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. Last Updated: 07/27/2016

Market Split on Sistema Swap

VedomostiVladimir Yevtushenkov
An asset swap between Deutsche Telekom and services conglomerate Sistema would make business sense but looks politically risky and may be unworkable, analysts said Wednesday.

Earlier, the Financial Times Deutschland reported that Sistema had proposed acquiring 10 percent to 20 percent of Deutsche Telekom in return for control of its telecoms arm, whose core asset is Russia's top mobile phone firm Mobile TeleSystems.

A German government spokesman said no official offer had been made. "I cannot comment on it as there is no official offer from Sistema."

Deutsche Telekom declined comment, and Sistema Telecom refused to confirm the report, which was attributed to unidentified sources.

Deutsche Telekom shares rose 0.7 percent to $17.44. The global depositary receipts of Sistema, the listed parent of Sistema Telecom, eased 1.3 percent in London to $26.20.

Analysts said the FTD story, which said talks were at an early stage and might yet fail, looked like a trial balloon to gauge political and investor reaction to a possible asset swap.

"My view is that it's a credible idea, it could happen and it makes sense," said Barry Shumaker, a telecoms sector analyst at Alfa Bank.

They also noted that Ron Sommer, Deutsche Telekom's former CEO, was an adviser to Sistema. Sommer advised private equity group Blackstone on its purchase of a 4.5 percent stake in Deutsche Telekom earlier this year.

"Deutsche Telekom would win an additional growth area to the United States, therefore it would make sense," said Frank Rothauge, an analyst at Sal. Oppenheim in Germany.

Deutsche Telekom has come under pressure after slashing its earnings and sales forecasts for this year and next in August, citing tough domestic price competition in Germany, particularly in the fixed-line telephony and broadband Internet markets.

Poor second-quarter results showed that Deutsche Telekom was no longer growing in its home market, making its international business crucial.

The Times said the asset swap idea was discussed during President Vladimir Putin's October visit to Germany, when he was accompanied by Sistema's main owner, Vladimir Yevtushenkov, and IT and Communications Minister Leonid Reiman.

That, analysts said, suggested there might be support from the Kremlin for a deal, which would allow Yevtushenkov to diversify his business risks.

The German government spokesman said, however, that German Chancellor Angela Merkel and Putin had not discussed the issue.

There is likely to be greater skepticism on the German side, which has already rebuffed Russia's bid to parley a 5 percent stake in EADS into a greater strategic role in the aerospace giant.

"We think that the chance of this happening is unlikely, because the state is afraid of Russia having too much power over key German industries," said Joeri Sels, an analyst at Germany's DZ Bank.

A return by Deutsche Telekom to the Russian market would also raise eyebrows. Only last year it completed the disposal of the 40 percent stake it once held in MTS after writing it off as a non-strategic investment.

The pull out was partly driven by the need for CEO Kai-Uwe Ricke to repair the company's balance sheet after an earlier acquisition spree by Sommer, but also because Telekom had been unable to get control of MTS.

Now the main assets on offer would be Sistema's 53 percent stake in MTS, worth $9 billion, and 51 percent of Comstar, worth $1.5 billion. That works out at 14 percent of Deutsche Telekom's $74 billion market cap.

J.P. Morgan's Hans Wittig said Deutsche Telekom could be tempted by a deal that could boost its sales by 10 percent and its earnings by 15 percent.

But he cautioned that, with Putin due to stand down in 2008, there could be political risks.

Analysts also point out that Yevtushenkov is close to Mayor Yury Luzhkov, whose term expires at the end of next year. "This story indicates a large power change in Moscow City Hall," said Alfa's Shumaker.