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. Last Updated: 07/27/2016

Telecoms Merger Halted by Pensioner

A lawsuit filed by a solitary hostile shareholder has brought to a grinding halt a planned $450 million merger of three St. Petersburg telecoms.

The merger of St. Petersburg Telephone, or PTS, St. Petersburg Intercity and International Telephone, or SPMMT, and St. Petersburg Telegraph is key to the ambitious national restructuring plans of telecoms holding Svyazinvest.

But now a St. Petersburg court has granted an injunction halting further work on the merger of SPMMT and PTS f the larger two companies in the three-way union f pending an Oct. 12 hearing of a suit filed by Sergei Moiseyev, a private SPMMT shareholder.

Moiseyev's suit claims that the merger will dilute the value of some shareholders' stock.

Moiseyev could not be reached for comment. Olga Voloshina, an SPMMT spokeswoman, said he was a pensioner who had never worked in the local communications industry as far as her company knew.

The business newspapers Kommersant and Vedomosti, meanwhile, suggested the mysterious Moiseyev's suit might have been planted by SPMMT management who oppose the merger. Kommersant reported some disgruntled managers worried they would not find a place at the consolidated company, while Vedomosti reported several senior managers had already resigned.

Be that as it may, Moiseyev's math f his suit argues that preferred SPBMMT shareholders have been offered less than half the value of their stock in exchange for stock in the new company f is not so easily dismissed, according to the United Financial Group, a Moscow brokerage.

"St. Petersburg MMT contributed over half the 1999 group revenues and three quarters of the net profit, but St. Petersburg MMT shareholders will hold only about 20 percent of the merged group," UFG said in a report Friday.

However, UFG added that PTS also brought much to the merger: PTS, unlike SPMMT, has coveted last-mile access to users. It also has spent five times as much over the past three years on capital expenditures, UFG said.

If Moiseyev's lawsuit is successful, more will follow, said Alexander Uzlov, head of SPMMT's advisory board, in a recent interview.

"The worst thing is that a chain reaction of lawsuits and serious court battles is possible," Uzlov said.

PTS runs St. Petersburg's city telephone network, while SPMMT provides long-distance services for St. Petersburg's 5 million or so residents. In addition to its traditional telegraph and telex services, St. Petersburg Telegraph runs a range of Internet services.

PTS last year made about $55.7 million in revenues, while SPMMT made about $58.1 million and St. Petersburg Telegraph a mere $1.4 million, according to company data published by UFG.

Uzlov said the purchase price of preferred PTS shares listed in the merger agreement was 2 rubles, while the purchase price of SPMMT shares was 8 rubles.

If the swap ratio corresponded to the purchase price, it would be 4 to 1.

But according to the merger agreement, the shares would be swapped using a swap ratio of 1.721 to 1 f implying less than half the value of the purchase price listed in the agreement.

Dmitry Ankudinov, an investment banker at Renaissance Capital f the financial advisers to the merger f said the share price implied in the swap ratio was a composite of several valuation methods, including "market trading analysis of the shares of each of the companies, comparable companies analysis, discounted cash flow analysis based on projections of each of the company's business plans and asset valuation analysis."

"More than 90 percent of all shareholders that had common and preferred stocks voted positively for the terms of the merger," Ankudinov said.

"I don't think there is something extraordinary that one of the shareholders didn't agree with more then 90 percent of the shareholders, believing that the commercial terms of the merger could be different."

Because two of the nation's two top telecoms leaders f Communications Minister Leonid Reiman and Svyazinvest director Valery Yashin f come from St. Petersburg, along with their strong ally, President Vladimir Putin, the merger carries more weight than any other Svyazinvest initiative.

Moscow analysts said that the suit could affect Svyazinvest's restructuring plans by slowing down the process and perhaps making it more costly.

"Although we do not see the suit as a major threat to the merger, it reveals potential legal pitfalls that could await other regional telecom mergers and shows that the transformation of the telecom industry may not go as smoothly and seamlessly as originally expected by Svyazinvest and the [Communications] Ministry," Yevgeny Golosnoi, a telecoms analyst at Troika Dialog brokerage, wrote in a report this week.

Meanwhile, the absorption of St. Petersburg Telegraph into PTS is going ahead as planned, Svyazinvest public relations director Oleg Mikhailov said in a telephone interview this week.

And both SPB MMT and Svyazinvest have filed countersuits with the Kuibyshev court asking for the injunction to be lifted. Those complaints are due to be heard later this month, Mikhailov and SPMMT press spokeswoman Voloshina said in interviews.

Golosnoi of Troika Dialog said the court would probably rule in favor of the phone companies.

"It will be interesting to see whether Svyazinvest will be able to exert pressure on the court," Golosnoi said in a telephone interview. "I think they will be able to win it in a legal way. ... Judges are not experienced in economics. Svyazinvest and PTS will have enough reasons to persuade the judge [the merger terms are] fair economically."

If the court rules in favor of the companies later this month, then the St. Petersburg merger could be completed by the end of the year as planned, said Uzlov of SPMMT.

"If the ban is not lifted, it will be next year at the very least" before the merger is completed, Uzlov said.

Mikhailov of Svyazinvest said the suit could damage his company and the government f which owns a 75 percent-minus-one-share stake in the holding f by causing the companies' share price to drop and by damaging relations with creditors, who had already been informed of the shareholders' positive decision.

But he said it would not halt the planned Svyazinvest restructuring program, which aims to bring 86 regional telecoms in which the holding has stakes under firmer control.

A preliminary restructuring plan issued this month by a consortium led by Arthur Andersen said a planned auction of a 25 percent-minus-two-shares stake in Svyazinvest should wait until the restructure is complete.

So far, he said, Moiseyev's complaint is the only lawsuit. "We will be more thorough in reviewing the issues [of stock valuations] as the managing organization," Mikhailov said.