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. Last Updated: 07/27/2016

City May Pay Full Price in MGTS Bid

The city of Moscow may have to pay full market price for a controlling stake it is seeking in the Moscow City Telephone Co., a shareholder monitoring the controversial issue said Friday.

Leonid Rozhetskin, investment banking managing director at MFK-Renaissance bank, which indirectly holds a stake in the Moscow City Telephone Co., or MGTS, said lawyers were discussing payment terms for an authorized 50 percent increase in shareholders' capital.

They are trying to secure a deal ahead of an MGTS board of directors meeting on the issue later this month.

Shareholders have objected to the capital increase, since it would dilute their stake.

They also worry that, while current corporate legislation would forbid an exclusive offering to the city of Moscow on preferential terms, an older law, which would permit this, might take precedence. They fear the stake will be handed over at a bargain price.

Rozhetskin told reporters a Moscow city holding acquired a stake in MGTS during a privatization auction in 1995 and had the right to acquire the entire new issue, but could be obliged to pay the market price.

"The one issue that remains open as I understand it, and it is extremely important, is what price the winner of the investment tender will pay on subscription to these newly issued shares," he said.

Foreign investors have been extremely frustrated by the MGTS dispute, which is seen by some as a test of shareholder rights in Russia's unruly economy.

Others regard it as a case of poor due diligence on the part of potential investors who should have been aware of the law governing the privatization auction three years ago.

Moscow city's holding, the Moscow Committee for Science and Technology and Co., acquired 25 percent of MGTS voting stock in the 1995 privatization.

With that, it obtained the right to force and acquire at par value an additional share issue which would give it a controlling stake on condition of a $106 million investment.

Major shareholders have not disputed that some major investment has been made. Rozhetskin said the investment could go towards the cost of acquiring the additional stake.

But the right to get those shares would be illegal under current law, which assures all shareholders right of first refusal to acquire new shares.

Officials and consultants of government holding Svyazinvest, the largest current MGTS shareholder, have said the original privatization law would take precedence.

Rozhetskin said the Moscow committee's acquisition of the shares was legal under the privatization terms but the price of acquisition was open to negotiation, despite also being covered by privatization terms.

"No one has been able to tell me whether [new corporate legislation] applies retroactively to a transaction done before, but it does have the force of law," he said.

Rozhetskin said MFK-Renaissance, as part of the Mustcom group which acquired a 25 percent stake in Svyazinvest last year, was not directly taking part in MGTS negotiations.

"We are not involved. We are just monitoring as interested investors in Mustcom and Svyazinvest," he said.