MegaFon Gets Low Valuation in $1.7 Billion IPO


Russian telecoms company Megafon's London initial public offering (IPO) successfully raised $1.7 billion, despite concerns about corporate governance at the company, majority-owned by Russian internet tycoon Alisher Usmanov.

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The listing priced at $20, the bottom of the $20-$25 a share price range, and placed a market value on the entire company of $11.1 billion.

MegaFon, which provides wifi and data services, is backed by Usmanov, who controls its major shareholder Garsdale Services. The Russian businessman attracted some attention earlier this month when it emerged that his public relations company had been tweaking his Wikipedia entry and removing details of his past ahead of the listing.

The company has appointed U.K. businessman and ex-Minister Lord Myners as chairman ahead of the listing, and Usmanov, who is also known for his investment in Facebook, will appoint three out of its seven directors.

Listings from Russia and former Soviet countries known as the Commonwealth of Independent States (CIS) are still viewed with suspicion, particularly after the corporate governance row over Kazakh ENRC. Goldman Sachs, initially the lead bank on the MegaFon IPO, dropped out earlier in the process, which had rung some alarm bells in the City.

"The fundamental problem comes down to governance. People don't have trust," Anthony Fry, adviser to the board at Espirito Santo Investment Bank, told CNBC.

"They are making efforts to address those marketplace concerns with appointments like Lord Myners."

"What's interesting is that despite the fact that people were burnt with Russian IPOs before, they keep coming back for more," he added. Megafon would have to see a hefty rise in earnings to justify investing if the company's price-to-earnings ratio performed in a similar way to other Russian offerings, according to Fry.

The MegaFon listing appeared to have taken off well initially, despite only offering secondary shares, with sources telling CNBC Tuesday night that it had been oversubscribed.

"MegaFon are not necessarily any better or worse than others," according to Alex Kazbegi, head of telecoms and transportation research at Renaissance Capital. "There's no track record (as a public company), but the U.K. can either take this as a negative or give them the benefit of the doubt."

Usmanov also has a history with London and New York listings through technology company, which could help address some concerns.

Existing investors, including subsidiary MegaFon Investment, are expected to use the proceeds to pay down debt, leaving a less leveraged business which could invest further in its data and internet services.

The IPO market in the U.K. has been shaky and relatively quiet this year, with a number of high-profile withdrawals and disappointing post-IPO performances, so success for MegaFon may help boost sentiment about London listings.

MegaFon's real strength is in providing data services, but other providers are snapping at its heels, according to Kazbegi. It was the first Russian network provider to start rolling out 4G coverage, and had the biggest market share of mobile data revenue with 36.5 percent of the market in the second quarter of 2012.

MegaFon's Russian focus could work both for and against it, Kazbegi argued.

"Given that some of the other publicly-listed companies have had not-so-good experiences with the CIS states, this is considered to be a plus," he said.

"However, more diversification could also be a plus."  

Written by Catherine Boyle, CNBC. Twitter: @cboylecnbc.