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Lawsuit Resolution Good News for Mobile TeleSystems

Alex Zhao, CFA

Mobile TeleSystems (MBT) announced on Dec. 25 that its parent company, Sistema, has reached an agreement with Rosneft, Bashneft, and the Republic of Bashkortostan (a federal subject of Russia). Under terms of the settlement, Sistema will pay Bashneft RUB 100 billion by March 30, 2018. Because our view on MTS’ business fundamentals is unchanged, we are reiterating our $11.50 fair value estimate for this narrow-moat stock but lowering our risk rating from very high to high, due to the resolution of this lawsuit that at one point affected Sistema’s shares in MTS.

The settlement is consistent with our earlier belief that the lawsuit was a legal tactic for the state-owned oil company Rosneft to force Sistema to pay damages alleged by Rosneft after purchasing Bashneft in 2016. Sistema’s shares in MTS were frozen in the summer of 2017 as part of the enforcement action. We think the settlement materially lowers the risk that the Russian government will become a major shareholder of MTS through the lawsuit. We also observe that, in its press release, Sistema thanked Sberbank, a state-owned bank in Russia, and the Russian Direct Investment Fund, Russia’s sovereign wealth fund, for facilitating the settlement. Sberbank is a major debtholder of MTS.

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