), StarKom (25%) and RTComm.Ru (0.5%).

// me for dealReporter
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