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. Last Updated: 07/27/2016

MGTS Share Issue No Surprise to Some

As market players debate whether a proposed new share issue by Moscow City Telephone Co. is a legal or business-savvy move, one question haunts: Why didn't investors know any better?

Some analysts said no one should have been surprised when Moscow City Telephone Co., or MGTS, announced last month that it would increase its authorized capital and hand over the shares to the city government.

The new share issue could dilute minority shareholders, but analysts said the risk of dilution was clear from the company's 1995 privatization.

The Moscow committee for science and technology, which is controlled by the city government, bought 33.3 percent of MGTS common shares in a 1995 investment tender. The terms of the tender require MGTS to grant the city shares equal to 50 percent of outstanding authorized capital, provided it invests $105 million in the company.

"Anyone who knew the privatization terms, and knows how ambitious [Moscow Mayor Yury] Luzhkov and his government are, shouldn't be surprised at all by the dilution," said Andrei Braginsky, an analyst at Skate Investors' Services. "This deal is not a business deal. It's political."

The controversy over the share dilution, which could happen in the next few months, has raised concerns about the lack of corporate governance in Russia and the shaky position of minority shareholders. The move has also tarnished the reputation of MGTS, a leading Russian blue chip stock that is one of the world's ten largest urban telephone companies.

Although some analysts said investors could have found out about the privatization terms had they done their homework, others said the possibility of a share dilution was not mentioned in MGTS's annual reports or prospectus.

The case highlights the lack of transparency in Russia's investment climate, analysts said.

"When you ask for the most blunt information, like an annual report, you still don't get it right away," said Shani Kogan, an analyst at United City Bank.

"To get some information you have to be a shareholder. So essentially, you have to buy stock before you can find out what you're buying."

But instead of heeding warning signals, investors played, and for a while won big, on MGTS stock during the bull market, analysts said.

"MGTS was one of the telecom darling stocks. Everyone was excited and ignored looking at the dangers. Either they forgot or didn't care; but they were sloppy," said analyst Alexander Gunya at Rye, Man & Gor Securities. Foreign investors own 15 percent of the company's shares, while telecom holding company Svyazinvest holds 46 percent.

"The market was booming, and people were making a lot of money with very little going wrong," said an analyst who asked not to be named. "Shareholders have a right to be angry. But they were gambling, and they knew it."

Investors have lost out ever since rumors of the new share issue surfaced at the beginning of the year. MGTS shares closed Monday at $695.00, down from about $900 in mid-January but up from a recent low of $600.

Some analysts said investors may have bet on the city government failing to make its required investment, and that if they did, holding company Svyazinvest would block the deal.

Svyazinvest can still contest the terms of the tender and insist the share emission follow the guidelines of the law on joint stock companies. This law, passed in 1995 after the tender, gives shareholders the first right to buy newly issued shares and specifies shares be sold at no less than a 10 percent discount.

But Boris Jordan, president of MFK-Renaissance investment bank, which is part of a consortium that owns 25 percent of Svyazinvest, said there are no plans to fight the share dilution.

"There was a complete understanding on the part of participants acquiring Svyazinvest that their interest in MGTS would be diluted when the conditions of the ... tender were met," Jordan said on behalf of Mustcom at a news conference Friday.