FOCUS: MTS’ tower, digital spin-offs to improve control, push quotes up

By Yekaterina Yezhova

MOSCOW, Sep 6 (PRIME) -- Mobile operator MTS’ shareholders will decide on September 30 on spinning off the towers, fixed-line and digital infrastructure into two wholly-owned subsidiaries, which, analysts say, would improve control and could push the operator’s quotes higher.

“The goals can differ, from improvement of control inside the company and cost cuts up to the plans to sell businesses or disclose their value in the group’s layout. For example, investors, as a rule, value digital services higher than traditional telecommunications, this is why separation can result in a more expensive MTS,” Dmitry Puchkaryov, a stock market expert at investment company BCS World of Investment, told PRIME.

The board of directors of the country’s major mobile operator earlier suggested spinning off passive infrastructure – towers and related assets – into Tower Infrastructure Company (TIC). According to researcher AC&M Consulting, MTS had some 18,000 towers as of the end of 2020.

MTS CEO Vyacheslav Nikolayev said at a conference call that other players on the tower infrastructure market “may mull consolidation” and the future of tower assets will depend on the market situation.

“In 2016–2017, MTS’ management was strongly against the tower sale. However, the market has changed and, following significant investment by VEON Russia (VimpelCom) and Tele2, the Russian operators have reached coverage parity,” Ivan Kim, an equities analyst at broker dealer Xtellus Capital Partners, said in a note.

“Thus, we believe MTS might not see its tower assets as of such a high strategic value anymore and could be more open towards monetization, as long as independence of acquiring Tower Infrastructure Company can be ensured. Assuming MTS goes for monetization and will likely retain a stake in the independent tower operator, its towers at U.S. $70,000 per unit would be worth 16% of market capitalization and 9% of enterprise value.”

Vitaly Manzhos, senior risk manager at investment company Algo Capital, thinks the company has different sales options. “Probably, the terms would include a lease of the former property. Then we would not rule out expansion of MTS’ tower infrastructure through acquisition of the competitors’ assets,” he told PRIME.

MTS’ board also suggested spinning off a significant share of its active network and digital infrastructure – fixed-line, data center, and cloud computing – into MWS-1, which will be later integrated into the operator’s existing wholly-owned subsidiary MTS Web Services.

“Right now, MTS is pretty much the client of MTS Web Services. The idea is to focus on developing cloud services for B2B/B2G clients. The opportunity is significant, in our view, since the market is high growth and there is notable fragmentation. The only major competitor to MTS would be Rostelecom. MTS is still clearly behind Rostelecom on the data center market, with a 9% share,” Kim at Xtellus Capital said.

Puchkaryov at BCS assumes that by spinning the assets off, MTS hopes to reap the most beneficial result. “The businesses may be valued by investors higher when they function as individual firms. Besides, these businesses are quite large and well-established to live independently,” he said.

The analyst added that the main advantages of the spin-off are better control over business and tougher responsibility in decision-making.

Initial public offerings will be only logical after the spin-offs and “in case of successful floatation, the parent company would get a good cash inflow. If a stake is kept, it would also boost capitalization growth, the asset economy,” Manzhos said.

Under the law, MTS’ board said the owners of MTS’ ordinary shares voting against the spin-off or abstaining from voting will be eligible to sell their shares back to the company at 326.73 rubles apiece, in line with the current market price, Manzhos said.

MTS’ ordinary shares closed at 329.15 rubles on September 3 on the Moscow Exchange, down 0.5% since the beginning of the year.

“Till the end of 2021, I expect MTS’ shares to keep on moving inside a mid-term range of 310–353 rubles. I reiterate that possible news about the sale of the tower firm will propel the company’s stocks to the upper end of the range or even higher,” Manzhos said.

Puchkaryov at BCS said investors like MTS mainly as a source of generous stable dividends, while its growth potential is limited. “MTS’ shares could climb by 5 to 10% from the current level in 12 months,” he said.

(72.8545 rubles – U.S. $1)

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