MegaFon, Russia's No. 2 mobile phone operator, hopes to raise around $2-billion (U.S.) in an initial public offering, it said on Thursday, launching a marketing drive to investors with a pledge to pay an attractive dividend.
MegaFon, controlled since April by Russia's richest man, Alisher Usmanov, is focused almost exclusively on Russia and is outpacing bigger rival MTS and smaller Vimpelcom in a maturing, though still lucrative, mobile market.
But some analysts said it was setting an ambitious valuation which could be a hard sell in a patchy IPO market, where the gap in price expectations between buyers and sellers is wide.
"MegaFon should come at a discount to (peers) because it is new," said Bruce Bower, a portfolio manager at Moscow-based fund manager Verno Capital, though he added it should benefit over time as the largest data operator among Russian mobile firms.
MegaFon said it aimed to sell global depositary receipts in London and Moscow at around $20 to $25 apiece, raising around $1.7-billion to $2.3-billion and valuing it at about $11.2-billion to $14.0-billion.
At the bottom of the range, that would value the firm broadly in line with MTS and Vimpelcom based on a multiple of enterprise value to earnings before interest, tax, depreciation and amortization (EBITDA) forecasts for 2012, according to Sergei Libin, a Moscow-based analyst at Raiffesenbank.
"Investors want to make money," said Otkritie analyst Alexander Vengranovich. "Even if everyone understands that MegaFon is an interesting story – at least not worse than MTS – it does not make sense to buy it at fair value."
About 17 per cent of MegaFon will be sold in the IPO if an over-allotment option is exercised, according to a source close to the matter. Nordic group TeliaSonera is cutting its 35.6-per-cent stake and MegaFon is selling treasury stock to cut debt. Mr. Usmanov will retain control and not sell shares.
After months of inactivity, Europe saw a pickup in share sales in October with companies including German insurer Talanx, Britain's Direct Line and Telefonica Deutschland successfully completing market debuts.
The market is still far from robust, however, with investors unsettled by a faltering global economy and governments' need to rein in deficits on both sides of the Atlantic.
MegaFon has also had some issues in the runup to its launch. Underwriter Goldman Sachs Group Inc. dropped out of the IPO, which one source close to the matter said at the time was due to unspecified shareholder concerns.
Mr. Usmanov is setting up a holding company for his assets including MegaFon, which he will own with two partners, fellow Arsenal soccer club shareholder Farhad Moshiri and Vladimir Skoch, father of billionaire lawmaker Andrei Skoch.
A source said previously that if the ownership structure was a concern to regulator the U.K. Listing Authority, another solution could be sought. The UKLA gave MegaFon's IPO the green light last week.
A copy of the IPO prospectus, obtained by Reuters, showed Mr. Usmanov would own 100 per cent of the voting rights of the holding company.
MegaFon said it would pay an annual dividend of 50 per cent of net profit or 70 per cent of free cash flow, whichever is higher, provided its ratio of net debt to core earnings remained in a range of 1.2 to 1.5. Analysts said that implied a dividend yield of 7 to 8 per cent, competitive against MTS and Vimpelcom.
Russia's mobile phone market is close to saturation, with 1.6 SIM cards per person and growth has slowed to a single-digit percentage. But that compares favourably with many western European markets and analysts see rich rewards from winning the race to develop next-generation mobile services.
MegaFon beat its two New York-listed competitors in terms of revenue growth and was on a par with MTS in terms of core profitability in third-quarter results.
Following the IPO, Mr. Usmanov will continue to hold more than 50 per cent of the company. TeliaSonera plans to keep a long-term stake of at least 25 per cent plus one share. It expects proceeds of 9-billion to 11-billion Swedish crowns ($1.3-billion to $1.6-billion) from the IPO.
MegaFon has also reserved 5 per cent of its shares for a long-term incentive plan for its CEO Ivan Tavrin.
The investor roadshow is expected to end on Nov. 27 with pricing, allocations and dealing in the shares starting the next day. The IPO could be the biggest by a Russian company since internet search group Yandex raised $1.4-billion in New York in May 2011.