MegaFon Declines in Debut After $1.7 Billion Share Sale

OAO MegaFon (MFON), Russia’s second-largest mobile-phone operator, fell in its first day of trading after raising $1.7 billion, signaling investor skepticism toward emerging-market wireless assets amid a slowing economy.

The stock fell as much as 2.8 percent and closed down 2 percent at $19.60 in London. MegaFon sold stock at $20 each, at the bottom of its estimated range of $20 to $25 in the biggest initial offering by a Russian company in three years.

MegaFon competes with Russia’s largest mobile operator, OAO Mobile TeleSystems, and smaller rival VimpelCom for subscribers in a market where most people already have wireless handsets. IPOs of companies in Europe this year have seen average returns of 8.1 percent, according to data compiled by Bloomberg.

MegaFon had postponed an IPO marketing campaign in October, raising investor speculation the demand may have trailed expectations amid Europe’s sovereign debt crisis. The same month, lender OAO Promsvyazbank called off its IPO on the last day of the sale, saying offers it was getting for shares to be listed in London didn’t reflect “fair value” for the bank.

“MegaFon’s price decline today shows that the demand level wasn’t strong enough,” said Alexander Golovtsov, who helps manage $2.8 billion at Moscow-based UralSib Asset Management.

Photographer: Simon Dawson/Bloomberg

Chairman of the London Stock Exchange Group Plc Christopher Gibson-Smith, second left, and OAO MegaFon Chief Executive Officer Ivan Tavrin, third right, applaud during the company's initial public offering launch at the London Stock Exchange Group Plc's headquarters in London. Close

Chairman of the London Stock Exchange Group Plc Christopher Gibson-Smith, second left,... Read More

Close
Open
Photographer: Simon Dawson/Bloomberg

Chairman of the London Stock Exchange Group Plc Christopher Gibson-Smith, second left, and OAO MegaFon Chief Executive Officer Ivan Tavrin, third right, applaud during the company's initial public offering launch at the London Stock Exchange Group Plc's headquarters in London.

Price Decline

Global stocks declined for a third day on concern budget talks to avoid the U.S. fiscal cliff have made little progress, with the MSCI All-Country World Index (MXWD) losing 0.4 percent.

“MegaFon is declining today with the rest of Russian stocks as global investors are concerned with the fiscal crisis in the U.S. and reduce their exposure to emerging markets,” Luis Saenz, head of equity trading at BCS Financial Group, said by phone from London. “MegaFon is a great company, while the history of Russian IPOs shows it’s often cheaper to pick shares from the secondary market after the offering.”

MegaFon’s shares could rebound in the next week on the prospect of its inclusion in the MSCI Russia Index (MXRU) because of the company’s size and liquidity in the stock, Saenz said.

Excluding MegaFon, IPOs in Europe, the Middle East and Africa this year raised $10.6 billion, less than a third of what companies did in the same period in 2011, Bloomberg data show.

Network Expansion

The IPO is part of a shareholder agreement reached in April with Alisher Usmanov, the Russian billionaire who controls MegaFon, to resolve disputes between Stockholm-based investor TeliaSonera (TLSN) AB and the venture’s local owners. Usmanov will keep a stake of about 55.8 percent and TeliaSonera will retain a 29 percent holding, Moscow-based MegaFon said in a statement today.

Photographer: Alexander Zemlianichenko Jr./Bloomberg

Mobile devices and prices sit on display inside an OAO MegaFon store in central Moscow, Russia. Close

Mobile devices and prices sit on display inside an OAO MegaFon store in central Moscow, Russia.

Close
Open
Photographer: Alexander Zemlianichenko Jr./Bloomberg

Mobile devices and prices sit on display inside an OAO MegaFon store in central Moscow, Russia.

MegaFon and TeliaSonera sold a combined stake of about 15 percent in the IPO, which is the biggest by a Russia company since United Co. Rusal (486)’s sale almost three years ago. MegaFon will use its proceeds to repay or refinance debt and to expand its network.

MegaFon said the IPO gave it a value of about $11.1 billion. That valuation excludes the shares it holds in its treasury. The size of the IPO offering excludes the so-called overallotment option to cover extra demand, MegaFon said.

The sale comes on the heels of an offering by another phone carrier, Telefonica Deutschland Holding AG, which raised 1.5 billion euros ($1.94 billion) in Europe’s largest IPO this year.

“Selling shares at the bottom of the range still could be considered a success because the company was late coming to the market and the market conditions weren’t favorable for any IPO of this size,” said Evgeny Golosnoy, an analyst at IFC Metropol in Moscow. “The price range was quite high, and even its low end implied almost no discount to established peers.”

Russia Competition

Russian mobile market will grow about 5 percent this year to $27.6 billion and is set to expand at the same pace through 2015, said Anton Pogrebinsky, an analyst at research firm AC&M Consulting in Moscow. The share of non-voice services, including data transmission, is set to increase from 20 percent this year to 30 percent in 2015, he said.

“While MegaFon may grow faster than the market, the sector has matured and the peak of its rapid growth is in the past,” Pogrebinsky said.

Russia’s mobile penetration was 161 percent at the end of September, according to AC&M, meaning there are more mobile- phone connections than people. MegaFon had 62.8 million users in Russia at the end of the third quarter compared with MTS’s 70.7 million subscribers and 56.2 million customers using VimpelCom in Russia, according to AC&M.

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 later 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.

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

To contact the reporter on this story: Ilya Khrennikov in Moscow at ikhrennikov@bloomberg.net Ruth David in London at rdavid9@bloomberg.net

To contact the editors responsible for this story: Kenneth Wong at kwong11@bloomberg.net Jacqueline Simmons at jackiem@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.