FOCUS: Telia’s slow withdrawal from MegaFon may calm down sellout frenzy

By Yekaterina Yezhova

MOSCOW, Jul 3 (PRIME) -- Swedish giant Telia Company will sell its 25.17% stake in Russian mobile operator MegaFon in several tranches, mass media reported, and analysts welcomed the move saying it could ease pressure on MegaFon’s stock, now depressed by risks of corporate control and overhang.

Dmitry Bedenkov, head of the analytical department at investment company IC RUSS-INVEST, told PRIME that MegaFon’s shares have recently tested minimum levels since last November, adding that mass media reported first on June 13 that Telia wanted to sell MegaFon’s shares for U.S. $500 million, that is by on-the-date market prices slightly less than 8% of its interest in the company.

“The market reacted quite sharply then, and MegaFon lost 6% on maximum volumes on June 14,” he said.

The bad news flow was exacerbated by a short connection breakdown MegaFon had on June 13. “Telia’s sellout and the troubles have coincided and pummeled the stock,” Bedenkov said. MegaFon stumbled first in May over a serious network failure.

Alfa Bank said, “MegaFon’s GDRs came under pressure after Telia announced it will sell an 8% stake in the mobile operator…We expect MegaFon’s shares to remain under pressure for some time.”

The mobile operator’s stocks lost 7.8% since June 13 to 541.20 rubles on June 29 in Moscow, and global depositary receipts (GDRs) sagged 10.9% to $9.31 in London.

VTB Capital analyst Ivan Kim said on June 14 that the potential $500 million stock sale meant a likely future overhang, and investors would expect Telia to sell down the entire stake over time, and “investor concerns over corporate governance on the back of a highly-regarded international telecom company exiting the stock”.

On June 19, mass media reported that Telia will sell its interest in MegaFon in several chunks with the first one of about 8% to be offered in the coming six month, which could be sold on the market if there are no buyers. The same stake will be offered in the next six months.

Telia will offer the market 72% more shares than it is currently in circulation, investment company UralSib Capital said in a research note.

“If Telia fails to find strategic buyers for its stake, the risk of sale of a huge number of shares on the open market will exert pressure on MegaFon’s quotes for a long time. Free float could soar hugely in the long-term,” UralSib Capital said.

At present, USM Group of Russian businessman Alisher Usmanov holds 56.32% in MegaFon; MegaFon Investments (Cyprus) Ltd., a wholly-owned unit of MegaFon, has 3.92% in the parent company; and 14.59% are in free float.

The market calmed down a bit after the information that Telia’s stake sales would be stretched over time, and the quotes in Moscow sagged by 1.6% on June 20 amid a higher-than-average activity, Bedenkov at IC RUSS-INVEST said.

“The smoother stock trading was a result of information from mass media that the sale will take time and will be dispersed in several tranches. The first 8% stake could be sold during sixth months. In such a way, there won’t be a dramatic change of the shareholder, and withdrawal from the Russian company would be gradual and unhurried, which would be positive for the stock,” he said, adding that Telia also voiced its geographical retargeting.

Telia said in January it was likely to sell its Central Asian telecommunications assets in 2017, and CEO Johan Dennelind described the company’s ambition to be a leading player in the Nordics and Baltics. The firm sold about $500 million worth of stock in Turkish cell operator Turkcell in May.

Some risks for MegaFon’s stock are still there. “Although the deal will be most likely done in several tranches, if confirmed, the sale would create an overhang risk and risks of corporate management due to the retreat of a blocking shareholder,” brokerage BCS said in a research note.

However, Kim at VTB Capital sees a silver lining in the news, “We also note that, based on current prices, the possible stock sale by Telia could trigger MegaFon’s inclusion into MSCI Russia at the November Review.”

(59.3862 rubles – U.S. $1)

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