Comstar-UTS: Arbitration or Speculation

    The MTS offer regarding the broadband operator and Comstar-UTS pay TV gives a chance to earn up to 10% on the shares of the latter.

    The most intriguing investment idea in the telecommunications sector in the stock market is the voluntary offer to buy shares of Comstar by its parent company MTS. Let me remind you that on July 15, the largest mobile operator announced that until September 21 it would accept applications from Comstar shareholders to buy back their securities at 220 rubles per share (or $ 7.16 per GDR). For current quotes, this implies an upside of 12% and 10.5%, respectively. It would seem that a great opportunity for arbitration is to buy now, present it for the offer and wait for the money in early October, but it is not so simple. MTS will buy only 9% of the free-float, in other words, if all 35% of the outstanding securities are brought to the offer, they will only buy out every fourth share.

    In order not to seem at first glance, MTS is not a charitable organization (organizing such arbitrations), it redeems a worthy telecommunication asset from the marketin anticipation of its continued growth. At the end of 2009, Comstar had 1.2 million broadband Internet access (broadband) subscribers, of which 812 thousand were in Moscow, where the operator controls MGTS , whose total customer base exceeds 3.6 million households. Thus, Comstar plans to actively “develop” this base, offering broadband access and pay TV to MGTS customers, as well as actively developing in the regions.

    Having bought 9% from the market, MTS will collect a 75% stake in Comstar, which will allow it to begin joining its parent structure. In this case, the “dissenting” minority shareholders, of course, can present their shares (or GDR) at the end of 2010 - beginning of 2011 for redemption (reorganization gives them such an opportunity). However, despite Comstar’s readiness to buy back its shares at 212.85 rubles, both companies honestly warned that the amount spent on this (already the second after September) buyback would not exceed 10% of the cost of net assets under RAS for Comstar . This indicator will be calculated at the last reporting date, however, for reference, I note that 10% of NAV at the end of the 1st quarter, according to Screen, amounted to only 5.4 billion rubles for the “daughter”. That is, she could acquire from the "dissent" only 6% of the shares.

    This very inconvenient scheme for minority shareholders worried the well-known investment fund Prosperity Capital Management (PCM), which rightly dubbed MTS’s proposal unprofitable and expressed a desire to collect 25% of the minority votes to oppose the reorganization. Representatives of the fund said that already in July, holders of 14% of Comstar's securities were against joining on such terms. Prosperity announced that it was going to collect the necessary 25% of the shares for the “block” by December.

    The media reported that PCM still adheres to its decision - its “subsidiary” fund Prosperity Russia Domestic Fund transferred from MTS shares to Comstar securities. The operator’s shares are now concentrated in this fund on $ 13.94 million, or 0.53% of its authorized capital. In total, according to various estimates, the fund controls about 2% of Comstar. In addition, if Prosperity began to buy shares from the market, then a further increase in the package is possible. Not on the Russian market, of course: from the time of the announcement of the offer until mid-August, only 0.054% of the shares were sold at MICEX and RTS at the auction - sold taking into account OTC transactions. The main trading activity was on the LSE, where from July 15 to August 10 3.34% of the share capital passed through trading"Comstar." I believe that Prosperity participated in the purchase and could buy about 1% in its other funds, which are not disclosed.

    In this case, there are 2 options for the development of the situation .

    1. Prosperity persuades holders of 25% of Comstar securities not to present them for redemption. Then you can play against the fund and its partners by buying securities on the MICEX and presenting them to the current offer. Then virtually your entire position will be redeemed by MTS. An operation can bring up to 12% in 2 months.

    2. Prosperity together with partners participates in the current offer. In this case, if you are also in it, then MTS will redeem only every fourth declared paper, and then naturally - gap down.

    Summary. I recommend Comstar shares to buyNow, because they will be pulled up to the designated range of 220 rubles closer to mid-September. At this time, they need to be sold somewhere at 216 rubles. Such an operation, according to my expectations, makes it possible to earn 7-9% per month.

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