FOCUS: MTS share buyback seen attractive for investors, calm down market risks

By Yekaterina Yezhova

MOSCOW, Nov 7 (PRIME) -- Mobile operator MTS, which services half of Russians, will spend up to 10 billion rubles until the end of 2016 to buy back its shares from minority holders and its core owner, local multi-industry holding Sistema. Analysts said the timing is perfect to retain investor attention and cushion year-end volatility.

“I think the moment for buying shares back is well chosen. In view of the projected volume of a free cash flow and liquidity from borrowings – like the recent placement of 15-year 10 billion ruble exchange bonds of the second issue – the operator can distribute, in addition to annual dividends of 52 billion rubles, indirect benefits in the form of a buyback of its own shares that can be later cancelled,” Finam analyst Timur Nigmatullin told PRIME.

The operator said on October 31 it will buy back up to 50 million shares, or 2.5% of capital. The securities, both common shares and American depositary shares (ADS), will be purchased proportionately from minority holders and Sistema. The shares can be cancelled or used for corporate needs.

MTS will allocate 4.935 billion rubles maximum to buy back shares from the market via its fully-owned unit, Stream Digital. Minority holders can apply for the program until December 1 and ask for a price in a 199–229 ruble range with a discount of 6.70% or a premium at 7.36% to the closing price of 213.30 rubles as of October 28.

KIT Finance Broker said bids will be exercised at a strike price, which is the lowest price per share within the range allowing the purchase of shares for the agreed sum.

If a holder asks for a price that is below the strike price, shares will be bought back at the strike price. If the ask price is above the threshold, the bid will be cancelled. When determining the strike price, MTS will range bids by prices in an ascending order and sum up volumes until it gets the total amount reserved for the buyback.

At the upper-end price of 229 rubles, MTS could buy back 21,548,154 shares from minorities, or 1.08% of its capital. At the lower-end price of 199 rubles, the operator could purchase 24,796,619 shares, or 1.24%, according to MTS’ offer to holders.

Natalya Milchakova, deputy director of investment company Alpari, said that “the shares would be most likely bought back at a price closer to the upper-end as the market price has added 4.6% since the announcement of the offer”.

KIT Finance Broker said the buyback coefficient will not be high. “It’ll be at least 2.1% at the maximum price of 229 rubles if all the minority holders offer their shares. However, first, the strike price would be most likely below 229 rubles. Second, not all minority holders will want to sell their stakes. In such a way, the coefficient of satisfying the bids will be higher, and the price of the deal lower,” it said in a research note.

“MTS will unlikely earn much because of the aforementioned factors. The stock could slip in the upcoming trading sessions and then could be speculatively purchased. According to our calculations, the maximum yield of the deal won’t exceed 2% at the purchase price of 215 rubles. We keep the Hold recommendation for long-term investors until the shares hit 245 rubles.”

The program expires at 10 a.m. Moscow time on December 1 for owners of common stock and at 5 p.m. New York City time on November 30 for ADS owners.

Settlements with common shareholders will be done between December 6 and 23, and with ADS holders on December 12 or about this date.

Under an agreement with the holding, Sistema, a beneficial owner of 50.44%, or 50.66% excluding shares owned by MTS’ units, will sell up to 1.27% in the operator’s capital for 5.065 billion rubles at most.

Sistema agreed to sell to Stream Digital a pro rata number of shares, so that its aggregate percentage ownership and voting power, together with its affiliated entities, in MTS after the offer will be substantially equal to the stakes held as of the date of launching the offer, according to MTS’ documents.

“Fundamentally, the buyback news has already been priced in into the 4% growth,” Nigmatullin at Finam said. MTS’ common shares gained 3.4% as of November 2 on the Moscow Exchange since they closed at 213.3 rubles on October 28, the last trading day prior to the buyback announcement.

ADS added 4.7% as of November 2 since they closed at $7.17 on the New York Stock Exchange on October 28.

“We expect to see quite weak figures for MTS for July–September due to a pending corruption case in Uzbekistan and a complicated market situation in Russia amid strengthening competition in the lucrative Moscow Region and falling real incomes of households,” Nigmatullin said.

He said that the time until the end of the year will be full of potentially negative events for stocks of Russian companies in general, like an expected rate increase by the Fed in December, controversial presidential elections in the U.S., uncertainty about an agreement to cut oil production volumes at an OPEC meeting in late November.

“This is why the purchase of own shares, especially from an open market, could smooth volatility significantly in this period, which means lower market risks for investors in the operator’s stock,” the analyst said.

Milchakova at Alpari expects the buyback to boost MTS’ capitalization in the short-term. “MTS’ stocks have demonstrated rather a weak growth this year, lagging behind the MICEX index in January–October. They underperformed the market, and the operator’s capitalization could rebound on buyback,” she said.

MTS said earlier it could buy back shares for a total of 30 billion rubles in three years. Prolongation of the current offer will depend on the company’s capitalization dynamics and the will of Sistema as a controlling shareholder. “I think the holder sees advantage in the unit’s bigger capitalization,” Milchakova told PRIME.

Nigmatullin at Finam agreed, saying that “chances seem high that the operator could extend the buyback program”.

(63.5043 rubles – U.S. $1)

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