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Aton - Daily Dashboard - Oct 5, 2010.


The MICEX and RTS managed to finish Monday's session 0.65% and 0.7% higher, respectively, as both indices edged upward during the afternoon, likely on the back of strongerthanforecast pending home sales statistics from the US. On MICEX, financials stocks were the biggest gainers, while several oil names also firmed on the continued relative strength in oil prices. WTI futures are currently trading at around $81.6/bbl, up 0.11% today. At the weaker end, Uralkali maintained its recent poor showing, slipping a further 0.92% on MICEX. In economics news, HSBC reported this morning that Russia's services PMI increased to 51.5 in September, up from a reading of 47.0 in August.

(To view the full report please click here:


Developed European indices extended their recent losses yesterday as confidence in the global recovery waned following discouraging growth forecasts from a number of Eurozone members and unconvincing economic data from the US. As a result, the MSCI Euro dropped by 1.06%. In the US, concerns over the pace of the economic rebound were also a drag on equities, sparking a moderate flight to safety which led to a rise in US Treasuries and appreciation of the dollar. The dollar is currently trading at a[logical not] /$1.37. As a result, the S&P slipped 0.8% with commodity producers suffering from a stronger greenback. The Asia/Pacific region is showing a mixed performance this morning with Australia trading in the red on the back of its central bank's decision to leave interest rates unchanged while Japan is at present 1% stronger following the announcement of new liquidity measures from Bank of Japan.


Brazil and Turkey outperformed their regional emerging market peers yesterday, while other developing indices demonstrated relatively uneven performances. Among the key stories, investors in Brazil reacted positively to the first round of the country's presidential elections while China this morning reported growth in its services PMI. That said, the Shanghai Composite remains closed for a national holiday.

Inflation Rises to 7% YoY in September Summer drought pushes up food prices.

Inflation in September reached 0.8% - in line with the Bloomberg consensus - and amounted to 7% YoY, Rosstat reported yesterday (4 Oct). The figure has risen from 5.5% YoY in July, mainly as a result of higher food prices following the extreme summer drought and wild fires. Notably, food inflation amounted to 8.7% YoY in September, driven by higher prices for fruit and vegetables (food inflation excluding fruit and vegetables was 6.5% YoY).

Core inflation edges upwards.

Underlying or core inflation also moved up for a third consecutive month to 5.3% YoY in September, climbing from a low of 4.4% YoY in June. As the core inflation rate excludes goods where price movements tend to be more volatile and dependent on seasonal factors, such as energy and food products, the upward move suggests inflation is also rising as a result of a pickup in domestic demand and lower unemployment. We expect inflation to accelerate further in coming months and forecast CPI to reach 8% by YE10. That said, core inflation remains at a moderate level, so we expect the CBR to keep the refinancing rate on hold. Although the economy is recovering, it is doing so at a moderate pace and hence we see the refinancing rate unchanged at least through 1H11.

VTB's Supervisory Board Approves Purchase of Stake in TransCreditBank

Kommersant reports today (5 Oct) that VTB's supervisory board has approved the purchase of 50% plus 1 share of TransCreditBank by the end of this year with an option to increase the stake to 100% by 2013. According to Kommersant sources familiar with the details of the potential deal, Russian Railways will now sell 10% of the bank to VTB to avoid diluting its blocking stake in TransCreditBank as a result of the upcoming additional share issue. VTB will purchase the remainder of the stock from TransCreditBank's minority shareholders.

Bottom line

We view the news as positive for VTB, but as it was expected, it may already be priced in.

TNKBP Buys 50% of ITERA

Vedomosti reports this morning (5 Oct) that TNKBP is considering the acquisition of up to 50% of independent gas producer ITERA. TNKBP would reportedly pay cash or swap some gas assets for a stake in the company. In preparing for the deal, ITERA, according to Vedomosti, is buying back a 26% stake it sold to Sun Group in 2006. ITERA holds about 800bcm (about 5bn boe) of gas reserves. If the company receives approximately $600mn for a 50% stake (RBC Daily refers to this amount in its morning issue today), the deal could be valued at about $0.25/boe, which is quite a good price for assets of this quality, in our view.

Bottom line

We believe the potential acquisition of 50% of ITERA at the estimated price would be valueaccretive and should be positive for TNKBP. In addition, via the joint development of Sibneftegas and Nortgas (50% of each are key ITERA gas assets), TNKBP could build a good strategic relationship with Gazprom, allowing it to resolve some development issues related to its own gas assets.

VimpelCom to Acquire Orascom Telecom Holding and Wind Telecomunicazioni SpA

Yesterday (4 Oct) VimpelCom Ltd announced an agreement with Weather Investments, under which VimpelCom will purchase Weather's assets (51.7% of Orascom and 100% of Italy's Wind Telecomunicazioni). The deal will be structured by a combination of 325.6mn VimpelCom shares (18.6% of voting rights, 20% of economic rights) and $1.8bn in cash in favour of Weather's shareholders. The transaction is expected to be completed in 1Q11. The terms of the agreement have been approved by the boards of both companies. Weather Investments will become VimpelCom Ltd's thirdlargest shareholder with a 19% stake. Altimo and Telenor's stakes are set to decline from 44% and 36%, respectively to 36% and 29%. The share of VimpelCom Ltd minorities will contract from 19% to 16% of voting rights.

VimpelCom Ltd's international expansion looks positive in the long term:

- VimpelCom will become a topfive mobile operator with a subscriber base of 174mn and a diversified revenue base (Russia, Ukraine and CIS, Italy, Middle East, Africa and Asia) with a mix of developed and emerging economies with underpenetrated markets

- The company is purchasing the assets at a discount to average market multiples in similar deals (6.2x vs average 8.9x EV/EBITDA ratios [VimpelCom data]). The price is still below the current multiples of international peers.

- VimpelCom estimates synergies valued at $2.5bn (base on opex and capex eliminations)

However, in the mid term the deal looks rather expensive for VimpelCom's current shareholders:

- The company will significantly increase its debt from a net debt/EBITDA LTM ratio of 0.8x in 1H09 to 2.02x in 1H10 and 2.32.5x after the deal is completed (VimpelCom will raise $2.02.5bn in additional debt for the transaction). Total net debt posttransaction will be approximately $2224bn.

- VimpelCom is acquiring assets at higher multiples than its own: VimpelCom estimated Weather's assets at 6.2x EV/EBITDA LTM (proportionate basis), while the same measure for VimpelCom shares is 4.5x.

- VimpelCom will not receive some of Orascom's assets, such as 14% of Egypt Mobinil, 75% of Koryolink in North Korea and certain subsea cable and internet portal operations.

Moreover, there are some risks:

- VimpelCom is still uncertain regarding Algerian asset Djezzy (which contributed 46% of Orascom's revenue in 1H10). Moreover, if the company has to sell its stake in Djezzy to the Algerian government, it will not receive any cash in return from Weather.

- The company could have a problem with regulators in Bangladesh and Pakistan, where Telenor (one of VimpelCom's main shareholders) also has assets. Despite the risks, VimpelCom's management is positive about the deal. They expect a successful resolution of the Algerian problem (with the help of Russian President Dmitry Medvedev, who is currently in Algeria) and potential difficulties with regulators in Bangladesh and Pakistan.

Bottom line

The market's reaction has been negative because the company overpaid for the new assets (vs VimpelCom's current price) and the apparent risks. We think this will continue to create a negative headwind for VimpelCom's shares. Furthermore, we believe the value of positive synergies is wiped out by the potential risks in the mid term. However, we think that longer term there is potential once the risks have been dealt with, and that this will be additionally supported by the significant correction in VimpelCom shares.

Aton OOO (LLC)

27 Pokrovka str., bld.6, 105062



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Publication:Russian Banks and Brokers Reports
Date:Oct 5, 2010
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