FOCUS: MegaFon’s idea to set up digital firm to help pay debts, other aims

By Yekaterina Yezhova

MOSCOW, May 21 (PRIME) -- One of Russia’s major mobile operators, MegaFon, will monetize control in Mail.Ru Group by teaming up with Gazprombank, Rostec and USM Holdings to create a digital services company, and analysts say the operator may use the proceeds to cut its debt.

“It looks like MegaFon had planned the deal some time ago. A year ago MegaFon raised its stake in Mail.Ru Group to 15.2% (an economic share, a 63.8% voting stake). A strategy was announced then to expand business directions related to telecom. Last year MegaFon launched a tariff offer Vklyuchaisya! (Connect!) on the basis of analysis of users’ big data,” investment company Alpari senior analyst Roman Tkachuk told PRIME.

Earlier in May, MegaFon set up MF Technologies (MFT), which is fully owned at present by the mobile operator’s 100% subsidiary Lefbord Investment Ltd. MegaFon will contribute a 5.23% economic share, providing 58.87% of votes, in Mail.Ru Group to MFT in exchange for 45% in the new firm.

Lefbord will sell 35% in MFT to Gazprombank and 9% to USM Holdings, both partners are MegaFon’s major shareholders. Rostec will receive 11% in MFT. The mobile operator will retain a 10% economic stake in Mail.Ru Group with no plans to sell it.

“The transaction values 100% of shares in MFT at U.S. $450 million, which envisages a 29% premium to the market price of Mail.Ru GDRs as of May 4, 2018. These terms imply a higher premium as compared to the purchase of a 15.2% economic interest in Mail.Ru from USM Holdings in February 2017,” MegaFon said in a statement.

The mobile operator says MFT was set up to develop digital services and implement projects in the digital economy. “The partnership will unite these leading businesses’ expertise in their sectors – telecommunications, IT, financial services and hi-tech – to enter new markets and create cross-sector industrial solutions,” the operator said.

“The purpose behind the creation of MFT is to fit properly in the industry of digital platforms. This partnership is made to keep up with the competitor, the alliance of Yandex and Sberbank, which emerged, in its turn, as a response to the success of China’s Alibaba and the U.S.’ Amazon. The presence of a state corporation and a state-participated bank on board proves that the government wants to play a noticeable role on this market,” Georgy Vashchenko, director of operations on the Russian stock market at investment company Freedom Finance, told PRIME.

“I think that business directions have not been distributed yet, but it’s only logical to presume that Gazprombank and MegaFon could be in charge of finance, and Mail.Ru Group of content and Web services.”

Who’s the winner

The deal will allow MegaFon to monetize its business. “Business monetization is a cornerstone for high-tech companies. For instance, the number of active users and income from advertisement are the most crucial indicators for U.S. social networks Facebook and Twitter,” Tkachuk at Alpari said.

“Russian IT firms leant how to make money as well. For example, Yandex develops contextual advertising actively. Another monetization method is creation of digital financial platforms. Japan’s Softbank and China’s WeChat have succeeded in this field.”

MegaFon said the digital partnership offers it an excellent chance to monetize its investment in Mail.Ru Group, since the operator purchased the stock in February 2017, Mail.Ru Group’s shares have risen by more than 70%. “Thus, MegaFon will secure $247.5 million in cash from the sale of shares to MF Technologies pre-tax, which will help reduce the company’s debt,” the operator said.

MegaFon’s net debt of the telecom segment stood at 234.5 billion rubles as of the end of 2017, or about $3.8 billion at current exchange rates. Vashchenko at Freedom Finance said the operator could use the money not only to repay debt but also as a new source of funding for an investment program or corporate aims.

“The news is moderately positive for holders of MegaFon’s shares. The operator will get a stake in the promising project that will generate 30–40 billion rubles per year,” Vashchenko said.

Participation of Rostec in the joint venture will add gravitas to the project, Tkachuk at Alpari said. “MegaFon has experience of working with Rostec: they cooperate in projects of the Internet of Things, surveillance systems, driverless transport,” he said.

Gazprombank, one of the country’s biggest banks, will get access to MegaFon’s user base of 77 million people and firms of Mail.Ru Group, including social networks VKontakte and Odnoklassniki. “For example, the bank could offer consumer microloans of up to 20,000 rubles on the basis of a social network profile for purchases on Alibaba or sell insurance or mortgage products at mobile connection stores,” Tkachuk said.

Mail.Ru Group’s global depositary receipts (GDRs) dove 8.7% in London on May 8, the day the deal was announced, while MegaFon’s quotes were flat both in London and in Moscow.

Alfa-Bank said it sees “a number of risks associated with changes to strategy and the treatment of minorities in the new entity” and said the news was negative for Mail.Ru Group.

Investment company Aton disagreed saying that “Mail.Ru Group will receive access to Gazprombank’s credit resources and will be able to reinforce its business portfolio with promising e-banking services.”

(61.9408 rubles – U.S. $1)

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