OREANDA-NEWS. April 20, 2010. A group of minority shareholders in Far East Telecom is dissatisfied with the swap ratios proposed by Svyazinvest for the consolidation of the regional telecoms and Rostelecom, Vedomosti reported. The deputy chairman of the company asserted that the dissenters, which reportedly include Prosperity Capital Management, comprise more than the 25% needed to block the share swap, reported the press-centre of OTKRITIE FC.

View: In our view, Far East Telecom is the RTO most undervalued by the current proposed swap ratios-- 40% below our estimates. The alternatives faced by dissenting shareholders vis-а-vis the restructuring process are unappealing. If the restructuring is approved, the buyout price for those voting "no" will be at a 30% discount to that currently implied by the swap ratio.

We expect a majority of it to be paid out in Rostelecom shares, rather than cash. If the restructuring is not approved and Far East Telecom remains outside of the consolidated structure, it faces delisting. Since Far East Telecom will be the first regionals to hold its AGM (2 June), Svyazinvest would prefer that vote proceeds smoothly. The swap ratios are currently unofficial, so Svyazinvest could sweeten the deal for Far East Telecom at its next board meeting, scheduled for 25 April.

Valuation: Far East Telecom trades on a 2010 EV/EBITDA of 2.8x. The implied multiple for the fully-consolidated Rostelecom at 4.9x.

Action: We see room for a significant sweetening of the swap ratio for Far East Telecom.