FOCUS: State-controlled Rostelecom’s full ownership of Tele2 likely to benefit both

By Yekaterina Yezhova

MOSCOW, Mar 25 (PRIME) -- Telecom behemoth Rostelecom has finally agreed with partners to consolidate already half-owned T2 RTK Holding, Russia’s fourth biggest mobile operator, which would boost the group’s annual revenue to half a trillion rubles. Analysts say integration would be a win-win deal with a possible flotation of the mobile operator in the future.

“We with our partners on Tele2 (T2 RTK Holding’s brand name) have settled basic conditions and a consolidation model of 100% of Tele2 by Rostelecom and we’re moving to formal procedures,” Rostelecom President Mikhail Oseyevsky said earlier in March.

“As a result of consolidation, the group’s revenue will be close to 500 billion rubles. Probably, it would be one of the biggest companies on the market.”

Rostelecom’s revenue rose 5% in 2018 to 320.2 billion rubles, and T2 RTK Holding’s revenue increased 16.4% to 143.2 billion rubles.

At present, Rostelecom owns 45% in T2 RTK Holding, and the remaining 55% belong to Tele2 Russia Holding AB, in which VTB has 50%, Alexei Mordashov’s Invintel B.V. has 40%, and Yury Kovalchuk’s Bank Rossiya has 10%.

The terms say that T2 RTK Holding will remain an independent unit with the existing management team.

Payment

VTB CEO Andrei Kostin said the merger will consist of money and a share swap. Rostelecom will exchange its quasi-treasury shares, representing 12.01% of its capital and kept on the books of its unit Mobilel, for T2 RTK Holding’s shares. The Federal State Property Management Agency now owns 45.04% in Rostelecom and state development bank VEB.RF has 3.96%, and 38.98% are in free float.

Deputy Prime Minister Maxim Akimov said the government is preparing a draft presidential order to cut the government’s stake in Rostelecom for its acquisition of T2 RTK Holding so that state control is maintained, which may be done through shareholder agreements, among others. The exact terms of the deal were not disclosed.

“In case with VTB, Rostelecom could swap shares. Now Rostelecom plans to pay for 55% of Tele2 in quasi-treasury shares and money, and it could probably borrow the funds,” Ivan Pchelintsev, investment strategies expert at BCS Broker, told PRIME.

Media reported that Rostelecom would issue new shares in favor of the government to avoid dissolving of its interest to the loss of control. An extraordinary general meeting of shareholders could vote on the matter in September. The deal would be probably built so that Rostelecom could avoid a mandatory purchase of shares from minority holders since it would raise its expenses.

“Tele2’s suggested valuation range of 186–240 billion rubles results in 4.3-5.5x 2018 EV/EBITDA, against 4.2x for Rostelecom itself, 4.8x for major mobile operator MTS, which is close to market multiples at a low-mid range,” investment group Aton said in a research note.

“If Rostelecom is able to finance the deal partially via quasi-treasury shares – Mobitel’s current holding is valued at around 23.5 billion rubles – and adding new debt, consolidated post-deal net debt/OIBDA would amount to 2.6-2.9x against the 1.9x current level.”

Investment company Freedom Finance analyst Anastasia Sosnova said a 240 billion ruble value for T2 RTK Holding is fair, and BCS Broker senior personal broker Andrei Bogdashov saw it at 200 billion rubles, including the debt.

Alfa-Bank said, “With a gross debt of 204 billion rubles and 18 billion rubles in cash and cash equivalents and short term investments at the end of 2018 (the net debt/EBITDA ratio at 1.85x), Rostelecom will have to raise more money to pay for Tele2. The possibility of using the quasi-treasury shares will partially or fully cushion the risk of a debt burden after the deal, which will mount because Rostelecom will consolidate Tele2’s net debt of 136 billion rubles on its books.”

Rostelecom’s net debt added 3% in 2018 to 186.7 billion rubles.

Benefits

Despite a heavier debt, Rostelecom and T2 RTK Holding will win from the deal.

“Since Tele2 is a fast-growing company, which said its revenue tripled in 2018, Rostelecom’s financial results should improve significantly...In 2018, Tele2 cemented its leadership by the number of partners in the mobile virtual network operator segment. The total number of subscribers of virtual operators working on Tele2’s networks exceeded 1.6 million people, which constitutes half of subscriptions in the segment of such operators in the country,” Sosnova at Freedom Finance said.

“Besides, Tele2 completed the launch of LTE networks in the regions, which propelled the operator to the first place by dynamics of construction of radio electronic equipment of the LTE standard in Russia and to the second place by the total rates of network expansion. In such a way, Rostelecom will get additional competitive advantages.”

Pchelintsev at BCS Broker said T2 RTK Holding will benefit from the merger because it will hand over its debt to Rostelecom. “Moreover, it will enable Tele2 to win new subscribers in addition to its current share of 16% of the country’s total number of mobile clients. Integration into Rostelecom will expand the list of services, like the Internet and TV, by raising its market share,” he told PRIME.

Rostelecom’s quotes could edge down in the short-term, but the deal looks good for long-term investors. “As to the dividend policy for 2019, Rostelecom plans to raise payments to 3.38 rubles from 2.50 rubles per share, but it will return to 2.50 rubles in 2020, which is most likely explained by spending on Tele2,” Pchelintsev said.

The state-controlled operator’s common shares have edged down 0.2% since the beginning of the year and closed at 72.93 rubles on March 22.

Georgy Vashchenko, director of operations on the Russian stock market at investment company Freedom Finance, did not rule out that Rostelecom may hold an initial public offering of T2 RTK Holding in the future.

“It would boost investor interest to mobile operators, which has faded after delisting of MegaFon from the London Stock Exchange and talks of a possible retreat of MTS from the New York Stock Exchange,” he said.

(63.7705 rubles – U.S. $1)

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