FOCUS: Rostelecom inclined to raise interest in Tele2 to control despite debt, risk

By Yekaterina Yezhova

MOSCOW, Apr 10 (PRIME) -- Raising its stake to control in mobile operator T2 RTK Holding in 2017 seems to be a no-brainer for Russian state-controlled telecom giant Rostelecom regardless of the asset’s heavy debt and market skepticism. While the partners are still negotiating the deal, analysts say Rostelecom’s benefit hinges mostly on the agreed terms and conditions.

“We thought that the shareholder structure should be probably changed. We’re talking with Rostelecom’s management, the previous and the current, and the shareholders. We think Rostelecom as a consolidator of these services should raise its stake in Tele2 (T2 RTK Holding’s brand),” Yury Solovyov, first deputy chairman of VTB Bank, a co-owner of T2 RTK Holding, told reporters in late March.

“It will improve the synergy effect from provision of various products. Cybersecurity of the country is not of least importance as well amid growing external threats. It will strengthen the role of the government, which will get control of the mobile asset. That’s why we’re thinking of changing ownership of Tele2, in which Rostelecom will have control.”

Rostelecom owns 45% in T2 RTK Holding, the remaining 55% are held by a consortium of VTB Bank, Bank Rossiya, insurance group Sogaz and businessman Alexei Mordashov.

“Tele2 is the fourth biggest mobile operator in Russia (after MTS, MegaFon and VimpelCom) with a market share by subscribers of 15% (as of the end of 2016). Regardless of its entrance on the lucrative market of Moscow and the Moscow Region in late 2015, Tele2 has failed to gain a market share that would be enough to turn it into a sustainable profitable business and get a positive money flow,” UralSib Capital said in a research note.

“Possible control over Tele2 involves risks for Rostelecom, which will have to consolidate financial indicators and debts of Tele2 in its reports in this case. We do not see any strategic reasons for the deal, whose terms could be disadvantageous for Rostelecom. We confirm a Hold recommendation for Rostelecom’s common stock.”

While incomparable by scale, T2 RTK Holding and Rostelecom have quite close debt figures. T2 RTK Holding’s net debt swelled 23.9% to 126.5 billion rubles, and Rostelecom’s net debt widened 2% in 2016 to 177.5 billion rubles.

Finam analyst Timur Nigmatullin said that T2 RTK Holding’s debt is three to four times above industry average.

All financial figures of the mobile operator were disclosed in VTB Bank’s report after T2 RTK Holding refused to disclose results in 2016 not to provoke a backlash from other market players, as it said then.

T2 RTK Holding’s net loss widened to 15.6 billion rubles in 2016 from 7.6 billion rubles a year earlier, as calculated under International Financial Reporting Standards (IFRS). Revenue rose 11.9% to 105.9 billion rubles.

Rostelecom’s IFRS net profit decreased 15% in 2016 to 12.2 billion rubles. Revenue added 91 million rubles to 297.4 billion rubles.

Nigmatullin thinks that benefits from the deal for any partner, be it Rostelecom or VTB Bank, directly depend on its parameters, which cannot be predicted accurately.

Rostelecom would be better off if it gains control through a share issue that would dilute stakes of the other shareholders although T2 RTK Holding’s debt could hurt its ability to pay dividends, according to the analyst.

“But the debt servicing cost will contract significantly in the mid-term along with the central bank’s cuts of the key rate. A moderately positive synergy is also possible thanks to better cooperation while developing infrastructure and expanding tariff options,” Nigmatullin said.

If Rostelecom gets control through the purchase of a stake at a price based on a 147 billion–170 billion ruble valuation of the company at the moment of its creation or higher, it would cost the state-controlled operator more and its own shares could be pressured. VTB Bank, as well as the other holders, would benefit from this scenario as they could receive more money for the deal, the analyst said.

Rostelecom’s common shares lost 9% since the beginning of the year and closed at 77.78 rubles on April 6 on the Moscow Exchange.

(56.9201 rubles – U.S. $1)

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