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. Last Updated: 07/27/2016

Shareholders Could Scuttle Telecom Deal

One week after Alfa-Eco announced its purchase of a 25.1 percent stake in Megafon, shareholders of the No. 3 mobile operator distributed a statement saying the deal violated agreements among its shareholders.

In the short message, shareholders complained that they learned about the sale when they read about it in the press.

"Closure of the [Megafon] deal will lead to a violation of agreements between Megafon shareholders," the statement said. "[We] did not give our approval of the deal."

In a research note Tuesday, Renaissance Capital said Megafon shareholders allege that LV Finance's sale of the stake to Alfa violated noncompetitive clauses in shareholders' agreements, due to Alfa's stake in rival Vimpelcom, and they may challenge the deal in court.

Alfa's announcement of the Megafon purchase sent shockwaves through the telecoms sector last week because the company already owns a 25 percent stake in Megafon rival Vimpelcom, the country's No. 2 operator. The two blocking stakes would give cash-rich Alfa a great deal of weight in the market.

Renaissance said it is quite likely that Megafon's shareholder agreement requires this kind of deal to be approved by shareholders.

"The move was not unexpected," the investment bank wrote, adding that "the likely purpose of Alfa's purchase of the Megafon stake was to increase its negotiating power ahead of the privatization of Svyazinvest."

A secretary at Alfa-Eco said all of its management is away on vacation and would be unavailable for any comment until September.

A spokesman for LV Finance, the company that formerly owned the stake through CT Mobile, said the two sides consider the deal closed.

"Megafon shareholders [including CT Mobile] had made many agreements," the LV Finance spokesman said, requesting not to be named. "Nevertheless, from our perspective the deal is legally clean and closed."

Legal issues surrounding the violation of agreements between CT Mobile and other Megafon shareholders will be dealt with by the stake holder's new owner, Alfa, LV Finance said.

Megafon shareholders could take other steps to block the deal, but for the moment the protest letter has been the only sign of cold feet.

Alexei Ionov, a spokesman at Telecominvest, which holds a 31.3 percent stake in Megafon, said shareholders have agreed to keep silent, barring the statement issued Monday.

Analysts did not exclude the possibility that Megafon shareholders will ultimately be able to scuttle the deal.

"It all depends on how strongly they don't want [Alfa as a shareholder]," Troika Dialog's Yevgeny Golossnoi said.

"They could take two roads," he said. "Either the Anti-Monopoly Ministry won't allow the deal. Or, if there was an agreement with LV Finance requiring it to initially offer the stake to other shareholders, they [Megafon shareholders] could go to court [to block the deal]."

Besides Telecominvest and CT Mobile, Megafon shareholders include Nordic TeliaSonera with a 35.6 percent stake, IPOC International Growth Fund Ltd. with 6.5 percent and WestLink Ltd. with 1.5 percent.