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Dial M for Muddy

19 October 2015 By Dominic Elliott

Muddy Waters’ latest target could have done without the distraction. The short-selling research outfit has turned its sights on TeliaSonera, a Swedish telecom already facing graft probes in three countries and attempting to sell foreign operations in seven. This could tie the troubled company in knots.

A report issued by Muddy Waters on Oct. 15 said that TeliaSonera may have to book writedowns of up to 20 billion Swedish crowns ($2.5 billion) for possible corrupt payments. The group booked these as if they were asset purchases, the report claimed. TeliaSonera countered by saying that it did not recognise the short-selling firm’s conclusions.

In normal circumstances, an under-fire company would return with a point-by-point list of rebuttals at a later date, as commodity trader Noble Group did when targeted by Iceberg Research earlier this year. But the attack against TeliaSonera came during a regulatory quiet period ahead of results. Even when TeliaSonera reports its third-quarter earnings on Oct. 20, it may not be able to say much more, because of its ongoing corruption probes.

The 37-page broadside from Muddy Waters lands some blows. Though its shares fell just 3 percent on the day the fund run by Carson Block launched its attack, spreads in TeliaSonera’s five-year credit default swaps widened 73 percent to their highest in four years, according to Fitch Solutions. Chief Executive Johan Dennelind had previously conceded that the ultimate owners of its local partner companies in Uzbekistan and Azerbaijan remain unknown.

One potential hit is financial. Muddy Waters reckons writedowns and fines could halve the share price. The key assumption, however, is that the businesses TeliaSonera is selling in central and eastern Europe and Asia have negative value. That may be too aggressive. Muddy Waters also seems to ascribe no value to other assets like TeliaSonera’s stake in music-streaming service Spotify, a Handelsbanken analyst noted.

TeliaSonera’s management would ideally be focusing its efforts on designing a new strategy, rather than scrapping with short-sellers. It is only beginning a possible shift from infrastructure to content, which explains the Spotify investment. Now Muddy Waters has entered the picture, Dennelind and his team may find themselves otherwise engaged.



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