FOCUS: Analysts say privacy may help MegaFon avoid pressure, redirect cash to MTS

By Yekaterina Yezhova

MOSCOW, Jul 30 (PRIME) -- MegaFon’s decision to curb its public exposure would save one of Russia’s major mobile operators many a worry about reputation risks and tumbling quotes, analysts say, recommending minor holders to take advantage of a generous offer and sell the stock. Competitors have currently no reason to follow MegaFon’s suit, while its delisting could channel spared money into MTS.

“The proposed delisting reflects the scale of strategic change we need to make to complete MegaFon’s transformation into a leader of the Russian digital market,” Executive Director Gevork Vermishyan said in a statement, adding that the company’s ambitions could convey huge extra risks for minority holders.

Reasons seen behind

“The management said the operator will have to handle multiple issues in the next few years because of business transformation, like a possible partnership with the government, large mergers and acquisitions, and significant investment projects. It all implies huge risks, an unstable return on investment, and a possible slide of financial indicators,” investment company Veles Capital analyst Artyom Mikhailin told PRIME.

“In such environment, minority holders could become an additional nuisance for the company, whose capitalization will continue shrinking. MegaFon’s shares have cheapened twice since the operator went public, and prospects are unclear.”

Investment bank Renaissance Capital agreed, saying, “The company was listed (in London) in November 2012 at U.S. $20 per share, market capitalization at $11.1 billion, and has lost almost half of its value since then in dollar terms.” MegaFon’s global depositary receipts (GDRs) closed at $9.55 on July 26 in London with market capitalization at $5.79 billion.

“We believe it is a foregone conclusion that MegaFon will become a private company again…We think that the decision to take the company private could have also been prompted by the possibility of sanctions on its main shareholders and delisting will ‘simplify’ life if it were to occur. MegaFon’s desire to become the state’s leading partner in digitalization of the economy might lead to the acquisition of local or state-related players in the IT space,” Renaissance Capital said in a research note.

Mikhailin at Veles supposed that “the operator wants to hedge its bets against a negative impact on capitalization and obtain more freedom in taking risky steps. The lack of a public status would diminish reputation risks and would allow the operator to disclose much less operating information that would improve competitive positions.”

While delisting from the London Stock Exchange (LSE) is on the agenda, a retreat from the Moscow Exchange will be studied after the buyback because of complexity and possible high costs. Investment company SOVA Capital analyst Alexander Vengranovich said earlier that MegaFon could announce its withdrawal from the Moscow bourse no later than in the middle of October.

Mikhailin at Veles said that even if the company stays on the local floor, its stock would not be liquid and there would be no reason to stay public.

MegaFon’s common shares lost 1.7% since the beginning of the year to 504 rubles in Moscow on June 29, the last trading day of the first half of the year. Quotes plunged 9% alone on March 15 to 524.90 rubles in Moscow when the company disclosed rather weak results for 2017 and its decision to abstain from dividends for the year.

The delisting news boosted common shares 15.2% since the beginning of the year to 590.80 rubles on July 26 and GDRs by 3.2% to $9.55.

Minority holders advised to sell

The operator will spend up to $1.26 billion on the buyback of ordinary shares and GDRs at $9.75 apiece, which implies an 8% premium to GDRs and a 20% premium to locals to the closing price on July 13. In total, MegaFon is ready to purchase, via its wholly-owned unit MegaFon Investments (Cyprus) Ltd. (MICL), up to 20.8% of its stock, almost the whole of free float, from July 16 through August 22.

The deal does not involve the company’s major shareholders: USM Group with 56.32% of MegaFon; Gazprombank with 18.79%; and MICL with 3.92%.

“Despite a huge premium to the market, MegaFon’s decision on the buyback looks ‘unfriendly’ toward minority holders. This thing is that the board of directors has recently approved actions that are potentially destroying the business’s market value…We recommend holders of common shares and receipts to accept the offer…At the moment, it’s the best offer of fixed yield on the Russian market with a relatively low risk,” Otkritie Broker analyst Timur Nigmatullin said in a research note.

Brokerage BCS also said that it would be advantageous for minority holders to accept the offer or sell their shares on the market with a slight discount to the set price.

MTS likely to gain

“MegaFon’s delisting could have a positive impact on quotes of its archrival, MTS, thanks to an additional inflow of liquidity from spared capital of minority stakes,” investment company Freedom Finance analyst Valery Bezuglov said.

MegaFon’s common shares contributed 19.10% to the telecom index of the Moscow Exchange as of July 26. MTS’ common shares had 62.73%, Rostelecom’s common shares – 14.10% and preferred shares – 2.21%, and preferred shares of Moscow City Telephone Company (MGTS), a fixed line unit of mobile operator MTS, had 1.86%.

In view of shrunken free float of MegaFon or its complete withdrawal from the Moscow floor, its weight in the telecom index will be taken by the remaining stocks, Dmitry Bedenkov, director of the research department at IC RUSS-INVEST, told PRIME.

“MTS would enjoy the biggest advantage and its weight in the industry indicator could exceed 70%. Shares of other telecom companies could get support in terms of reinvestment of money after MegaFon’s buyback,” he said.

Mikhailin at Veles said there are currently no reasons for other operators to turn private.

(62.9726 rubles – U.S. $1)

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