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MTS/Comstar tie-up seen cheap but best for Sistema now

18 мая 2009

Russia's most-popular cellular provider, OAO Mobile TeleSystems, is likely to take control of its fixed-line sister firm, OAO Comstar United TeleSystems, in a deal analysts and investors deem a logical tie-up at a potentially attractive price.

But for now, the move will be of most benefit to conglomerate AFK Sistema, which controls both companies and aims to raise cash through the transaction to ease its debt burden.

Comstar's takeover by New York-listed MTS could be announced this summer, according to Sistema.

Experts see logic in the deal and say MTS could pick up Comstar for an attractive price after stocks plummeted last year. But some warn of limited near-term prospects for the convergence of fixed and mobile telephone services after a landmark acquisition by MTS' fiercest rival last year yielded lackluster results. They also say close cooperation is possible without a takeover because MTS and Comstar share the same owner.

"Sistema's need to transfer cash from financially strong MTS to the holding level seems to be the primary driver for such a deal," analysts at investment bank UralSib wrote in a note to clients earlier this month."There's so far little opportunity for short-term benefits from fixed-to-mobile integration."

London-listed Sistema, controlled by billionaire Vladimir Yevtushenkov, is Russia's biggest publicly traded conglomerate. But concerns over debts have prompted investors to value its shares at a hefty discount to its combined holdings in the telecoms, oil, technology, retail and banking sectors.

Analysts expect Sistema's debt load to lighten as MTS pays up to $1.3 billion for its 51% stake in Comstar before purchasing the remaining stock from minority shareholders.

The price could carry a 25% premium to current market levels. But after Russian equities dived in 2008, it would still be far below the $4.3 billion that MTS rival OAO Vimpel Communications (VIP) paid for fixed-line operator Golden Telecom, at a time when Comstar itself had an overall market capitalization of around $5 billion.

VimpelCom's move was touted at the time as the start of a wave of fixed-mobile convergence in Russia, a well-established trend in more developed European and North American markets.

But initial results here have disappointed.

"We see some rationale for an MTS/Comstar merger," said one London-based investor."But there's not much evidence of synergies between VimpelCom and Golden Telecom just yet."

VimpelCom was eager to sell mobile contracts to Golden's lucrative corporate clients, while using its own well-known brand to market Golden's fixed-line, broadband Internet products to increasingly affluent households.

VimpelCom also identified cost savings with Golden in purchasing equipment, rolling out networks, leasing lines and terminating calls.

MTS could approach the Comstar deal in a similar manner.

Firstly, it could widen billing relationships with subscribers, cross-selling an expanded product range across a bigger customer base. Comstar runs Moscow's fixed-line incumbent and has a growing fixed-line broadband network, both in the Russian capital and regionally.

Joint procurement and installation of hardware are also possible.

But the effects of such initiatives may only be felt several years down the line, while achieving them could be possible by simply cementing ties with Comstar under the existing ownership structure rather than buying it.

Some see the two companies as a perfect match in the short term because of their varying financial needs.

"It's very logical for MTS to spend its free cash flow on Comstar, which would gain access to the funds it needs to develop its networks outside of Moscow," said Philip Townsend, head of research at the Metropol brokerage in Moscow.

MTS generated more than $2 billion in free cash in 2008 but has found it increasingly difficult to identify appropriate acquisition targets either in the former Soviet Union or beyond.

Comstar, meanwhile, is struggling to break the stranglehold that state-run incumbents still enjoy in Russia's regional fixed-line markets.

Townsend puts fixed-line demand at almost double Russia's 33% penetration rate, with small and medium-sized businesses particularly hungry for those telecoms services.

One potential obstacle to a tie-up is Comstar's 25% stake in OAO Svyazinvest, a government holding company that controls Russia's seven regional fixed-line operators as well as long-distance provider OAO Rostelecom.

Sistema's initial public offering in 2005 was aimed at raising funds to bid for control of Svyazinvest. But the painfully drawn-out privatization was once again postponed and Sistema is now keen to sell the stake George Soros once famously called "the worst investment of my life."

A sale back to the government is now in the works in exchange for canceling debt to state banks. Many analysts believe this deal must happen before any MTS move for Comstar.

So far, concrete details on MTS' move for Comstar are scarce. But some clarity is likely to emerge this summer.

"All I can say is that a decision is a matter of weeks away," Sistema Chief Executive Leonid Melamed said recently.


Источник: Total Telecom

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