Government Expects Higher Comstar Bid for 28% MGTS Stake in Russia

Svyazinvest's 28% stake in Moscow-based fixed-line operator MGTS has been evaluated by auditors KPMG, as requested by the Russian government. Press reports indicate that the stake has been valued at a price significantly higher than the US$380 million previously offered by the main suitor Comstar UTS, with Kommersant reporting that the figure may be as high as US$520 million. With KPMG having completed its appraisal of the stake, recommendations on the government's next move are now being sought from the Federal Property Management Agency, the Information Technologies Ministry and the Economic Development and Trade Ministry. Comstar holds 63.5% of common shares in MGTS, while state-controlled fixed-line operator Svyazinvest holds 28% of common shares and the remaining shares are free float. To date, Comstar has made two public offers for Svyazinvest's stake. In December 2005 and March 2006 it bid around US$380 million, equating to US$18.35 roubles per share. MGTS's current share price is around US$17.75.
Outlook and Implications
Government Happy With KPMG Evaluation: The Russian government is reported by Kommersant to be happy with the valuation made by KPMG. This is understandable, as it can now expect to make over US$100 million more from its stake, according to the KPMG price-tag, than it would have done if it had sold in March. The KPMG valuation also justifies the decision to invite the auditors, a decision taken in response to Comstar's second bid, which the government had considered too low. The Russian government's unwillingness to divest its stake had stemmed from the fact that it ultimately intends to privatise Svyazinvest, and the 28% stake in MGTS was deemed likely to increase the value of the former. However, the KPMG valuation places Svyazinvest's stake 38% higher than its current market price, increasing the probability that the state would be willing to sell.
Comstar Dismayed: As yet Comstar have made no official comment, but the Sistema-owned company is likely to be unhappy with KPMG's valuation. The fact that a US$520 million price has been set by an independent, internationally renowned auditor places pressure on Comstar to increase its bid significantly. The company is highly unlikely to table a bid that matches KPMG's valuation, but may consider tabling a bid much higher than it has previously offered. While General Director, Semyon Rabovsky, has in the past said that the company had no plans to make a third bid for the stake, Comstar has undoubtedly been keen for some time to acquire the Svyazinvest stake. Comstar has enjoyed recent success in the Moscow market through its Internet and IP TV operations, and has also been consolidating in the Moscow fixed-line market (see Russia: 24 April 2006: Comstar Plans Expansion in Moscow, Russian Regions and Russia: 11 January 2006: Comstar UTS Acquires Moscow Alternative Operator) The acquisition of the Svyazinvest stake would give it complete control of MGTS, the dominant Moscow fixed-line operator with a subscriber share of around 80% and a capacity of around 4.4 million telephone numbers. The Moscow fixed-line market remains an area of potential growth, and Comstar has long been keen to increase its exposure in this sector.
Comstar's Options: While Comstar may be forced to make a higher bid for the Svyazinvest stake, an alternative option may be to block dividend payments from MGTS. This would cause MGTS's stock to be converted to common shares and may ultimately reduce the Svyazinvest stake to 23%. Such a stake would represent less than a blocking stake in the company, and would be of relatively little value to Svyazinvest, for whom it would therefore be financially expedient to sell its stake at a reduced rate. At the moment however, Comstar has not indicated what its strategy will be, but there is little doubt that Svyazinvest and the Russian government will be the happier parties following KPMG's valuation.