OAO MegaFon, Russia’s second-largest wireless carrier by customers, will push ahead with a share-sale plan that could become the largest initial public offering by a Russian company since VTB Bank’s in 2007.
Sweden’s TeliaSonera AB (TLSN) will sell a stake, and MegaFon will also offer its own stock, which will start trading in London and Moscow this quarter, the operator controlled by billionaire Alisher Usmanov said today in a regulatory filing. While the offer size will depend on investor demand, people familiar with the matter said last week that MegaFon may raise $3 billion from the sale of a 20 percent stake.
Russian companies are returning to stock offerings after the central bank sold a $5.2 billion stake in OAO Sberbank (SBER) last month. MegaFon’s IPO is a part of shareholder agreement reached in April when billionaire Mikhail Fridman’s Altimo cashed out of the operator and Usmanov boosted his ownership to a controlling stake, resolving years of governance disputes with TeliaSonera.
“MegaFon is a much clearer investment case focused on the Russian telecom-market growth,” said Konstantin Chernyshev, head of research at Moscow-based UralSib Financial Corp. UralSib values MegaFon’s equity at $13 billion, and including debt, at $17.8 billion, or 4.8 times estimated 2012 earnings before interest, taxes, depreciation and amortization.
MegaFon, based in Moscow, didn’t say how many shares it plans to sell or at what price. TeliaSonera said it may divest a stake of as much as 10.6 percent, keeping at least 25 percent ownership.
Morgan Stanley (MS:US) and Russia’s Sberbank CIB (SBER) are managing the sale with help from Credit Suisse Group AG (CSGN), Citigroup Inc. (C:US) and VTB Capital, MegaFon said. Their valuation for MegaFon’s equity vary from $12.3 billion to $16.1 billion, implying a multiple including debt of 5 to 5.7 times projected Ebitda for this year, a person with knowledge of the matter said, asking not to be identified because the details are private.
The sale’s arrangers will have a so-called over-allotment option to sell an additional 15 percent of the total size of the offer, according to a copy of the term sheet obtained by Bloomberg News. MegaFon will trade under the ticker MFON.
OAO Mobile TeleSystems, Russia’s biggest wireless company, is trading at 5 times 2012 earnings, while the multiple for VimpelCom Ltd. (VIP:US), the third-largest operator by subscribers, is 4.5 times, according to UralSib. The Russian telecom operators are trading at a 19 percent discount to developed markets peers as investors demand a high risk premium to hold Russian assets, Chernyshev said.
Telefonica SA (TEF), Spain’s largest phone company, is seeking to sell shares of its German wireless unit at 6.5 to 7 times estimated 2013 Ebitda at the higher end of a range, people familiar with the matter have said. MegaFon’s operating income before depreciation and amortization was 42 percent of sales in the second quarter, compared with Telefonica Deutschland AG’s Oibda margin of 26 percent.
Telefonica Deutschland’s IPO won’t compete with MegaFon as the two companies have different investor bases, said Alexander Vassiouk, director at Prosperity Capital Management in Moscow.
At $3 billion, MegaFon’s IPO would be one of the biggest in Russia in recent years. OAO Rosneft (ROSN), the country’s largest oil producer, raised $10.4 billion in an IPO in 2006, followed a year later by VTB Bank (VTBR)’s $8 billion stock sale. United Co. Rusal (486), the biggest aluminum producer, raised $2.2 billion in a Hong Kong listing in 2010.
Initial share sales in Europe, the Middle East and Africa have raised about $6 billion this year, compared with $37 billion in the same period last year, data compiled by Bloomberg show.
MegaFon has 62 million subscribers, according to a company presentation last month. It also owns units in Tajikistan, Abkhazia and Ossetia. The company, led by Chief Executive Officer Ivan Tavrin, reported first-half revenue of $4.2 billion, a 14 percent increase from a year earlier. MegaFon had considered an IPO as early as a decade ago.
Mobile TeleSystems rose 0.5 percent to 224.44 rubles at 5:21 p.m. Moscow time, while OAO Rostelecom, Russia’s dominant long-distance phone operator, added 2.5 percent to 137.19 rubles. VimpelCom lost (VIP:US) 1.4 percent yesterday in New York.
MegaFon may use the proceeds to reduce its 156 million rubles ($5 billion) of debt or for investments such as network improvements, Tavrin told reporters on a conference call today. MegaFon doesn’t need the proceeds to fund acquisitions and doesn’t plan any takeovers abroad, he said.
The operator said it plans to hand out 50 percent of profit or 70 percent of free cash flow as dividends, whichever is higher. This means MegaFon will be a “strong dividend play,” paying out some $600 million to $800 million a year through 2015 and implying a dividend yield of as much as 6 percent, according to UralSib.
“It’s the price that matters,” Alexander Vassiouk, a director at Prosperity Capital in Moscow which has $4 billion under management, said yesterday by phone. “MegaFon will be attractive if sold at the same price-to-earnings multiple as OAO Mobile TeleSystems (MBT:US), while offering a comparable dividend yield.”
Russia’s richest man Usmanov, the main owner of MegaFon, is valued at $18 billion by Bloomberg Billionaire Index. He also controls Russian iron-ore producer Metalloinvest (METIN) and Internet company Mail.ru Group (MAIL), which owns Facebook Inc. (FB:US) shares among other assets. He is also a shareholder of London soccer club Arsenal.
Usmanov, 59, acquired Russian mobile-Internet provider Scartel earlier this year. Scartel, which operates under the Yota brand, agreed in March to develop fourth-generation network jointly with MegaFon. The company will let MegaFon use its equipment to provide so-called LTE communication services, in turn getting access to MegaFon’s network.
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