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. Last Updated: 07/27/2016

Sistema Mulls Move Into India

Russian telecoms giant Sistema is considering large purchases in Ukraine and Kazakhstan and a $450 million acquisition in India, the company said in a stock prospectus sent to investors.

Sistema signed a nonbinding agreement to acquire 49 percent of the Indian provider Aircel Televentures, according to the prospectus, part of which was obtained by The Moscow Times. The agreement also gave Sistema an option to increase its stake in Aircel to 51 percent free of charge pending changes to Indian legislation on foreign ownership.

Sistema is in the midst of an initial public offering on the London Stock Exchange that could bring in a record $1.55 billion. The company is widely expected to use the funds to bid for the government's 75 percent stake in fixed-line monopoly Svyazinvest.

Economic Development and Trade Minister German Gref said Thursday that the government had agreed to sell the state's entire stake in Svyazinvest this year.

But Sistema might also use money raised in the IPO to bid for Kazakhtelecom or Ukrtelecom, according to the prospectus, Bloomberg reported. Ukraine has put on hold plans to privatize its 42.3 percent stake in UkrTelecom, the country's fixed-line monopoly.

Sistema declined to comment. But a source with knowledge of the Aircel deal said a move into India is still highly speculative and would be unconnected to the IPO.

Sistema will use "debt financing with the Russian government, involving a swap of some of India's sovereign debt to Russia to Sistema," the prospectus said without giving more details.

"This potential deal has nothing to do with the current offering," the source said. "The agreement is only preliminary and would not result in any equity investment by Sistema. It relates to a potential exchange for debt owed to the Russian government."

President Vladimir Putin visited India in early December and signed a declaration with Indian Prime Minister Manmohan Singh that they said would help boost bilateral trade to $5 billion. India's state-run oil company, ONGC, has a stake in an oil project off the coast of Sakhalin and is interested in acquiring a stake in Yuganskneftegaz, the key Yukos unit that was confiscated and sold to state-owned Rosneft last year.

"Sistema is very much interested in expanding outside Russia," Alfa Bank analyst Andrei Bogdanov told Reuters. "The Indian market fits their business strategy very well -- a large market, low penetration, relatively low competition. And Sistema has always been good at setting up local partnerships."

Some analysts said details of the prospectus show that Sistema is looking at alternative investment opportunities in the event that it fails to acquire Svyazinvest.

"This small paragraph in their prospectus highlights a very important consideration, namely, should they fail to acquire Svyazinvest, they will have more than $1 billion sitting there waiting to be put to a productive use," said Alex Kantarovich, chief strategist at Aton. "The danger is that they will misallocate these resources, which is something completely normal for conglomerates to do: They misallocate resources, and destroy value."

Svyazinvest controls long-distance fixed-line monopoly Rostelecom, several regional telecoms and a number of providers.

Sistema, whose assets range from telecoms to computers, will likely face competition for the stake from Alfa Group and Telekominvest.

Sistema's most valuable asset is Mobile TeleSystems, Russia's biggest mobile phone company.