Standard & Poor’s: Comstar United TeleSystems (JSC) Outlook Revised To Positive After Similar Action On Its Owner MTS; ‘BB’ Rating Affirmed
August 3, 2010 Standard & Poor's
• Comstar’s majority shareholder MTS has launched a process to increase its stake in Comstar to 100% by a way of a merger.
• We are revising the outlooks on Comstar and its subsidiary Moscow City Telephone Network to positive from stable and affirming our 'BB' rating on both companies.
• All our future rating actions on Comstar will mirror ones on Comstar’s parent MTS.
MOSCOW (Standard & Poor's) Aug. 2, 2010--Standard & Poor's Ratings Services said today it revised its outlooks on Russian telecoms operator Comstar United TeleSystems (JSC) (Comstar) and its subsidiary Moscow City Telephone Network (JSC) (MGTS) to positive from stable. At the same time, the 'BB' long-term corporate credit and 'ruAA' Russia national scale ratings on Comstar and MGTS were affirmed.
The action on Comstar and MGTS mirrors that on Comstar’s parent Mobile TeleSystems (OJSC) (MTS; BB/Positive/--), which already owns 63% of Comstar (for further details see “Russian Telecoms Operator Mobile TeleSystems Outlook To Positive From Stable; 'BB' Rating Affirmed”). MTS has recently initiated a process aimed at increasing its stake in Comstar to 100%. According to the plan, Comstar will be merged into MTS and in due course will cease to exist as a separate legal entity. The merger needs approval of 75% of MTS' and Comstar's shareholders. The companies expect to close the transaction in the second quarter of 2011.
"The equalization of the Comstar rating with that on its parent reflects our view that its credit quality will be enhanced by being owned by a company with more favorable credit characteristics, both from a business and a financial profile standpoint," said Standard & Poor's credit analyst Alexander Griaznov.
MTS’ management has already started integrating Comstar into its business. The management relies heavily on cost and revenue synergies, confirming the strategic importance of Comstar for MTS.
Comstar posted 7% year-on-year revenue growth in the first quarter of 2010, reflecting growth in regulated and unregulated prices and also recovery in telecom traffic volumes. Over the next 12 months, Standard & Poor's estimates that the company will be able to achieve revenue growth close to 10%, supported by further regional expansion outside Moscow. At the same time, we believe that the increasingly saturated broadband market in Moscow, characterized by increasing competition, is constraining revenue growth, which will result in the need for the company to lower its tariffs. Nevertheless, we note that Comstar's consolidated margin of operating income before depreciation and amortization is relatively strong at about 40% and we expect it to remain resilient over the next 12 months, supported by the large-scale operations of MGTS. In 2010, Comstar has already signed agreements to sell its 25% stake in Svyazinvest to OJSC Rostelecom (BB/Stable/--), which if realized will strengthen Comstar's stand-alone financial metrics, in our view.
"The positive outlook of Comstar mirrors that on its parent MTS," said Mr. Griaznov. "Any future rating action on Comstar would also mirror that on MTS."
Company — Comstar UTS
Full nameComstar United TeleSystems