Megafon is negotiating with some Mail.ru Group shareholders to purchase their shares, the operator announced yesterday. Megafon did not disclose who the negotiations are with and what the size of the share is. We are talking about buying out Alisher Usmanov’s share, the operator’s partner said and was confirmed by a source in one of Usmanov’s structures.

Both Megafon and Mail.ru Group are controlled by Usmanov through USM Holdings. NMT, controlled by USM Holdings, owns 15.2% and almost 64% of the votes of Mail.ru Group. Another 27.6% of Mail.ru Group belongs to the South African media holding Naspers, and 7.4% belongs to the Chinese Tencent. About 50% of Mail.ru Group receipts are traded on the LSE.

A source in Usmanov’s structures said that negotiations are “at an advanced stage,” but did not say when the deal might be closed. He claims that Megafon has no legal obligation to buy out shares of other Mail.ru Group shareholders. Usmanov needed free funds, but Vedomosti’s interlocutor does not say for what. A USM spokesman declined to comment. Mail.ru Group itself reported that negotiations are underway on commercial cooperation with Megafon.

“If an agreement is reached and the acquisition of a stake in Mail.Ru Group takes place, Megafon and Mail.ru Group will continue to operate as independent companies on completely market conditions,” the operator said.

Since the transaction involves related parties, USM Holdings needs to coordinate it with another Megafon shareholder - the Swedish-Finnish Telia Company, says Megafon's partner. This is not a quick job, he warns: Telia must carry out its own assessment of the asset. A Telia representative declined to comment.

In the case of such an “intra-holding” sale, when one subsidiary is the buyer of another, the common parent company is recognized as an interested party and has no voting rights, says Natalya Milchakova, deputy director of the analytical department at Alpari. This version is confirmed by a person close to the participants in the transaction. The fate of the deal will be decided by minority shareholders and it will not be easy to reach a compromise, continues Milchakova: if the amount that Megafon offers for the package in Mail.ru seems too high, Telia and the operator’s minority shareholders may oppose the deal, and if the valuation seems too low, then will lead to a fall in Mail.ru Group's stock quotes, then it will be time for the shareholders of this group to protest, she summarizes.

Mail.ru Group is the largest Internet holding in terms of audience in RuNet (54.7 million in September, TNS data). The group includes the Mail.ru portal, the social networks VKontakte and Odnoklassniki. The capitalization of Mail.ru Group on the LSE is $3.7 billion, so Usmanov’s share could be worth about $562.4 million. It is difficult to estimate the share of USM Holdings, since the company has a large advantage in votes compared to the economic share of 64% versus 15.2% , writes VTB Capital analyst Ivan Kim in an analytical note. The size of the control premium is still being discussed, says a source in Usmanov’s structures. The control premium could be up to 30% of the price of the USM package, says Otkritie Capital analyst Alexander Vengranovich.

The company can purchase a stake in Mail.ru Group on debt or use money intended for dividends. But the second option is less preferable for Telia Company, the analyst adds. According to his estimates, Megafon's debt to EBITDA ratio could increase from 1.9 to 2.15 if such a deal is concluded.

According to the operator’s partner, Megafon will follow the path of digitalization of its own services. This is why Mail.ru Group is needed. A source in Usmanov’s structures added that two types of partnership are currently being discussed - to create a virtual operator (MVNO) and in the field of big data. According to Vengranovich, the most valuable resource of Mail.ru Group is the audience of social networks and, perhaps, Megafon expects to use it to curb the outflow of subscribers.

The deal may be a response to increased competition in the market, says Natalya Milchakova from Alpari: in addition to Tele2 entering the Moscow region, new players are appearing on the market - for example, Sberbank announced plans to create a virtual operator . This may require integration of content and mobile data, she said.

Megafon is ready to become a shareholder of Mail.ru Group