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By John Helmer, Moscow

The November 15 announcement by Megafon, the telephone property of Alisher Usmanov and Andrei Skoch, reveals a discount on last month’s valuation targets of up to 20%, depending on how the assets for sale are counted. To attract buyers for shares at bargain-basement prices, the company is promising to pay out more than 50% of its net profit in dividends, a temptation which wasn’t enough in last month’s offer to convince investors to buy into Megafon at the bottom of the valuation range of $11 billion. So uncertain is the future that the minority Swedish shareholder, TeliaSonera, confirms that it has agreed to retain its Megafon shares for no longer than next May, and may then sell out entirely.

Megafon says it has commenced a roadshow of presentations to investors today, and plans to start selling shares and General Depositary Receipts (GDRs) on the London Stock Exchange on November 28. The company has issued an Intention to List (ITL) document, but it is refusing to release the prospectus, or provide details of what it claims in that document about the risks the company faces, and what it reveals of the business practices and litigation record of Usmanov and Skoch.

The public document claims the minimum valuation of the company is $11.2 billion. A month ago, VTB, one of the underwiters of the share sale, reported its minimum valuation was $12.6 billion. London market sources reported at the time that demand for Megafon shares was reluctant above $11 billion.

The company’s Moscow spokesman Elena Aleksandrova was asked to explain whether the $11.2 billion valuation of the company takes into account the announcement and government approval of the addition toMegafon’s assets of a $1.3 billion stake in Euroset, a rival Russian mobile telephone operator. She had not replied by publication time.

Lawyers for Megafon have provided an assurance to the UK Listing Authority that an attempt by Usmanov and Skoch to reorganize their future control of the company, putting Skoch’s father Vladimir in charge of a new holding structure, will not go ahead. The lawyers advertised themselves in the London industry publication The Lawyer, which reported in September that “Cleary Gottlieb Steen & Hamilton and Freshfields Bruckhaus Deringer have taken advisory roles as Russian telecoms group MegaFon prepares to list on the London Stock Exchange (LSE) in the coming weeks, with an IPO tipped to raise up to $4bn (£2.5bn).”

That number was also advertising. The latest announcement from Megafon acknowledges that the funds to be raised will be $1.7 billion. The lawyer in charge of claims on behalf of Megafon is Raj Panasar. He used to work at Goldman Sachs, which dropped its participation in the share sale attempt after expressing concerns. What Panasar told the London regulators to overcome the qualms at Goldman Sachs, and at the regulatory authority, isn’t known.

All the new public announcement from Megafon says about Papa and Junior Skoch is nothing. Instead, the document reports “AF Telecom, a company controlled by Mr Alisher Usmanov, will continue to hold more than 50% of MegaFon’s issued share capital upon completion of the Offering.”

This compares with the October listing announcement which said even less. Under a chart entitled”the Megafon equity structure”:

Megafon added this qualification: “The chart above indicates the effective equity capital structure which may be inconsistent with the architecture of the formal ownership through special purpose entities which, for the sake of simplicity, are not shown above.”

Megafon’s refusal to provide excerpts of its prospectus to clarify the control shareholding arrangement to which Goldman Sachs reportedly objected, along with the UK regulators, also makes it impossible for sharebuyers to understand what risks they are running, and how the new arrangements differ from last month’s.

A copy of the prospectus can be read here. This reveals that Usmanov and Skoch are going ahead with their new control scheme, but believe potential shareholders in Megafon will be protected by the undertaking that Usmanov will cast all the votes in the new holding, USM (Usmanov,Skoch, Moshiri), even though Skoch, and another of Usmanov’s associates, Farhad Moshiri, hold what is described as an “economic interest” of 40%.

“Further to what has been reported in the media with respect to the ongoing re-organisation and consolidation of Mr Usmanov’s interests in internet, media, mining, steel and telecommunication assets into a new holding company, together with the interests of his long term partners
(Mr Vladimir Skoch and Mr Ardavan Farhad Moshiri) in Metalloinvest, a leading Russian iron ore producer, Mr Alisher Usmanov has entered into a definitive shareholders’ agreement with these aforementioned long-term partners. The agreement regulates the agreed future interests of each party in the new holding company (“USM Holdings Limited”), as it will in turn relate to: (i) the agreed interests of USM Holdings Limited in USM Telecom Holdings Limited; (ii) USM Telecom Holdings Limited’s agreed interest in Garsdale; and (iii) Garsdale’s interest in OJSC MegaFon. The shareholders’ agreement therefore regulates the future respective indirect interests of Mr Usmanov, Mr Skoch and Mr Moshiri in OJSC MegaFon.”

“The key terms of the shareholders’ agreement insofar as it relates to OJSC MegaFon are:
• Mr Usmanov will hold 100% of the voting rights with respect to USM Holdings Limited.
• The economic interest of Mr Usmanov in USM Holdings Limited will be 60%, of which a 10% economic interest in USM Holdings Limited may be allocated for the benefit of directors, officers, consultants, advisers and employees of USM Advisers Limited, a company indirectly controlled by Mr Usmanov, created to provide management services to USM Holdings Limited. Any allocation to such beneficiaries in the future will be at the discretion of Mr Usmanov and such beneficiaries will have no voting rights in respect of USM Holdings Limited.
• The economic interests of Mr Skoch and Mr Moshiri in USM Holdings Limited will be 30% and 10%, respectively, with no voting or management rights.
• USM Holdings Limited will own all except a single share in USM Telecom Holdings Limited. Mr Usmanov will, directly or indirectly, control that single remaining share, which will have special rights enabling Mr Usmanov, directly or indirectly, to elect the majority of the Board of Directors of USM Telecom Holdings Limited.
• Mr Skoch and Mr Moshiri will not be permitted to transfer their interests in USM Holdings Limited without the consent of Mr Usmanov.
• Mr Skoch and Mr Moshiri will have no veto rights over the management of USM Holdings Limited or, for the avoidance of doubt, in USM Telecom Holdings Limited, as it relates, directly or indirectly, to OJSC MegaFon.
• The shareholders’ agreement provides that it will terminate upon certain actions being taken for the winding up or receivership of USM Holdings Limited.”

In short, Megafon is asking public sharebuyers to trust Usmanov to defend their interests from any suspicion they may have that Skoch and Moshiri might not have their best interests at heart.

According to the Risk Factors section of the prospectus, unsubstantiated media speculation is to blame for the risks associated with Usmanov in the marketplace. “The media and others have speculated negatively from time to time about us and certain of our existing and prospective beneficial owners, which could adversely affect our reputation, potentially disrupting our ability to
do business with counterparties who give weight to media comment, distracting our senior executive officers from their management responsibilities, and adversely affecting the trading price of our Securities.”

“For example, the press has in the past speculated, and may in the future speculate, about the background of our largest ultimate beneficial owner. Mr Usmanov spent six years in an Uzbek jail after he had been convicted in 1980 of fraud and embezzlement. In 1989, however, a Soviet court removed his criminal record, and, in 2000, the Supreme Court of Uzbekistan vacated the judgment of 1980 and terminated the case due to the absence of the constituent elements of a crime. Accordingly, the original conviction was not in accordance with law. Nonetheless, media and others have speculated negatively about Mr Usmanov in the past and may do so in the future. For example, an Observer article in the late 1990s quoted Mr Usmanov as having stated that he knew Mr Gafur Rakhimov, whom the article claimed was a “drugs baron”. It was also reported that Sergei Adoniev, who owns a small, minority, indirect stake in us, pleaded guilty to a charge (in fact for fraud) in the United States and was deported to Russia in 1996. Future negative speculation in the media related to us and our existing and prospective direct or indirect shareholders could adversely affect our reputation, which in turn could result in a reduction in the value of the Securities.”

About the litigation record relating to Usmanov’s business practices in Sweden and in the US, and about the background of Andrei Skoch, and his father Vladimir, there is nothing in the prospectus.

The public announcement of November 15 has omitted Megafon’s undertaking last month on how the money to be raised will be spent. The October ITL declared: “The offering and listing is [sic] intended to enhance the Company’s capital markets profile and access, providing strategic flexibility to support its long term growth and development. The Company intends to use the net proceeds of the offering (received from the sale of shares and GDRs by its subsidiary MICL) to repay and/or finance existing debt and for general corporate purposes including the continuing development and expansion of its network”.

A shareholder confirms that “deleveraging is a priority.” So why isn’t Megafon committing to it in the new attempt at selling shares? The company was asked to clarify what differences there are between the October Intention to List (ITL) announcement and the one issued today. There was no response.

The prospectus adds a new twist, declaring that “we will not receive any proceeds from the sale of Securities by Sonera Holding B.V.” That leaves a little less than half of the proceeds, those from the sale of shares by Megafon Investments (Cyprus) Limited. According to the prospectus, “the net proceeds of the Offering received by us will be used as follows: approximately U.S.$ [blank] will be used to repay and/or refinance existing debt; and the remainder will be used for general corporate purposes, including the continuing development and expansion of MegaFon’s network.”

The blank speaks for itself.

At the time last month when Usmanov, Skoch and their advisors called off the listing attempt, Megafon claimed it needed the extra time. It announced: “the schedule for the completion of the prospectus including recent M&A activity and the UKLA review and its proximity to the release date for the Company’s Q3 results has led the Company to opt to include those results in the IPO prospectus.” Since then official approval has been granted by the Russian government’s competition watchdog, the Federal Antimonopoly Service (FAS), to Megafon to acquire a 50% shareholding in domestic handset rival Euroset. Here is the Reuters report. The deal adds about $1.1 billion to the asset line on Megafon’s balance sheet.

So how come the minimum valuation in the new listing is more than a billion dollars below the October range? The answer appears to be that last month’s assets have been discounted in value for the share sale. Counting a like-for-like reduction of $1.4 billion, plus $1.1 billion for Euroset, the value discount accepted by Megafon and its underwriters appears to be about 20%. Megafon was asked what valuation is assigned in the new prospectus to the Euroset asset approved for acquisition this month. No reply.

TeliaSonera, the Stockholm-based publicly listed telecommunications company, announced in April that it was planning to sell 10.6% of its stake in Megafon at an initial public offering (IPO). It noted that if the IPO failed to materialize by the end of 2014, it would oblige the Usmanov group to buy this bloc of shares. The announcement from TeliaSonera also said it “further aims to keep a long term ownership of 25 percent plus one share in MegaFon after an IPO. TeliaSonera has focused on realizing the value and increasing the liquidity of our investment in MegaFon, whilst maintaining a long term strategic ownership in the company. By reaching an agreement with the two other partners, whereby MegaFon will pursue an IPO and adopt an agreed dividend policy, we have resolved the ownership disputes and found a way to increase both the liquidity and value of our asset. By reducing our ownership we expect to realize a significant amount of the accrued valued generated by MegaFon since its inception.”

Today’s IPO announcement fromMegafon hints that there may be a new agreement between Usmanov and the Swedes. According to the public document, TeliaSonera may remain in the company, or it may sell out. “TeliaSonera A.B. may own more than 25% of MegaFon’s issued share capital” is one hint. The other hint is in the arrangements for the new Megafon board to include “two Directors representing TeliaSonera (as long as it retains 25% plus one ordinary share after the completion of the Offering)”. The one restriction on a sell-out by TeliaSonera is this lock-up provision in the Megafon announcement: “the Selling Shareholders as well as certain other shareholders of the Company will be subject to a lock-up in respect of shares in the Company for a period of 180 days.”

TeliaSonera confirmed today that it is reserving the right to sell out after this period.

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