The savings Bank saw risks to increase the share of Rostelecom in Russian Tele2

Sberbank lowered its rating of the shares of “Rostelecom” from-for sudden change of head company and the possibility of increasing the share of “Rostelecom” and Tele2. Such a transaction could adversely affect the company’s ability to pay dividends

Sberbank lowered its recommendation on the shares of “Rostelecom” to “sell” as “a drastic change in management increases the uncertainty about its prospects of growth and dividends, especially if “Rostelecom” will eventually redeem the shares of other shareholders Tele2″, stated in received by RBC, the Bank said. Given these risks and outcomes for the year 2016, the savings Bank has lowered the target price for the shares of “Rostelecom” by 20% to 70.2 RUB apiece.

At the end of trading on the MICEX on 7 March the quotations of ordinary shares of Rostelecom was equal to RUB 77,13

Last week, on March 3, the Board of Directors of Rostelecom approved the change of the President of the company. Instead of Sergey Kalugin, whose contract was terminated prematurely on this post appointed the former Deputy Chairman of VTB Michael Tatarstan. As told RBC two sources in the telecommunication market, the replacement is associated with a negative attitude Kalugin to increase the share of “Rostelecom” in “T2 RTK Holding” (renders cellular communication services under the Tele2 brand). Now Rostelecom 45% of the company, the rest — from VTB, the structures of Yuri Kovalchuk and Alexei Mordashov.

As stated by Mikhail Oseevsky at a press conference on March 6, “Rostelecom” “thinking about whether to get control of “T2 RTC Holding”. He did not specify when it can be decided on this issue, but noted that this is one of the options and that there is a scenario in which the company will be able to establish effective communication without increasing the share capital.

In the report of the savings Bank the decision on change of head of Rostelecom called unexpected, because the “investment attractiveness of JSC “Rostelecom” increased significantly during the leadership of Sergey Kalugin”. In the savings Bank believe that the purchase of shares from other shareholders, “T2 RTK Holding” can have a negative impact on the value of “Rostelecom”.

As stated in the report of the Bank, the enterprise has a high debt burden — the ratio of net debt to EBITDA in 2016 is 7.7. “In the medium term the company will probably remain unprofitable, and the acquisition price may be too high. We estimate the cost of capital of Tele2 at 26.6 billion rubles, while VTB evaluates its 195 billion. (financial reporting), which would imply 107 billion rubles for a 55 percent stake. It is five times more than the expected free cash flows of Rostelecom for the year 2017, therefore, we believe that such a deal could create a risk to the dividend”, — stated in the report of Sberbank.

Now the dividend policy of Rostelecom envisages payment of 75% of adjusted free cash flows and raising dividends every year. In 2016, adjusted free cash flow fell 39% to RUB 13.3 billion, this implies a dividend per share this year, at least on the same level as last year – 5.9 RUB.

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