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. Last Updated: 07/27/2016

Analysts Take Pulse of Svyaz Plans

Government plans to transfer its controlling stake in long-distance operator Rostelecom to the state-owned holding company Svyazinvest, creating a mega-holding in the telecommunications industry, drew a mixed market response Friday.


Several stakes, expected to total about 25 percent of the new $4 billion holding company, will be offered to portfolio investors within the next few months in the hope of raising $1 billion to $2 billion for Russia's cash-strapped budget, news reports quoted privatization officials as saying.


The share transfer will give Svyazinvest, created last year to hold the government's shares in 85 regional telephone companies, a near monopoly in both long-distance and regional markets. The effect on Rostelecom is less clear, but at least two Moscow brokerages downgraded its stock amid the current uncertainty.


Such a deal -- the all-important details of which are to be finalized in the coming weeks -- would amount to a massive restructuring of one of Russia's most promising and profitable industries, as well as a creative maneuver to sell off one of the government's few remaining prize assets to raise desperately needed privatization revenue.


Rostelecom rebounded more than 4 percent in heavy trading Friday, closing at $2.58, after falling more than 5 percent after the announcement Thursday. But market watchers expressed mostly optimism about Svyazinvest's long-term prospects.


"Its long-term competitive position looks great," said James Fenkner, head of research with CentreInvest Securities.


"It looks like a good structure," said Alex Knaster, managing director of CS First Boston in Moscow, who added that the merger could strengthen both companies.


"One of the problems of Svyazinvest without Rostelecom was the big issue of competing licenses," Knaster said.


The government announced last year that Svyazinvest, when in operation, would receive full long-distance licenses.


For now, Rostelecom controls about 90 percent of the domestic long-distance market and 85 percent of international traffic. With business booming, Rostelecom net profits tripled in 1995, to $247.2 million, from $73.5 million in 1994.


Sector analysts said the transfer would "sweeten the deal" for bidders in a forthcoming Svyazinvest tender.


"The aim of this operation is clear," said Konstantin Chernyshev, a senior analyst with Rinaco-Plus brokerage. "Adding Rostelecom undoubtedly makes Svyazinvest more attractive for investors."


A December 1995 investment tender for a 25 percent in Svyazinvest, won by Italian telecoms group STET with a bid of $1.4 billion in cash and investment, came to nothing when STET withdrew after a dispute over the registration of the holding company's subsidiaries.


The head of STET's Moscow office, Carlo Del Bo, said Friday that he was not yet familiar with the details of the stock transfer. But he said STET is ready to play a role in the new company if Russia wants "a telecommunications partner" to develop its infrastructure.


While investors have in general been wary of what many view as Svyazinvest's unwieldy formation, foreign investors have snapped up about 30 percent of Rostelecom's stock. A controlling stake of 51 percent is in government hands, and the remaining shares are held by employees and Russian investors.


According to a September report by Brunswick Brokerage, Rostelecom's capitalization of more than $2 billion made it the fourth largest company trading in Russian markets, excluding the national gas monopoly Gazprom, and its stock amounted to 9 percent of overall market capitalization.


Several Moscow brokerages, including Troika-Dialog and CentreInvest, downgraded Rostelecom on Friday, citing fears that revenue from long-distance traffic could be redirected to local telecommunications companies.


"There is a great deal of uncertainty now because the financials of cash-cow Rostelecom are now co-mingled with the cash-starved regionals," Fenkner said. Analysts also sounded a warning concerning the structure and management of the enhanced Svyazinvest.


"This is just a transfer of ownership, not yet a merger," said one senior Western analyst, who did not wish to be identified. "All depends on who will manage Svyazinvest and how they will do it."


Doubts also linger as to the feasibility of the project in terms of reaching the government's 12.8 trillion rubles ($2.3 billion) revenue target from privatization this year. In the first nine months of the year, privatizations generated only 734 billion rubles of revenue, Interfax reported.


"It is unclear how you could succeed before the end of the year to merge the two companies, float their shares, find a buyer and strike the deal," commented the newspaper Kommersant Daily.


Chernyshev also said the timing of the sell-off might not be the best if the government aims to attract strategic investors because it will have to compete with the privatizations of European giants Deutsche Telekom and France Telecom.