FOCUS: Doctor Melamed Selected to Cure MTS, Market Disappointed

Published on: 17th April 2006

MOSCOW, April 17 (Prime-Tass) -- Leonid Melamed, a medical doctor by education, who until recently headed Rosno insurance company, was appointed the new president of Russia?s largest mobile operator MTS on Thursday.

He has no experience in the telecom industry and has never worked in a public company. Melamed replaced Vassily Sidorov who served as MTS president since October 2003 and was essentially fired by Vladimir Yevtushenkov, the chairman and key owner of AFK Sistema, the parent company of MTS and Rosno. Melamed will serve as acting president until June 14 when the company?s EGM is expected to formally approve his candidacy.

Yevtushenkov said he wants Melamed to significantly increase capitalization and improve the company?s image among investors but analysts have strong doubts about a medical doctor and an insurance specialist being able to find the right remedy for the company?s problems.

They said that Yevtushenkov?s decision to appoint Melamed, a Sistema-trusted insider, shows that the former still sees MTS, a public company, as his own family business. And while most investment houses are still bullish on MTS in the long-term, analysts recommend investors take a cautious approach to a company which for many years was an investor favorite.

?The market expected that an outsider would be appointed,? Konstantin Chernyshev, a senior analyst with Uralsib, said. ?But Sistema decided to appoint an insider, taking a traditional approach (to personnel changes). Although Melamed is known as a tough manager, the size of Rosno is incomparable with MTS, and it might take significant time before Melamed will be ready for full-scale management of the company,? he added.

Yevtushenkov told a news conference that he was unhappy that MTS shares were underperforming the broader market and wanted to reverse this trend as soon as possible. ?We need to listen to the market. If shares are falling, we need to restore investors? confidence,? he said. ?Appointment of a new president is only one element of our strategy aimed at restoring investors? confidence,? he said. He said MTS' marketing and public relations sectors need to be improved.

Several candidates were considered for the position of MTS CEO, including Russians and foreigners, and executives from within and outside of Sistema and MTS, Yevtushenkov said. However, he said Melamed was best suited for the task as he knows Russia well and had built a successful insurance business at Rosno. Yevtushenkov characterized Rosno?s evolution under Melamed?s supervision as ?a transformation from a (Russian car) Zhiguli into a Mercedes.?

Yevtushenkov said Melamed's main task would be to turn MTS into "a real global company with a market capitalization of well over U.S. $20 billion." He did not say when this could happen. The company's capitalization, based on its current share price, is around $13.3 billion. Yevtushenkov added that after Deutsche Telekom AG (DT) sold its 10% stake in MTS last year, Sistema was not looking for a new foreign partner in MTS and that it has never had any offers to sell its MTS' shares.

Melamed said he would like to make MTS transparent to investors, clients and employees. He said he would use his experience in insurance to develop and offer services for MTS clients such as phone banking or services related to insurance. Melamed said MTS was not planning a wider management reshuffle, adding that all remaining key vacant positions would be filled in the near future.

Sergei Shchebetov, who leads Sistema Telecom, Sistema's telecommunications unit, said that following criticism of high spending, the board of directors at MTS would review the capital expenditure plans for 2006, which may lead to a change in the $2 billion capex forecast for this year. "We will still pursue acquisitions, but we won't overpay for them," he said, adding that MTS would also try to "correct other mistakes of the past year." Shchebetov said profit-margin forecasts for 2006 might also be changed by the end of summer if cost-cutting takes place.

Melamed, born in 1967, holds a medical degree from Moscow?s prestigious Sechenov Medical Academy. He founded Rosno in 1992 with two other business partners, and became CEO in September 2003. The company originally specialized in medical insurance, and Sistema bought into it in the mid-1990s. Later Allianz purchased a minority stake, which was increased to 47% while Sistema currently holds 49%. Melamed retains approximately a 1.7% stake in Rosno, according Deutsche UFG.

Rosno is now Russia?s fourth largest composite insurance company with the net profit of $19 million for the first nine months of last year under U.S. GAAP.

The net profit of MTS rose 14% on the year to $1.126 billion in 2005, as calculated under U.S. GAAP on revenue of $5 billion.

?While he may indeed turn out to be the right CEO for MTS, his candidacy was not obvious to us from the few details we know,? Alexander Kazbegi, telecoms analyst at Renaissance Capital, said. ?The appointment of an experienced telecom or consumer goods company CEO would likely have produced quicker results and would have been met with greater approval from the market. While Melamed's earlier position involved working with consumers, the insurance business has more to do with risk management than with managing consumer behavior,? he added.

Many analysts were disappointed by fact that Yevtushenkov failed to clearly explain the premature departure of Sidorov. Russian media speculated that Sistema would have to pay $10 million or ten annual basic salaries to Sidorov for firing him a few months before his contract expires. These reports were not confirmed by Sistema.

While Sidorov may be blamed for certain problems with the company, it is difficult to blame him all problems considering that for over a year MTS did not have a chief marketing officer and it has now been six months since MTS lost Nikolai Tsekhomsky as the chief financial officer without hiring a replacement.

Rumours that Sidorov was to be fired were circulating among investors since late last year following disappointing third quarter results, the failed acquisition of a company in Kyrgyzstan and loss of market share in key regions of Russia and Ukraine. MTS shares have underperformed those of rival VimpelCom, losing 8% in the last six months, while VimpelCom has gained about 13%.

The company?s net profit plummeted 54.95% on the quarter to 2.937 billion rubles in October-December 2005, as calculated under Russian Accounting Standards (RAS).

As of March, MTS accounted for 34.7% of Russia's total subscriber base in, while VimpelCom had a 33.9% share, according to Advanced Communications & Media (AC&M).

Earlier MTS' business strategy was to enter new markets first and grab premium subscribers. But acquisition targets became scarcer and more expensive, while remaining subscribers generated less revenue, making additional subscriber gains value-dilutive.

Tom Adshead, head of research at Metropol, said that some of MTS' underperformance was not of its own making but due to share overhang following Sistema's IPO in London in early 2005 and then Deutsche Telecom selling its 10% stake on the Russian stock market last year.

On Thursday Sistema held an investors conference call to present the new CEO. But the conference call ?was somewhat uneventful and in parts confusing and did little to boost investors? shattered confidence in the MTS investment case,? Alexei Yakovitsky, co-head of research at Deutsche UFG, said.

?Neither Sistema nor Melamed could say much (the latter for obvious reasons) about what they thought was wrong with the previous management team and which particular parts of the MTS operation could be improved. The market will need tangible proof that Sistema is prepared to make changes going far beyond the simple replacement of the number one person in MTS to be convinced that the shattered MTS story is finally reaching a turnaround phase,? Yakovitsky added.

Kazbegi said that assuming that the capitalization is included in Melamed's key performance indicators, ?the stock must return 15% per annum to reach the target figure over the three years of his proposed tenure (which is much better than the company?s

performance over past year and a half but still not very demanding).?

?No new guidance was given, and we don?t expect management to make any potentially significant changes until the end of summer. Hence, in our view, it is unlikely that MTS' share prices will perform much better over the next three months,? he said.

Yakovitsky said he expects Melamed to present his first thoughts about his stock recovery strategy when the company reports its first quarter results in late May.

?We suggest that MTS? valuation is low enough to inspire hopes of a better tomorrow. The stock is trading at 11.7x 2005 earnings, at a 28% discount to a basket of emerging market peers and at a 21% discount to its closest peer, VimpelCom, which to us implies that the market is expecting zero or even negative growth from the company. This is a highly unlikely scenario in our view. The market should probably give Sistema?s new appointee the benefit of the doubt, especially given that Sidorov has already taken major steps in the right direction to fix the 2005 problems, which should start paying back as early as this year,? he added. Yakovitsky has a Buy recommendation on the stock.

MTS' ADRs were traded at $33.180 as of Thursday closing down 0.4% on the day and down 5.2% since the beginning of the year.

UralSib has a Buy recommendation on MTS with the target price of $55 per ADR, while Renaissance has a target price set at $50 with the same recommendation.

(27.6985 rubles - U.S. $1)

End"

 

Tags: [sistema]  [capex]  [mts]  [ipo]  [london]  [chief financial officer]  [insurance] 

Previous Story

Next Story