UPDATE 5: Russia’s MegaFon nods purchase of 64% in Mail.Ru for $740 mln

(Specifies speaker in paragraph 11, adds comments in paragraphs 12–14)

MOSCOW, Dec 23 (PRIME) -- The board of directors of Russian mobile operator MegaFon has approved a purchase of 63.8% of voting shares of local Internet giant Mail.Ru Group for U.S. $740 million, the operator said Friday.

MegaFon will buy 11.5 million Class A shares and 21.9 million ordinary shares in Mail.Ru Group, currently held by New Media and Technology Investment LP, New Media Technologies Capital Partners Ltd. and Ardoe Finance Ltd., subsidiaries of USM Holdings, for an agreed consideration of $640 million on completion plus an unconditional deferred payment of $100 million due in one year post completion paid in cash.

“Closer ties with Mail.Ru Group will allow us to execute common strategic projects, including, but not limited to, the creation and promotion of special offerings to digital subscribers of VKmobile based on the social network VK, and improvements in clients targeting and segmentation, which latter projects we understand have been approved by Mail.Ru,” MegaFon’s CEO Sergei Soldatenkov said.

Mail.Ru Group’s CEO Boris Dobrodeyev said potential co-operation in a number of common projects, such as the launch of the special VK branded offering and the use of predictive analytics technologies, offers new useful products to the company’s user base and new opportunities for the business.

“MegaFon is a natural partner for Mail.Ru in various areas and we look forward to working together,” he said.

The transaction is aimed at achieving significant synergies for both companies, including enhancement of MegaFon’s digital offering and its distribution, a launch of special VKmobile offering for users of VK social network, and other potential initiatives, MegaFon said in the statement.

The deal was recommended for approval by the special committee of MegaFon’s board of directors, comprised of non-executive and independent directors. MegaFon’s shareholders will meet at an extraordinary meeting on January 20, 2017, to approve the transaction. The deal is also subject to receiving consent from the local antitrust authorities, and subject to additional conditions, fulfilment of which is out of MegaFon’s control.

A spokesperson for the Federal Antimonopoly Service said the authority has not received MegaFon’s request for the purchase of the stake in Mail.Ru Group yet.

Morgan Stanley is acting as a financial advisor to MegaFon, and Cleary Gottlieb Steen & Hamilton is acting as a legal advisor.

Bank of America Merrill Lynch is acting as a financial advisor to MegaFon’s special committee and is providing a fairness opinion. White & Ñase is acting as a legal advisor.

Dmitry Kononov, investor relations, M&A director at MegaFon, said during a conference call that “the closure of the deal is expected in the first quarter of 2017 upon the receipt of all necessary endorsements.”

“The deal will create significant competitive advantages for MegaFon; it will allow the operator to attract and maintain digital subscribers. The proposed deal will create long-term value for MegaFon’s shareholders and is a new stage in our company’s development,” Kononov said.

MegaFon’s Chief Financial Officer Gevork Vermishyan said the dividend policy will remain unchanged after the deal. “The company fully understands the value of the dividend story. We won’t revise our approach to this value…As of the end of the third quarter, our net debt/OIBDA ratio amounted to 1.56. The indicator will stay at an acceptable level after the purchase,” the executive said.

The operator’s debt burden will improve since Mail.Ru Group, whose results will be consolidated with MegaFon’s figures, has a higher margin than MegaFon, Vermishyan said.

The purchase would not affect MegaFon’s capital expenditures. “In the disclosure of 2016 results, we’ll release our forecast for 2017, what level of capital expenditures the company plans to invest in 2017,” he said.

In 2015, MegaFon’s capital expenditures increased 24.2% on the year to 70.164 billion rubles. The indicator was expected to stay at 68 billion rubles in 2016.

Vermishyan also said that the mobile operator has no plans to acquire 100% of the Internet company.

MegaFon’s Operating Director Anna Serebryanikova said, “I’d like to remind that Mail.ru Group is a company whose shares are traded publicly in a big volume of some 50%. That’s why the purchase and consolidation of 100% of the company would not be probably in the interests of business.”

“First, it’s because we want and believe that it’s a serious competitive advantage to see Mail.Ru Group to continue to develop as an independent company. A simple takeover could convey risks that a unique corporate culture, approach and products could be downgraded,” she said, adding that 100% of Mail.Ru Group would cost “too much” for MegaFon.

Kononov said it is a related-party deal, and will be approved under specific rules. “It was analyzed and considered by a special committee at the board of directors, which comprises independent directors, who are not linked to USM. USM won’t take part in the vote (at the shareholders’ extraordinary general meeting),” Kononov said.

Vermishyan said votes of Stockholm-headquartered telecom operator TeliaSonera, which owns 25.17% in MegaFon’s capital, will be sufficient to approve the deal. “TeliaSonera has enough votes; they can vote with their shares, and the deal is done,” he said.

“We hope, however, not only they will vote, and we get a 100% decision, support from all shareholders. Moreover, we’ve started to talk with them and think the deal is profitable for all MegaFon’s shareholders, in first place,” Vermishyan said.

“We have grounds to believe that TeliaSonera would endorse the deal, because its representatives participated in a special committee, and the board put this issue on the agenda for shareholders’ voting. We think the deal is well-elaborated, and we have several independent conclusions that its price is reasonable, market-justified and in compliance with MegaFon’s interests. We think the shareholders, keeping all these things in mind, will support us,” Serebryanikova said.

An offer to minority shareholders is not obligatory in case of the deal, because it is being done between affiliated entities. After the purchase, MegaFon will consolidate financial results of Mail.Ru Group in its reports, she said.

(60.8641 rubles – U.S. $1)

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