Telenor Fattens Stake in Golden

The Russian telecom market looks to be hotter than a pan-fried latke.

Norwegian incumbent operator Telenor ASA (Nasdaq: TELN) has firmed up its position in one of the world's fastest-growing telecom markets by taking a 20.4 percent stake in Russian service provider Golden Telecom Inc. (Nasdaq: GLDN) following an asset swap and the purchase of shares on the market (see Telenor Takes Golden Stake).

Telenor traded its Moscow-based business, Comincom, for a 19.5 percent stake in the alternative carrier. It then spent $9.1 million to acquire a further 0.9 percent share of Golden Telecom, which provides services to other operators as well as business and domestic customers in Russia's main business centers. The Norwegian operator values its 20.4 percent stake at $204 million, based on Golden's share price at the close of trading on November 28.

So what is Telenor up to? The Norwegian player decided it was better to own part of a growing and increasingly successful alternative carrier than control a much smaller bit player. "We needed to protect our investment in the Russian market, and took a strategic decision to be part of the industry consolidation," says a spokeswoman from the Norwegian carrier's Networks division, which looks after its fixed network business. "This is an interesting position for us to have – Russia is a growth market," she adds.

Svetlana Issaeva, who covers the Central and Eastern European markets for Pyramid Research, says the move makes sense for Telenor. "This gives it a stake in a stable, growing, and diversified player," in a market that is growing so fast Pyramid can hardly keep up, says Issaeva.

She says that in terms of subscriber and revenue growth, Russia can only be matched at the moment by China, and that the mobile sector in particular has been booming, with market penetration at the end of 2003 set to be about 23.5 percent, about double the 12.3 percent recorded at the end of 2002.

Issaeva adds that the whole Central and Eastern European market is set to experience 38 percent subscriber growth for 2003, with countries such as Bulgaria, Poland, and Romania expanding their markets significantly.

Golden Telecom's revenues have reflected the burgeoning growth that Russia has experienced during 2003 (see table below). Its most recent financial statement, for its third quarter ending September 30, showed revenues up 95 percent, operating income up 173 percent, and net income up 60 percent, compared with the same period a year before.

Table 1: Golden Telecom Recent Key Financials (in Millions)
Sept '03 June '03 Mar '03 Dec '02 Sept '02
Revenues $90.1 $80.8 $78.4 $76.8 $46.4
Operating Income $18.3 $17.4 $17.2 $14.3 $6.6
Net Income $12.5 11.8 $12.8 $12.9 $7.9
Source: Company data

This year, Golden Telecom's shares, which trade on the Nasdaq as an ADR, have been on a tear, more than doubling from a 52-week low of $12. Today shares were near unchanged, down $0.015 (0.05%) at $27.885 in afternoon trading. Telenor's shares fell $0.21 (1.15%) to $18.04.

So will Telenor be looking to increase its holding in Golden Telecom, or even invest in some other assets? The carrier's spokeswoman says she can't say any more about the operator's plans for the region.

Telenor is not the only company that has an interest in Russia's growth potential. Here is a just a selection of some recent headlines that show there's a new revolution going down in Lenin's old stomping ground:

— Ray Le Maistre, International Editor, Boardwatch

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