Today, Mobile TeleSystems (MBT) is down hard – it’s dropping 9% as I write this. The direct reason is that Mobile TeleSystems put out a Press Release saying it’s evaluating whether to keep its current listing structure. This listing structure has the NYSE as its primary exchange, where it originally listed in 2000. The Moscow quotation only came later.
The Press Release makes it clear that this evaluation is purely exploratory, and that no immediate decisions have been made:
“We want to engage with investors to discuss their preferences, ability and any potential restrictions in relation to different listing options. This consultation is not about any immediate decisions. Rather, the review’s scope is strategic in nature and we believe that the resulting insights will help us ensure that MTS equity capital markets and listing framework maintains maximum investor appeal in the context of on-going market developments. We continue to see strategic benefits of being a publicly listed company, and remain committed to full transparency with our shareholders, strong governance practices and providing attractive shareholder returns.
“This public announcement will ensure that our investors are not exposed to any regulatory risks as they engage with us in a frank and open dialogue on the subject”
That hasn’t kept investors from panicking, even though no actual development took place. And indeed, even if Mobile TeleSystems was to delist from the NYSE, it would quickly be replaced by an unsponsored ADR, much like Gazprom’s (OTCPK:OGZPY). Why would this exploratory work prompt any selling?
Well, if the development really took place, some investors could be forced to sell. Not everybody can hold unsponsored ADRs. And of course, since “delisting” sounds bad, lots of speculators can also pile on. Anyway, this isn’t an actual fundamental development, but it did again push Mobile TeleSystems into amazingly low valuation ratios (roughly 3.4x EV/EBITDA, ~10% dividend yield).
Still, listing elsewhere wouldn't change Mobile TeleSystems' fundamentals, and as I'll explain, U.S. investors would still be able to hold stock in it.
Why Would Mobile TeleSystems Do This?
The company does list a few reasons. Except for listing costs, though, they sound mostly hollow. There’s a much better reason, but that’s not listed at all.
You see, like Veon (VEON) before, Mobile TeleSystems stands to be fined for events which took place in Kazakhstan. These events involved corruption of senior officials, and hit all mobile operators in that country. Basically, you couldn’t operate in Kazakhstan without greasing a few hands. Mobile TeleSystems has already disclosed this liability and provisioned for it.
However, let it sink in. Mobile TeleSystems is a Russian company. It operates in the Russian market as well as some other Eastern European markets. It doesn’t have any operations in the U.S. And the U.S. has no jurisdiction in the markets Mobile TeleSystems operates in or Kazakhstan for that matter. Yet, the U.S. is standing ready to fine Mobile TeleSystems for close to $1 billion, much like it also went after Telia and VEON.
How can this be? Well, as of late the U.S. has taken to the practice of holding foreign companies to U.S. laws. And fining them hard for it. Even when these companies aren’t American companies or operate in the U.S. How can this be? Well, it just kind of takes the tiniest of links for the U.S. to claim jurisdiction. For instance, using dollars is often enough. Or, in Mobile TeleSystems’ case, being listed in the NYSE.
Hence, Mobile TeleSystems’ motivation, which isn’t disclosed, might be to simply sever ties to the U.S., and thus remove the liability it has already provisioned for.
Of note, a sponsored ADR is sponsored by the company itself. An unsponsored ADR isn’t. An unsponsored ADR creates an ADR in the U.S. markets through the actions of investors, not the company’s. Hence, it doesn’t produce a presence for the company, as the issuer has no control over the unsponsored ADR. If MBT was to lose its U.S. listing, investors would be able to keep their shares in this new format.
There has been no fundamental change at Mobile TeleSystems. The drop today is driven by technical considerations (being able to own the stock if the sponsored ADR goes away) as well as speculation. Indeed, the drop today even produced a rarity - typically, MBT trades at a premium to its Moscow quotation, which has been as high as 10%. Today, it fell so much that it's trading at a ~2.6% discount. The news was out during Moscow trading, but the stock "only" fell 2.6% in Moscow.
Mobile TeleSystems lists a few reasons for considering the elimination of the ADR, but it’s likely that the true reason isn’t listed. Were Mobile TeleSystems to eliminate the presently-existing sponsored ADR listing, and that listing could and would be replaced by an unsponsored ADR in short order. It might be that Mobile TeleSystems would actually eliminate a close to $1 billion liability, if this were to happen. That would actually be a fundamental positive (if it were to happen).
Finally, nothing actually happened. Mobile TeleSystems only announced exploratory work on the matter.
Disclosure: I am/we are long MBT, OGZPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.