Usmanov Spurns IPO Proceeds for Grip on Technology

Alisher Usmanov didn’t receive a cent from the $1.7 billion London share sale of his mobile operator OAO MegaFon (MFON), nor did he pocket a dime from the $1 billion initial public offering of his Internet company Mail.ru Group Ltd. (MAIL) two years ago.

The commodity billionaire has a different reason for IPOs. He’s used the deals to let partners cash out and increase his control over technology companies, and emerged as Russia’s wealthiest person this year.

The MegaFon IPO marks the latest success for the 59-year- old Uzbekistan-born businessman, who built a fortune in iron ore and steel assets while helping Russian President Vladimir Putin’s team in the early 2000s recover natural-gas assets spun off earlier by OAO Gazprom’s management.

Usmanov’s timing has paid off. He bought into MegaFon in 2007 as Dmitry Medvedev prepared to take over as president from Putin, with innovation as the keystone of his economic program.

“Usmanov positioned himself as a businessman creating an innovative technology holding company that fits with Medvedev’s agenda,” Stanislav Belkovsky, a Moscow-based political analyst, said by telephone.

Shifting from commodities to technology, Usmanov is riding a wave of mobile Internet usage. Mail.ru runs Russia’s biggest e-mail service, social networks and online games.

Twitter, Jobs

Medvedev was the first Russian leader to set up a Twitter account and met Apple Inc. founder Steve Jobs in person in the U.S. He oversaw the creation of the Skolkovo high-tech center, a Kremlin-backed version of Silicon Valley.

Usmanov’s telecommunications, Internet and media assets now account for more than half of his $17 billion fortune, while the rest comes from his iron ore producer Metalloinvest, 4 percent of Russian miner OAO GMK Norilsk Nickel, 30 percent of the Arsenal Football Club and cash, including proceeds from the sale of shares in Facebook Inc. (FB), according to Bloomberg Billionaires Index.

His next IPO may be also in technology. Usmanov’s UTH Russia television company, which brought Walt Disney Co. (DIS) into a country-wide channel last year, has been considering a share sale since 2011. UTH’s press offices declined to comment.

Elena Martynova, spokeswoman for the billionaire’s USM Holding, declined to comment on Usmanov’s plans.

‘White Knight’

At MegaFon, Usmanov took on the role of a “white knight,” buying out “murky” shareholders battling with billionaire Mikhail Fridman’s Altimo in 2007 and 2008, said Evgeny Golosnoy, an analyst at Moscow-based IFC Metropol.

MegaFon was formed in 2002 through the merger of Russian mobile assets held by Sweden’s Telia, Finland’s Sonera and funds controlled by Danish lawyer Jeffrey Galmond. A Zurich-based arbitration tribunal concluded in May 2006 that then Communications Minister Leonid Reiman was the beneficial owner of Galmond’s IPOC fund, which was at the heart of a four-year battle with Altimo over a 25 percent stake in MegaFon. Reiman repeatedly denied the connection to IPOC.

“There was a shareholders’ deadlock in MegaFon with three major owners,” said Evgeny Dumalkin, a vice president at Moscow-based Altimo. “Usmanov showed himself to be a wise negotiator, agreeing on a compromise that fit both us and TeliaSonera.”

In April, Fridman exited MegaFon, Usmanov gained control and TeliaSonera AB (TLSN) agreed to reduce its stake via the IPO.

Peace-Maker

“Usmanov has built a reputation for resolving difficult situations and peace-making in corporate conflicts,” said Alexander Vengranovich, an analyst at Otkritie Capital.

Usmanov has been dogged by a six-year prison term he served in Uzbekistan on a 1980 conviction for fraud and embezzlement. In 1989, a Soviet court expunged his record and in 2000 Uzbekistan’s Supreme Court ruled there were no constituent elements of crime, according to MegaFon’s IPO prospectus.

The MegaFon deal helped restore peace at the main mobile service provider to government entities and state companies, with close ties to the so-called St. Petersburg group, according to Anna Kurbatova, an analyst at BCS Financial Group, referring to officials and businessmen who followed Putin from his hometown to Moscow.

The IPO came under threat this year when Goldman Sachs Group Inc. withdrew as an adviser, without publicly giving a reason. Prior to the sale, MegaFon appointed Paul Myners, a former U.K. Treasury minister, as an independent director, to reassure investors about corporate governance.

Biggest IPO

MegaFon recovered to hold the biggest IPO from Russia since United Co. Rusal’s $2.2 billion share sale in January 2010. The deal may worth as much as $1.86 billion if the overallotment option is used in full, according to Bloomberg calculations.

Usmanov’s move into technology appears to serve the goals of Medvedev’s government, and state banks have willingly funded his projects, Belkovsky said. Usmanov’s 34 percent of MegaFon is pledged as collateral to OAO Sberbank (SBER) through 2018, the mobile company said in the prospectus.

Since Usmanov bought into MegaFon four years ago, the company has spent 240 billion rubles ($7.7 billion) developing its network infrastructure and, according to researcher AC&M Consulting, became a leader in mobile data transmission in the country. This year, Usmanov also acquired Scartel, which is developing a fourth-generation network in the country.

MegaFon and Usmanov are now finalizing the $1.3 billion acquisition of a 50 percent stake in Russia’s largest handset retailer Euroset, the other half of which is owned by Fridman’s mobile operator VimpelCom Ltd. (VIP)

OAO Mobile TeleSystems (MBT), the largest mobile company in Russia and controlled billionaire Vladimir Evtushenkov’s AFK Sistema, has expressed concern that a Euroset deal could hurt competition in retail sales.

Facebook, Groupon

At Mail.ru, the exit of two of its co-founders in and after the November 2010 IPO allowed Usmanov to gain a voting majority. The company’s charter bans foreign shareholders from owning more than 45 percent. With a market value of $6.5 billion, Mail.ru has been paying generous dividends to shareholders as it sells minority stakes in Facebook, Groupon Inc. (GRPN) and Zynga Inc. (ZNGA)

Usmanov, who held Facebook shares via Mail.ru and his Digital Sky Technologies fund, has sold $1.4 billion of shares in the social networking site since its May IPO, according to Bloomberg Billionaires Index. In an interview broadcast on Russian television in April, Usmanov said DST persuaded Facebook founder Mark Zuckerberg to sell it shares in 2009 by waiving voting rights.

MegaFon shares rose 1.8 percent to $20.87 a depositary receipt at 10:23 a.m. in London today, while Mail.ru added 1.2 percent to $32.65.

“Usmanov successfully diversified away from the raw materials sector,” said Metropol’s Golosnoy. “It’s quite unusual for a Russian oligarch.”

To contact the reporters on this story: Ilya Khrennikov in Moscow at ikhrennikov@bloomberg.net; Alex Sazonov in Moscow at asazonov@bloomberg.net

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

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