Interfax reported Friday evening that VimpelCom, the second largest wireless company in the CIS, made an official takeover offer to shareholders of SMARTS, which ranks seventh among the domestic wireless companies in terms of subscriber base. The entire company is valued at $500-550 mln. Investors have not yet received any official comments from either party.
SMARTS had 3.94 mln users as of the end of October, and the shareholders valued the company at over $1 bln. Furthermore, SMARTS has been under pressure from shareholders, since the company's management accused the Sigma Group of a raider attack. In addition, criminal charges have been pressed against the company's founder Gennady Kiryushin, and the case is being heard at the Basmanny Court of Moscow.
We view this development as extremely positive for VimpelCom, and moderately negative for MTS. If the merger gets off the ground, VimpelCom could strengthen its positions in Russia, and rank first in terms of subscriber base on the domestic market. Assuming that VimpelCom also takes over Golden Telecom, these developments could turn MTS into a "#2 company" in terms of both market cap and revenue, while the synergy effect in the Volga region could boost subscriber base growth.
Meanwhile, we cautiously note that SMARTS is a rather controversial asset. MTS has already entailed serious losses (the price of the error was $320 mln) as a result of an asset acquisition with a disputable legal status, and it is critically important for VimpelCom to realize that SMARTS is an unusual case. The company will put not only 50% of its 9M07 net profit at stake, but also its reputation, especially among US-based investors, unless agreements with the Sigma Group are made.
MTS shares currently hold a fairly strong upside. Our recommendation is Buy with a target price of $18.22 per share.
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