Russian Daily Monitor

Vedomosti: Vimpelcom eyes SMARTS

Vedomosti reported Friday that Vimpelcom is interested in acquiring
SMARTS, Russia
+s fifth largest mobile operator with 2.4 mn subscribers. We
see the story as little more than rumours. The current shareholders of
SMARTS estimate the value of the company at more than USD 700 mn,
indicating a price of USD 300 per subscriber, whereas subscribers of
Vimpelcom, in turn are valued at USD 290. Vimpelcom is the leader of Volga
mobile market (where SMARTS operates), and thus it would seem unwise to
pay such a high price for SMARTS.
However, the Russian mobile market does need consolidation, in the highly
competitive Volga region in particular. We await higher M&A activity from
MTS and Vimpelcom in Russia in order to remove excess competition.
However, the prices of deals are expected to be well below than that
demanded by SMARTS.

Money market

A new string of poorer-than-expected data from the United States released
on Thursday nudged the euro back up to late May levels of around USD 1.25.
The ISM Manufacturing index slipped to 53.6 in August from 56.6 in July,
while PMI Manufacturing in the eurozone in August experienced only minor
slippage to 50.4 from 50.8 the previous month. The euro
,s rebound was also
backed by continuing speculation on a slowdown in the U.S. economy in the
light of surging oil prices, Hurricane Katrina and the likely cooling of
the housing market. The fact that the U.S. economy may have started to
slow before the hurricane, as evidenced by recent business activity
indexes, may force the Federal Reserve to give up raising rates, which
would also undermine the dollar
,s position.
Although recent releases favor the euro against the dollar, U.S. payrolls
scheduled for release Friday, may calm bullish euro sentiment. If the
readings on payrolls indicate continued strong employment, the euro may
stay below 1.25 against the dollar, otherwise, the euro could appreciate
further. The dollar
,s value on the local market is expected to be close to
28.3 roubles on Friday, following euro-dollar dynamics in accordance with
the Central Bank
,s currency basket rules.

Bond market

The rouble bond market strode upwards on Thursday helped by the old
reliables: high liquidity, a strengthening rouble, and narrowing Eurobond
spreads. Crucially, the market expects these factors to remain supportive
for a while, thanks to high oil prices. However, the upward trend has
essentially lasted since spring, and the market may be ripe for a minor
correction which could be triggered by some technicality such as a
(temporary) depreciation of the rouble, following a similar twist in
global FX trends.
The benchmark domestic yield curve flattened somewhat: the medium and long
term segments of the curve rallied, with the Moscow
,38 yield sinking to
7.39% from 7.45%, while two short-duration papers maturing in 1H06 sagged,
with Moscow
,35 yield rising to 5.65% from 5.40%. Thus, we see most
short-term potential in long and medium duration corporate bonds,
especially solid second-tiers, which should maintain their spread to the
curve.
The Russian Eurobond market is approaching new record highs as concerns
rise that the United States economy may slow by the end of the year and
Federal Reserve policy makers will have to end their tightening cycle
sooner than was previously expected. The yield of the indicative Russia
,30
reached a record low 5.32% on Thursday, loosing 3 bps on the day, while
the benchmark remained almost flat. The move towards lower yields in U.S.
Treasuries may resume if upcoming employment data on Friday does not show
notable improvements. Local Eurobonds are expected to follow this trend
with tendency to further contraction of credit spreads, backed by
improvements in macroeconomics and credit profile. On Thursday the
sovereign credit spread tightened to 126 bps, down 3 bps on the day.

Equity market

As the week
,s trading winds down, activity is likely to be muted Friday
relative to the heavy volumes of the past three days. The lust for oil
should continue, however, as the market continues to play catch up with
ever-increasing commodity prices.
UES was the star of Thursday trading, climbing 4.3% on solid turnover.
There was some speculation about strategic buying, but the logic behind
such a move is not obvious. The stock might be simply catching up after a
period of relative underperformance. The same is happening to juicemaker
Lebedyansky, whose strong 2Q05 financial results published recently
prompted a rapid revaluation of its shares. Some potential for further
appreciation still exists in the latter, we believe.
Elsewhere, oil and metal stocks were in stable demand on the back a surge
in respective commodities. Telecoms were also well bid in New York, with
MTS adding 1.1% and Vimpelcom climbing 0.3%.
All in all, the RTS had climbed 1.42% by the end of the day, reaching
894.57, just a few notches short of 900, on combined turnover of USD1.4bn.