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MTS’s Comstar Offer Should Be Rejected, Funds Say

OAO Mobile TeleSystems’ offer for OAO Comstar United TeleSystems is “unfair” and should be rejected, Prosperity Capital and East Capital, the two largest managers of Russia-focused funds, said.

Prosperity and East, which together own 3 percent of Comstar, said an offer by eastern Europe’s largest mobile-phone company for a 9 percent stake at a price of 220 rubles per share undervalues the telephony and internet company. The deal may see MTS pay about $1 billion in cash and stock, the companies said last month.

“We are demanding an improved offer and we will be going to the board of Comstar and its independent directors to reject the current terms,” said Alexander Branis, chief investment officer at Prosperity, which manages about $4.5 billion of assets, in a phone interview this week. “Comstar deserves a premium given its superior growth outlook, scope to improve profitability and lower leverage.”

Moscow-based MTS, which owns about 62 percent of Comstar, is seeking full control to cut costs and tap growing demand for Internet services in eastern Europe. The boards of MTS and Comstar both recommended the deal, the companies said last month.

Jacob Grapengiesser, a partner at East Capital, which oversees more than $6 billion in Russia and central and eastern Europe, said he was against the offer. “It is unfair,” Grapengiesser said in an e-mailed comment today.

Under the merger, Comstar will be folded into MTS and cease to exist as a separate entity. The companies expect to complete the deal, which requires approval from 75 percent of shareholders, in the second quarter of 2011.

Maria Yeliseyeva, head of investor relations at Comstar, said the company won’t comment until the board makes a recommendation on the offer. Comstar fell 2.7 percent to 188.99 rubles at the close in Moscow trading. Its global depositary receipts in London fell 1.3 percent to $6.04.

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