UPDATE 2-IFR - MegaFon names only two banks for US$4bn IPO

Thu May 3, 2012 12:34pm EDT

By Abhinav Ramnarayan and Owen Wild

LONDON, May 3 (IFR) - Russian mobile phone operator MegaFon named only Goldman Sachs and Morgan Stanley to lead what will be Europe's largest IPO in a year, snubbing other major lenders that had helped get the US$4bn deal off the ground, sources told IFR on Thursday.

The two were notified on Wednesday that they would be joint global coordinators for the IPO, even though MegaFon had met with more than a dozen banks in the pitching process.

With Europe's equity capital markets (ECM) in a lull since Easter, competition was keen to handle the offering from MegaFon, one of Russia's three major mobile telecoms companies.

The IPO will be the biggest in Europe since Glencore's US$10bn offering in May 2011 and, with the company seen as a high-quality asset, investor demand is expected to be solid.

Other banks that pitched for the IPO include Bank of America Merrill Lynch, Barclays, Citigroup, Credit Suisse, Deutsche Bank, JP Morgan, UBS, Sberbank, VTB and Renaissance Capital.

The decision to name only Goldman Sachs and Morgan Stanley set off a flurry of activity, as losing banks scurried to pick up work elsewhere on the deal.

Bankers at both Goldman and Morgan Stanley declined to comment, as did a MegaFon spokesman. One banker close to the process said that more than two banks had been expected to secure top-level roles.

But many bankers have previously expressed a desire to limit the number of firms at the top of a deal syndicate, in order to ensure control and clear responsibility when launching an IPO.

The last jumbo IPO attempted in Europe was the EUR6.24bn privatisation of Loterias in Spain, a deal that collapsed in September 2011 with six joint global coordinators and an additional three bookrunners.

Bankers said part of the reason for the failure was the unwieldy size of the syndicate, which meant that firms did not feel any individual responsibility for the cancellation.

Glencore last year had a more modest group of three joint global coordinators and two additional bookrunners.

MegaFon will likely appoint other bookrunners in the coming days. They will get an equal share of the valuable league table credit but a slightly smaller fee than Goldman Sachs and Morgan Stanley.

LOANS KEY TO IPO

MegaFon has just begun rolling out 4G, the next generation of mobile phone technology, and its IPO comes with Russian ECM teams under some pressure after other deals have stalled.

Already this week Polyus Gold abandoned a planned follow-on by instead selling US$635.5m of stock privately, and a US$3bn spin-off of Mechel Mining is now not expected until next year.

In the year to December 31 2011, MegaFon earned net income of Rbs43.6bn (US$1.48bn) on revenue of Rbs242.6bn. Operating income before depreciation and amortisation (OIBDA) was R100.8bn, a 41.6% OIBDA margin. Revenue was up 12.6% over 2010, while OIBDA rose 3.1%. Net income fell from Rbs49.2bn in 2010.

In mid-April, the company signed off on a US$2bn syndicated loan with Citigroup, BNP Paribas and Barclays, and it also has a US$1.5bn credit line with Sberbank.

The loans are to be used towards buying back a 25.1% stake in MegaFon from Altimo - part of a complex restructuring of the shareholder register crucial for the IPO to take place.

Telecoms operator TeliaSonera, presently the majority owner, said the London listing would take place after a US$5.15bn dividend was paid to shareholders.

That payment signals the end of a long dispute between TeliaSonera and Altimo, the telecoms arm of Alfa Group. Altimo had in the past blocked dividend payments while MegaFon held cash reserves of more than US$1bn, allegedly as part of a dispute about corporate governance reforms.

Now Russian billionaire Alisher Usmanov - the third largest shareholder currently - will take control of the company by buying shares from Altimo and from TeliaSonera.

His holding company AF Telecom will own 50% plus one share, TeliaSonera will cut its stake to 35.6%, and 14.4% will effectively be treasury shares. TeliaSonera will maintain a stake of 25% plus one share post-IPO.

The IPO will see 20% of the company floated from a mix of treasury and TeliaSonera-owned stock to raise US$3.5bn-$4bn.