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April 8, 2009, 10:55 a.m. EDT

Russia's Sistema sells real estate stake to VTB Bank

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By Polya Lesova, MarketWatch

NEW YORK (MarketWatch) -- Shares of Russia's Sistema rallied Wednesday after the conglomerate sold a stake in its real estate subsidiary to state-controlled VTB Bank for less than $1 and gave the bank the option to take a controlling stake in the unit.

London-listed shares of Sistema soared 11.6% in Wednesday trading.

Sistema said late Tuesday that it has signed an agreement with VTB Bank to sell a portion of its shares in JSC Sistema-Hals , Sistema's main operating subsidiary in the real estate business.

The deal will be carried out in two stages. In the first stage completed Tuesday, VTB acquired a 19.5% stake in Sistema-Hals for 30 rubles (less than $1) and also received a call option to acquire a further 31.5% stake in the company for 30 rubles, Sistema said in a statement.


VTB may exercise its call option after it receives the necessary approvals from the regulatory authorities. Following the exercise of the call option, VTB will own 51% of Sistema-Hals.

Both parties have also agreed the terms for the restructuring of Sistema-Hals' debt to VTB, the companies said.

London-listed shares of VTB gained 1.1%.

Leonid Melamed, president and chief executive officer of Sistema, said in a statement that he was "grateful" for the partnership with VTB and that the transaction is in line with his company's strategy.

"We believe there is huge potential in the Russian real estate sector, and will continue to participate in the development of Sistema-Hals through our 20% minority stake," Melamed said.

VTB Bank said in a statement that after acquiring the shares in Sistema-Hals it plans to "actively participate in the company's management." The bank will nominate its representatives to be elected members of Sistema-Hals' board of directors.

"We see the deal as positive for Sistema, as the company is divesting a loss-making and overleveraged business."

Nadezhda Golubeva, UniCredit Securities

Sistema is the largest diversified public corporation in Russia and the former Soviet Union. Its main businesses are telecommunications, technology and real estate. Among its assets is Mobile TeleSystems , the largest mobile phone operator in Russia.

Sistema-Hals said Wednesday that the placement of its ruble bond public offering is scheduled for April 14. The company plans to issue 3 billion rubles in bonds with maturity in 2014.

"Funds raised through the placement will be used for debt restructuring," the company said in a statement.

Nadezhda Golubeva, equity analyst at UniCredit Securities, said that the deal confirms earlier reports that Sistema had agreed to sell Sistema-Hals to VTB in exchange for its debt.

Sistema-Hals' debt to the bank is about 23.5 billion rubles, or about $690 million, she said.

"We see the deal as positive for Sistema, as the company is divesting a loss-making and overleveraged business," Golubeva said in a research note.

"Given Sistema has a cross-default provision on Sistema-Hals' debt, the deal essentially eliminates the risk of a $1.3 billion (total debt of Sistema-Hals) additional obligation to Sistema, or $2.7 per Sistema GDR [global depositary receipt]."

The restructuring of Sistema-Hals' debt suggests that restructuring the $750 million debt of Sitronics , another Sistema subsidiary, is also possible, Golubeva said.

"We view the deal as negative for VTB, as the value of the stake is less than Sistema Hals owes the bank," she said. "We also believe the deal confirms a budding trend of banks taking over pledged assets, which we regard as worrying."

UniCredit has a buy recommendation on Sistema and a sell recommendation on VTB.

Polya Lesova is a New York-based reporter for MarketWatch.

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