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Politics, military’s opposition delay Rostelecom’s sale by up to 2 years

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MOSCOW, Oct 6 (PRIME) -- A poor market and objections of the military have prompted the Russian government to postpone the sale of its 46.99% common stake in telecom giant Rostelecom, which is on the 2014-2016 privatization list, with analysts saying the delay may last for up to two years.

The Defense Ministry has rejected a privatization plan under which Rostelecom was supposed to split the business in two with one of the parts servicing only the military and special services under a shareholder agreement guaranteeing quality, business daily Vedomosti reported quoting sources in September.

The ministry, backed by President Vladimir Putin, wants to create a network of its own, while using Rostelecom facilities in the process.

Apart from government, state-owned Vnesheconombank (VEB) intended to sell its 4.13% common stake in the operator.

Nordea Bank’s chief analyst Valery Yevdokimov said investors had a reasonable guess about delay with Rostelecom’s privatization in the light of rising political risks this year. The matter was only to find a suitable excuse.

“We may speak about the future sale only theoretically, because current market conditions are unfavorable. At least, big foreign investors may wait for more details about new possible sanctions, including those linked to the telecommunications industry. Nobody can say now how long we’ll have to wait,” Yevdokimov said.

Alexander Yalygin, analyst at market analysis & consulting department at KIT Finance Ltd., said that the stake may be sold with premium no sooner than in eighteen months or two years, which is the time period needed by the military to create a loop network, ensuring connection between the armed forces and security services.

“This idea is very capital-consuming, and its implementation will take a lot of time. At that, it’s almost impossible to spin the part of special connection off the existing Rostelecom network. If the Defense Ministry does not change its mind, privatization of the operator may turn out to be a pricey and pointless idea,” Gazprombank’s analyst Sergei Vasin said.

The Federal State Property Management Service’s Director Olga Dergunova said on October 2 that the agency is still preparing the sale. In September, she said that the government would sell a stake in Rostelecom no sooner than in 2015.

Apart from VEB and the government, which owns the stake in Rostelecom via the property agency, large shareholders include Rostelecom’s subsidiary Mobitel with a 13.99% common stake, and the Russian Direct Investment Fund owning a 1.13% common stake.

The government earlier planned to raise about 200 billion rubles from the sale of its stake in the operator. “The government is interested in selling its stake in Rostelecom at the highest possible price. The company’s capitalization has dropped 16% since the beginning of the year. The sale of assets at such a discount is economically unreasonable,” Yalygin told Russian Connection.

Among potential buyers of the stake, Yalygin mentioned Yury Kovalchuk, the main shareholder of Bank Rossiya, who actively cooperates with T2 RTK Holding, a joint venture between Rostelecom and regional operator Tele2. The country’s top three cellular operators – MTS, MegaFon and VimpelCom – may also bid for the stake, the analyst added.

“Usually, the participation of big investors in the capital of a company may imply better conditions for obtaining funding for a current business activity and a long-term business development. However, it’s still too early to talk of such an advantage now because of sanctions,” Nordea Bank’s Yevdokimov said.

Impact on quotes

“Rostelecom’s shares have been in a medium-term rising trend after hitting a local bottom in early May,” Nordea Bank’s analyst said.

On October 2, Gazprombank set the target price of Rostelecom’s common shares at 150 rubles and of preferred shares at 107 rubles with a potential growth by 45% and 49% respectively. The bank saw the both types of securities perform better than the market. The operator’s common shares closed on October 2 at 101.00 rubles, and preferred stock was at 69.12 rubles.

“The delay in selling the stake is not a surprise for the market. However, we may expect some pressure exerted on the operator’s shares due to the government’s tougher position regarding plans and conditions of privatization,” Gazprombank’s Vasin said.

In June, First Deputy Finance Minister Tatyana Nesterenko said that the government had decided not to sell the stake in Rostelecom in 2014 as planned due to the lack of certainty about its value. Later Economic Development Minister Alexei Ulyukayev said that the government would not abandon plans to sell the stake.

The capitalization of Rostelecom, listed on the Moscow Exchange, currently amounts to about 270 billion rubles.

(39.6980 rubles – U.S. $1)

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