* Offer priced at bottom of $20-$25 range
* Shares fall below the $20 offer price
* MegaFon raises $1.7 bln
* Pitted against NYSE-listed rivals MTS, Vimpelcom (Adds detail on subscription level, fresh quotes)
By Megan Davies and Maria Kiselyova
MOSCOW, Nov 28 (Reuters) - Shares in MegaFon fell nearly 3 percent on their market debut on Wednesday, following a bumpy ride for the issue and showing limited demand among investors for another Russian mobile stock.
Russia's second-biggest mobile phone operator priced its London and Moscow offer at the bottom of the indicated range, raising $1.7 billion and creating a market alternative to established New York-listed Russian players MTS and Vimpelcom.
Investor caution towards MegaFon, controlled by Russia's richest man Alisher Usmanov, in part reflects the patchy performance of Russian new issues. MegaFon has also struggled to differentiate itself from leader MTS, which has a bigger free float, a similar dividend yield and a long track record as a public company.
"MegaFon is five years late with its IPO (initial public offering) as the phase of active growth of the Russian telecoms market is already over," said Yevgeny Golosnoy, analyst at brokerage Metropol. "Global investors ... need either a very low price or growth potential."
MegaFon's IPO at $20 per GDR - the bottom of a range between $20 and $25 it had previously set - valued the company at $11.1 billion and is the biggest listing by a Russian company since aluminium producer RUSAL floated in Hong Kong in 2010.
Leaving the London Stock Exchange after a ceremony to mark the start of trading, MegaFon Chief Executive Ivan Tavrin high-fived a colleague and appeared elated. He declined comment.
Following a series of Russian IPOs which have fallen below their issue price, Megafon shares traded at $19.46 in London at 1500 GMT, 2.7 percent below the issue price. The deal was covered 1.3 times, one market source said, but it had been a struggle to fill the book, said another.
"People got full allocations and hedge funds made up a significant portion of the book - that's a bad sign because they flip," or quickly trade out of a stock, s a id one equity salesman in Moscow.
PRICED AT A DISCOUNT
MegaFon is focused on Russia and is outpacing its peers in a maturing, though still lucrative, mobile market. Still, some analysts have said the IPO would only be interesting if priced at a clear discount to MTS.
Alexander Vengranovich at brokerage Otkritie said the offer price valued MegaFon at a discount of around 12 percent to MTS and gave it an enterprise value/EBITDA multiple of 3.6 for 2013.
MegaFon's offering had a setback when questions about corporate governance prompted investment bank Goldman Sachs to drop out of the deal, a source previously said.
The UK Listing Authority signed off on the prospectus only after Usmanov pledged to keep overall control under a deal to restructure his and his partners' assets.
The IPO values MegaFon at less than the implied value of $20 billion at which billionaire Mikhail Fridman sold out last April, in a cash deal that secured Usmanov control and ended years of shareholder disputes at the company.
In the same deal, Teliasonera reduced its stake, at an implied value for MegaFon $17 billion. The Nordic telecoms firm said at the time it would sell more shares via a market float, leaving it facing market risks.
Those risks materialised in the more cheaply valued IPO, in which Teliasonera sold down its 35.6 percent stake and will keep 25 percent plus one share on a fully diluted basis. Its shares fell 1.3 percent in Stockholm.
The rest of the offering came from the sale of treasury stock by MegaFon, which will have a free float of nearly 17 percent if syndicate banks exercise an over-allotment option.
Teliasonera will receive $1.3 billion in proceeds assuming exercise of the option.
MegaFon's muted trading follows a history of poor performance by Russian IPOs, the majority of which from the past two years are underwater.
"The years of insatiable appetite for Russian equities, connected to oligarchs or representing plays on domestic consumption growth, are gone and people and companies now have a much more uphill battle for investor dollars," said Steven Dashevsky, founder of hedge fund Dashevsky & Partners.
Metropol's Golosnoy said he expects MegaFon's stock price to fall further, suggesting buying only at a price of $17 to $18.
Morgan Stanley and Sberbank acted as joint coordinators to the issue, with Citigroup Inc, Credit Suisse and VTB as joint bookrunners. ($1 = 31.0925 Russian roubles) (Additional reporting by Olga Popova and Douglas Busvine in Moscow, with Alessandra Prentice in London; Editing by David Holmes)