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MegaFon Plans $2.1 Billion IPO in Biggest Sale Since 2010

OAO MegaFon (MFON), Russia’s second-largest mobile-phone operator, plans to raise as much as $2.1 billion in the biggest initial public offering by a company from the country since United Co. Rusal (486)’s sale almost three years ago.

MegaFon and investor TeliaSonera AB (TLSN) will sell a combined 15 percent stake for $20 to $25 per global depositary receipt, Moscow-based MegaFon said today. The offer may raise $1.7 billion to $2.1 billion, according to a term sheet obtained by Bloomberg. There will be a 10 percent so-called over-allotment option to cover extra demand, and trading of the shares will begin Nov. 28 in London and Moscow, the carrier said.

The IPO is a part of a shareholder agreement reached in April with Alisher Usmanov, the Russian billionaire who controls MegaFon, to resolve disputes between Stockholm-based TeliaSonera and the venture’s local owners. Usmanov will retain his 50 percent holding, while TeliaSonera will keep at least 25 percent, MegaFon said today.

“With this IPO, TeliaSonera is monetizing its investments in Russia, where it has received barely any returns in the last decade,” said Evgeny Golosnoy, an analyst at IFC Metropol in Moscow. “When the Nordic company started developing MegaFon, they could’ve hoped to gain control, while by now it has become obvious that Russia won’t let foreigners control the country’s major mobile operators.”

Shareholder Accord

TeliaSonera, Sweden’s largest phone company, helped set up MegaFon in 2002 when the Nordic company was created in a merger with Finland’s biggest fixed-line operator and they combined their Russian assets. Governance and strategy disputes with Russian partners have since plagued the venture.

As part of a shareholder settlement in April, when billionaire Mikhail Fridman’s Altimo cashed out of the operator and Usmanov boosted his ownership, MegaFon agreed to pay the higher of 50 percent of net income or 70 percent of cash flows in dividends.

The IPO price implies a market value of $11.2 billion to $14 billion, MegaFon said. That compares with so-called fair value of $12 billion to $16 billion estimated in October by analysts.

“Russian IPOs are often priced with a 10 percent to 20 percent discount to fair value,” said Mikhail Nesterov, who helps manage $4.5 billion of assets at St. Petersburg-based TKB BNP Paribas Investment Partners. “It’s positive that the MegaFon’s price range implies a discount” to larger local competitor OAO Mobile TeleSystems (MBT), or MTS.

MTS Discount

MTS’s current price implies a multiple of enterprise value to forecast 2013 earnings before interest, taxes, depreciation and amortization of 4.4, according to IFC Metropol. The middle of MegaFon’s price range reflects a multiple of 4.15, about a 6 percent discount to MTS, based on UralSib Capital estimates for MegaFon’s 2013 Ebitda.

Morgan Stanley (MS) and OAO Sberbank (SBER) are managing MegaFon’s share sale, with help from Credit Suisse Group AG (CSGN), Citigroup Inc. (C) and VTB Capital. (VTBR)

MegaFon will start a roadshow with investor meetings in New York today, said a person familiar with the matter, who asked not to be identified because the plan isn’t public.

“MegaFon is the last out of Russia’s three major mobile operators to go public and should attract some investor interest, at least at the lower end of the price range,” said Konstantin Belov, analyst at UralSib Capital in Moscow.

Russian IPOs

MTS, Russia’s largest mobile operator, has traded in New York since 2000. Another rival, VimpelCom, sold shares in the U.S. in 1996 and is now part of VimpelCom Ltd. (VIP), which operates in 18 countries including Russia.

MegaFon had 62.8 million users in Russia at the end of the third quarter, versus MTS’s 70.7 million subscribers and 56.2 million customers using VimpelCom in Russia, according to Moscow-based researcher AC&M Consulting.

Russian companies are returning to stock offerings after the central bank sold a $5.2 billion stake in Sberbank in September in a secondary offering. MD Medical Group Investments Plc (MDMG), Russia’s largest chain of maternity centers, raised $289 million in a London IPO last month.

Rusal, the biggest aluminum producer, has fallen 59 percent on the Hong Kong exchange since its $2.2 billion IPO in January 2010.

Kcell’s Sale

TeliaSonera is selling another asset in an IPO at the same time. Kcell, the company’s unit in Kazakhstan, is seeking to sell as much as 25 percent stake in an IPO in London and Almaty, according to a Nov. 13 filing. Kcell, with 12.7 million users, had $1.2 billion revenue last year.

TeliaSonera expects to receive proceeds of 9 billion kronor ($1.3 billion) to 11 billion kronor from MegaFon’s IPO, the Swedish company said today. TeliaSonera rose 1.6 percent to 44.91 kronor at 2:18 p.m. in Stockholm.

MegaFon’s third-quarter profit rose 20 percent to 14.9 billion rubles ($470 million) as customer gains helped boost revenue 12 percent to 71.2 billion rubles. Operating profit before depreciation and amortization increased to 45 percent of sales from 42 percent.

Data revenue accounted for 13 percent of MegaFon’s sales as customers browsed the Web and sent e-mail on mobile devices. Mobile broadband will remain the main driver for phone companies’ revenue, according to UralSib Capital.

Usmanov also controls smaller mobile operator Scartel, which uses the brand Yota and which is working with MegaFon in developing a faster network.

MegaFon may use the IPO’s proceeds to reduce its 159 million rubles of debt or for investments such as network improvements, CEO Ivan Tavrin said Oct. 9. MegaFon doesn’t need the proceeds to fund acquisitions and doesn’t plan any takeovers abroad, he said.

Tavrin, 36, agreed to buy 1.25 percent in MegaFon within a month following the IPO and has an option to increase his stake to as much as 5 percent by 2017.

To contact the reporter on this story: Ilya Khrennikov in Moscow at ikhrennikov@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net

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