On April 3, there were a number of media reports that MTS had made a USD 1 bn offer to acquire 97% share in SMARTS, the seventh largest Russian mobile operator in terms of the subscriber database. The said amount includes the company’s debt of USD 200-250 mn.
SMARTS has recently been under pressure and the company’s management charged the Sigma Group of an attempted raid. A criminal case was initiated against the company’s founder Gennady Ilyushin, currently being tried by the Basmanny Court in Moscow. Despite all of this, the company has been put up for sale, and in late 2007 its shareholders received a USD 750 mn offer from VimpelCom.
However, the deal has yet to get off the ground, since VimpelCom made a legally-based obligatory offer to SMARTS’s minority shareholders, which was accepted by VolgaTelecom. SMARTS then opted to go public and VolgaTelecom is appealing this procedure in court.
The potential acquisition is extremely positive as this could translate into one of few remaining chances for MTS to maintain its leadership status in CIS. VimpelCom is merging with Golden Telecom, and this push MTS to the second place according to revenue in FY 2008.
At the same time, MTS already has had an unpleasant experience of a disputable asset acquisition: in late 2005, MTS approached the Kirghiz market by acquiring 51% share in Bitel. A few days later, the company’s office in Bishkek were raided, and the Russian mobile operator lost control over the assets. Later on, MTS wrote off the funds spent to acquire 51% of Bitel’s shares and USD 170 mn - the value of the remaining 49% of the company’s shares.
Given the ambiguity of the asset, we are neutral on this development. However, overall, we are upbeat on SMARTS’s takeover. Needless to say, MTS’s shareholders are to stand to gain from such transaction unless this deal involves additional risks.
We reiterate our Buy recommendation for MTS’s shares with a target price of USD 18.22 per share.
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