FOCUS: Investors hope Sistema not to sell MTS to pay Rosneft

By Yekaterina Yezhova

MOSCOW, Sep 4 (PRIME) -- The market has not lost trust in major Russian mobile operator MTS despite a whopping U.S. $2.3 billion its parent company Sistema may have to pay under a suit from powerful oil major Rosneft, because investors hope that Sistema is unlikely sell its stake in the carrier to pay the claimed damage, analysts say.

They even believe that the suit will benefit MTS’ minority owners as Sistema may have to boost MTS’ dividend payouts to collect funds to pay Rosneft.

“MTS’ operating activities have not been really impacted by court proceedings around Sistema, according to operator management’s multiple statements,” Natalya Milchakova, deputy director of Alpari analytical department, told PRIME.

“It’s also important to mention that Rosneft does not want MTS’ shares, which would be a non-core asset for the oil major. This is why the plaintiff had no interest in MTS.”

Rosneft and its unit Bashneft filed the lawsuit on May 2 to recover over 106.6 billion rubles from Bashneft’s former owner, Sistema, and its unit Sistema-Invest. MTS’ common shares in Moscow spiraled down 10.4% on May 3 to 247.3 rubles, and American depositary receipts (ADRs) in New York lost 8.6% to U.S. $9.30. The plaintiffs raised the claim to 170.6 billion rubles later in May.

On June 27, the Arbitration Court of the republic of Bashkortostan seized Sistema’s assets worth 185 billion rubles under the lawsuit, including a 31.76% stake in MTS of its 50.03% effective ownership. The court maintained arrest on July 6 by declining claims of Sistema and Sistema-Invest, and MTS’ stocks slumped on July 7 to 224.1 rubles at home and $7.78 abroad.

MTS’ market capitalization has remained safe despite claims of pessimists and critical analysts. “The operator’s capitalization has added 1.85% since the end of June to now, while the whole stock market has not been feeling well,” the Alpari analyst said.

Zerich Capital Management senior analyst Viktor Markov agreed that the court proceedings have not been detrimental for MTS’ work. “The mobile operator showed strong results for April–June with the net profit rocketing 62.6% on the year. It proves that MTS has a powerful brand and evolves independently, regardless of the conflict between Sistema and Rosneft,” he said.

When Sistema triggered a technical default for 3.9 billion rubles, MTS assured its investors that its operating activities would not be impeded by the move.

On August 23, the court partially satisfied Rosneft’s claims and ordered Sistema and Sistema-Invest to pay 136.3 billion rubles. The holding disagreed and said it would appeal against the order.

MTS’ quotes reacted with a 1.8% growth in Moscow on August 24, “because cutting of the claim’s amount raised hope on the market for improvement of Sistema’s footing,” Markov said, adding that MTS enjoys trust of its clients, which allows it to run a successful business.

Sistema announced an 8.9 billion ruble technical default on August 28, but MTS again calmed down investors.

“The arrest of 31.76% of shares in the authorized capital of MTS held by Sistema as well as the above-mentioned technical default of Sistema does not impede operational activities of MTS and does not impact the company’s debt instruments,” the operator said in a statement.

MTS’ common shares gained 4.2% since the beginning of the year to 270 rubles on August 31, much better than 1.3% and 9.4% lost by the telecom index and the broader MICEX respectively. The operator’s ADRs jumped 9.4% since the beginning of the year to $9.99 on August 31 in New York.

Possible outcome

“The settlement of the (Sistema-Rosneft) conflict contains not only a legal, but also a political component, since the holding is a gigantic Russian business. A sale of shares could worsen the country’s investment climate, and a final court decision would be most likely well weighted,” Markov at Zerich said.

“The court could cut down the amount of the suit, and Sistema would survive without having to sell MTS’ shares.”

Milchakova at Alpari said the possibility that Sistema will have to sell its stake in MTS exists, but seems most unlikely since Sistema could use some of MTS’ profit in dividends.

“We think Rosneft will recoup the damage and Sistema will have to pay, to which end MTS’ board of directors may decide to raise dividends. But MTS’ minority shareholders will win from the decision too, this is why the Sistema scandal becomes partially beneficial for MTS shares,” Milchakova said.

The operator said on August 28 that it had paid 21.3 billion rubles in dividends on 2016 results, but it did not pay 9.9 billion rubles in dividends to Sistema due to the suspension of its rights under the stake arrest.

Sistema’s President Mikhail Shamolin said on August 30 that the holding does not plan to revise dividend or financial policies of its portfolio companies, but the amount claimed by Rosneft is huge and could impact the business in future.

If forced to pay 136.3 billion rubles, Sistema will be able to borrow from banks and could use shares of MTS and other assets as collateral, Shamolin said, adding that no decisions to sell MTS’ shares had been made so far.

(58.0557 rubles – U.S. $1)

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