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. Last Updated: 07/27/2016

Deutsche Offers 10% of MTS to Sistema

Deutsche Telekom said Wednesday it would place a 5 percent stake in Russia's MobileTeleSystems and give co-owner Sistema an option to take control of the country's top cell-phone group.

Deutsche Telekom, which wants to reduce its 40.1 percent MTS stake as part of an attempt to cut a 61.1 billion euro ($67.4 billion) debt pile, said it planned to make the placing in the fast-growing Russian company when market conditions allowed.

The deal also gives Russian investment group Sistema, which already owns 40.4 percent of MTS, until September 2003 to buy another 10 percent stake and clinch control of the cash-generative Russian group, one of a handful of Russian firms to earn a U.S. listing.

The two-part deal could raise nearly 640 million euros for the German group, based on current market values.

Industry sources say months of talks between the two sides to cut the German group's MTS stake to a strategic 25.1 percent have been tough.

"The purchase price ... is dependent on the date of exercise and calculable by reference to the market price of MTS shares at such time," Sistema said in a statement.

Vassily Sidorov, the first vice president of Sistema's telecoms management arm, said part of the deal allowed both sides to be protected against market volatility.

"It is a market-based pricing mechanism," Sidorov said. "There are other components to the deal which make it sensible for both parties."

Moscow-based Sistema, a sprawling conglomerate with interests stretching from telecoms and banks to oil, and its German partner said they had signed a shareholder agreement to guarantee Deutsche Telekom's strategic position within MTS.

The powerful business group has promised the German telecoms giant rights to board representation and management appointments at MTS.

"There are certain aspects regarding board composition, regarding some key decisions for the company. There are certain aspects relating to management appointments within the company.

"They will reflect that Deutsche Telekom has not become, all of a sudden, a minority shareholder but is a strategic partner in the company," Sidorov said.

Sistema, which said earlier this year it planned a $300 million bond issue, announced last week it had given Deutsche Bank and ING a mandate for an international bond. But Sidorov said the exercise of the option was not entirely tied to the bond issue.

"A bond is not the only way of raising funds -- so we are not 100 percent tied to the success of the Eurobond. But they are linked," Sidorov said.

However, some bond investors said they were wary about putting cash into a holding company in a country where business practices can be opaque.

"I am sure it will be a small bond. It would surprise me if it were more than $150 million," said one emerging bond fund manager in Paris.

MTS's market capitalization, which has almost doubled since its listing, stands at around $4.25 billion, implying a value of around 640 million euros for Deutsche Telekom's 15 percent stake. MTS's shares closed at $42.65 in New York on Tuesday, just under last week's record high of $44.17 high.