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. Last Updated: 07/27/2016

Beeline's Stock Issue a First for Russia

A start-up Russian telecommunications company is hoping to raise $90 million through an initial public offering and stock sale in the United States by the end of the year, the first Russian firm to tap directly the world's largest equity market.

Elizabeth Hamburg, director of corporate finance for the mobile phone market leader VympelCom -- better known by its trademark Beeline -- said an application for public placement of Level 3 American Depositary Receipts, or ADRs, on the New York Stock Exchange had been filed with the U.S. Securities and Exchange Commission, and that approval was expected before the end of the year.

One investment banking specialist in Moscow said VympelCom's offering would be the first of its kind by a Russian company, at home or abroad.

"There isn't a strong enough market to support [initial public offerings] in Russia," said the banker, who asked not to be identified. "Ninety million dollars couldn't be absorbed by the local market."

Instead, VympelCom -- founded just three and a half years ago -- will be turning to deep-pocketed foreign investors to raise money to repay debts and acquire new technologies.

"We are primarily looking to place these shares with institutional investors in the U.S., the U.K. and Europe," said Alan Apter, co-head of investment banking for Renaissance Capital, one of the underwriters of the issue.

Most of the $90 million will be raised through new issues of ADRs although some ADRs will be converted from existing shares in the privately held company.

Communications Minister Vladimir Bulgak touted VimpelCom's offering as a first example of a growing focus by international capital markets in the Russian telecommunications sector.

"One company is not enough, we need more," Bulgak told a press conference Friday.

Conversion into ADRs makes Russian shares saleable to international investors in dollar denominations. The SEC has already given approval to 11 Russian companies for issue of Level 1 and Level 2 ADRs. But only Level 3 ADRs, which require three years of accounting to U.S. standards, can be used to raise fresh capital.

If SEC approval is received, VympelCom will be ready to take orders from investors within two months. A decision from the SEC should come through by the end of October, sources involved with the deal said.

A Moscow investment banker with knowledge of SEC practice said refusal of VympelCom's application was very unlikely.

"Foreign issuers typically pre-clear their filing with the SEC, in advance of the actual filing. It amounts to an informal approval process," he said.

VympelCom, established in 1993, has expanded rapidly and now controls 59 percent of the Moscow mobile phone market, ahead of competitors Moscow Cellular Telephone and Moscow Telephone Systems, or MTS. VympelCom is 52 percent-owned by Dmitry Zimin, former senior manager of Russia's MINTZ military radio institute. Its other major shareholder is the U.S. company FGI Wireless, whose sole activity is its VympelCom investment.

Revenue in 1995 was $100.9 million, with $27.6 million net income. In the first half of this year the revenue and net income figures were $84.4 million and $18.8 million respectively.

Vladimir Mesherekov, a telecommunications specialist with Coopers & Lybrand in Moscow, said the potential market for mobile phones in Russia is huge.

He said he doubted, however, that VympelCom would maintain its lead on the market.

"VympelCom went ahead because of its superior technology, but now MTS is starting to catch up thanks to its lower prices," he said. "The MTS technology has the advantage of excluding exploitation of a mobile number by a non-sanctioned user."

VympelCom is hoping to use the money raised in the offering to develop Personal Communications Services, a high-frequency cellular system.

Chris Sturdy, head of ADRs in the London office of the Bank of New York, said it was not surprising that a small company such as VympelCom would issue Level 3 ADRs before giants like LUKoil. The Russian oil major announced this summer that it was aiming for a Level 3 issue.

"VympelCom is a single-product, service company whose accounts can be matched to U.S. GAAP [Generally Accepted Accounting Principles] standards very easily. U.S. GAAP for an oil company requires an audit of reserves, and other complications," Sturdy said.

Chris Buckley, an oil analyst with Morgan Stanley in London, said LUKoil could get its three-year GAAP for Level 3 ADRs by the middle of next year.

"LUKoil can get its 1994 GAAP accounting this year, then 1995 accounting at the start of next year and 1996 accounts by May or June," he said