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Europe's Telia finds it hard to say goodbye to Asia

Uzbek corruption case which sparked retreat also complicates asset sales

Despite the sale of its controlling interest in Tajikistan's Tcell in April, Telia is still left to dispose of stakes in five other Asian and Caucasus nations. (Photo by Sitora Gharibshoeva )

ALMATY, Kazakhstan -- Stung by a corruption scandal over its investment in Uzbekistan, Scandinavian telecommunications company Telia declared in September 2015 that it would make a quick exit from the remainder of its once far-flung investments in Asia and the Caucasus to focus its attentions on northern Europe.

Pulling out is proving harder than expected. In April, Telia sold off its 60% stake in Tajikistan's Tcell and last year it offloaded a majority stake in Nepal's Ncell; the two mobile operators were the largest in their markets. Even before the Uzbek scandal broke, Telia had gotten out of Cambodia.

Yet Telia is still left with stakes in mobile operators in Uzbekistan, Afghanistan, Kazakhstan, Azerbaijan and Georgia. A preliminary deal that would have seen Telia step back from its stakes in the latter three countries as well as Moldova has come apart and no replacement suitor has been identified.

"We have six months left, but I think [the retreat] will be a challenge to accomplish," said Stefan Olsson, a telecom sector analyst for Swedbank Markets in Stockholm. "Telia needs to prove that it has disposed of these assets to a responsible buyer who is going to follow all the rules and regulations and that the money is clean and is from good, honest sources."

The Uzbek corruption scandal first surfaced in 2012, centered on payments of more than $300 million made to Takilant, a company linked to Gulnara Karimova, daughter of then-Uzbek President Islam Karimov, beginning in 2007. Other foreign telecom operators were also implicated in improper payments to Karimova for market access.

Authorities in various European countries froze assets linked to the payments. Takilant was found guilty last year by a Dutch court of accepting bribes from Telia and other telecom operators. Its minority shareholding in Uzbekistan's Ucell, controlled by Telia, was seized by the Dutch government. Karimova is now under detention in Uzbekistan, though authorities have not directly linked this to the Takilant case. Her father died in office last year.

The corruption case tarnished Telia's image as a transparent, socially conscious Swedish-Finnish company. Chief Executive Lars Nyberg, who had overseen the Asian expansion of what was then called TeliaSonera, resigned in 2013 and several senior executives were fired.

Last September, Telia said that it expected to pay fines of up to $1.45 billion under potential settlements with U.S. and Dutch authorities. Provision for the fines dragged the company into a net loss for the first nine months of 2016. In April however, Telia trimmed the size of the forecast fines to $1 billion. Swedish authorities last year closed an investigation into corruption allegations involving Telia's Azeri operations, but are still looking into the Uzbek case.

Valued opportunity?

While mobile phones are near-universal in many of Telia's European markets, there is still much room for growth in its Asian operations and its profit margins in markets like Kazakhstan and Uzbekistan have been running far ahead of its European businesses.

"Phones and social media networks are now the most important things for the young," said Halima, a second-year student at the Agrarian University in Dushanbe. Like many Central Asians, she accesses the internet mostly through her phone. "If my phone is out of charge, then I am lost," she said.

The Aga Khan Fund for Economic Development paid $27.7 million to add Telia's stake in Tcell to its existing 40% interest on April 27. The deal, first announced in September at $39 million, temporarily fell apart after Tajik authorities produced a $19.6 million back-tax bill; the deal was put back together with the tax liabilities passed along with ownership of the business.

The Aga Khan Fund owns the majority of Afghanistan's Roshan Telecoms, in which Telia holds a 12.5% stake. Telia said in its 2016 annual report that it is in the process of selling its Roshan stake, but it has not disclosed the prospective buyer. While the stake may be of interest to the Aga Khan Fund, it generally focuses on countries with significant populations of Ismaili Muslims, which would seem to rule out Telia's other Central Asian markets.

Telia sold its 60.3% stake in Nepal's Ncell to Malaysia's Axiata Group for $1.03 billion last year. At the time of Telia's retreat announcement, Ncell was generating the highest operating margins of Telia's Asian units.

Nepalese authorities are now seeking to collect capital gains tax on the deal. Local press reports have estimated the claim at up to 36 billion Nepali rupees ($348 million). Telia said on June 4 that it does not owe any taxes to Kathmandu and that the government's claims "lack support in the law." In 2012, Telia sold its stake in Cambodia's Smart Mobile. Telia originally acquired its Nepali and Cambodian stakes from Kazakhstan's Visor Capital.

Untangling interests

Telia's investments in Azerbaijan, Georgia and Moldova, and part of its interest in Kazakhstan's Kcell, are held via Fintur, a joint venture with Turkey's Turkcell. Telia is itself a major investor in Turkcell, with a 31% stake, down from 38% after a share sale on May 4.

In its 2016 annual report, Turkcell put the carrying value of its 41.45% stake in Fintur as of Dec. 31 at 1.22 billion Turkish lira ($339 million), implying a company valuation of about $830 million. Fintur generated operating profit of $77.1 million on revenue of $617.2 million in the first nine months of 2016, according to the annual report. Kcell, Kazakhstan's top operator, reported a 41% decline in operating profit last year to 31 billion tenge ($95 million) as revenue slipped 12.7% to 147 billion tenge.

Soon after Telia's announcement of its retreat plan in 2015, Turkcell expressed interest in buying Telia's majority stake in Fintur. Sale negotiations over the Fintur shares and Telia's 24% direct stake in Kcell unraveled last year however and in October, Turkcell and Telia said they would work on a joint sale of their interests.

In its annual report, Telia said, "The delay during 2016 in the sales process was caused by events and circumstances beyond Telia Co.'s control" but added that divestments "are deemed highly probable within one year." Telia wrote off 7.25 billion Swedish krona ($826 million) of the value of Ucell in 2015 and in 2016 and 450 million krona for Tcell and Roshan last year. Swedbank's Olsson puts the current value of Telia's Ucell stake at 3.2 billion krona.

Analysts say the sale of Telia's remaining Asian operations has been complicated by the corruption charges, increased competition and effects from low oil prices and the recession in Russia, including weakened local currencies. Attention to corruption issues, a problem in much of Central Asia, is much higher now than when Telia entered the region a decade ago. Olsson said that prospective buyers, if any, are most likely to emerge from Asia.

High profit margins or no, Telia is likely to keep finding it hard to sell the Central Asian businesses amid the taint of the Karimova case. "I think the whole Telia scandal has sent shockwaves through other companies and other people," said Edward Lemon, a Columbia University research fellow focused on Central Asia issues. "Western companies who had been looking to invest in Central Asia have realized that this can have major repercussions on their reputation at home."

Additional reporting by contributing writer Sitora Gharibshoeva in Dushanbe.

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