Shares in Russia\'s MegaFon Fall After I.P.O.

MOSCOW â€" Investors on Wednesday balked at the initial public offering of MegaFon, Russia's second largest cell phone operator, as the company's shares fell in the first day of trading.

The Russian cellphone operator, whose majority owner is Alisher Usmanov, one of Russia's richest men, had valued its priced its stock at $20 a share, the bottom of the expected price range. The offering has been beset by several issues including regulatory approval delays. The I.P.O. raised $1.7 billion, making it Europe's second largest offering this year after Telefónica Deutschland raised $1.9 billion last month.

Yet despite MegaFon's pricing aimed at enticing investors, shareholders remained unimpressed.

MegaFon's shares, which are jointly traded in Moscow and London, fell almost 2 percent, to $19.63, in morning trading in Europe.

The new listing, which is the largest Russian I.P.O. since the aluminum maker Rusal raised $2.2 billion in 2010, comes at a difficu lt time for the European financial markets.

The European debt crisis has hampered efforts by a number of companies to tap investors for cash. The total raised in I.P.O.'s in Europe this yearâ€" $14.2 billion - represents a 63 percent decline compared to the same period last year, according to data provided by Dealogic.

“Europe is constrained by the euro crisis,” Clifford Tompsett, a capital markets partner at the consultancy PricewaterhouseCoopers in London, said. “It's not an attractive place to launch an I.P.O.”

For MegaFon, the share sale is the end of a protracted process.

The Russian company was forced to postpone its roadshow last month after British authorities took longer than expected to approve the new listing. Goldman Sachs also withdrew from the offering, initiating a rare spat in the I.P.O. market.

The American investment bank did not publicly disclose it reasons. But Goldman Sachs had worried a planned restructuring of Mr. Usmanov's conglomerate would weaken corporate governance at the cell phone company, according to person familiar with the decision, who spoke on the condition of anonymity because he was not authorized to speak publicly.

An aide to Mr. Usmanov who declined to be cited by name because regulators have imposed a silent period on MegaFon around the I.P.O., said MegaFon simply chose other banks because Goldman was slow in conducting its pre-I.P.O. analysis of the company.

“When the train was leaving the station, Goldman was left on the platform,” said another person with direct knowledge of the matter.

The acrimony did not blunt investors' initial interest.

MegaFon's I.P.O had been oversubscribed, and a single large American investor scooped up more than 10 percent of the 84.5 million new shares, according to a person with direct knowledge of the matter, who declined to be identified because he was not authorized to speak publicly about the purchase.

“It's a decent asset in a good market,” Igor Semyonov, a telecoms analyst at Deutsche Bank in Moscow, said of MegaFon.

MegaFon had marketed its shares in a roadshow by emphasizing its lead in wireless data transmissions in Russia. The company is a bet Russian consumers will continue buying devices like smart phones and iPads at a brisk clip.

The Russian cellphone operator also asserted it can execute a strategy of “leapfrogging” ahead of developed markets in providing much of the population with wireless broadband, because few Russians have broadband of any type today.

About 39 percent of Russians have broadband provided over telephone or cable wires, compared to 72 percent of Western Europeans, according to a MegaFon presentation to investors. As that gap closes, some new Russian customers might choose the convenience of wireless Internet, rather than a land-line service.

“People are buying second devices, and they are using data very extensively,” Mr. Semyonov, the Deutsche Bank telecoms analyst, said of mobile phones and tablet computers, a core market for MegaFon's wireless data service. “Whether it will replace fixed broadband at home, I wouldn't go that far.”

MegaFon's domestic competitors, Mobile TeleSystems and Vimplecom, are both listed on the New York Stock Exchange.

In total, MegaFon sold a 15.2 percent stake through the I.P.O. The Swedish telecoms company TeliaSonera is selling down its stake in MegaFon in the offering. But to raise confidence in MegaFon, TeliaSonera's chief executive and president and a member of the MegaFon board, Lars Nyberg, said he would invest $2 million of his own money in the IPO

“I have a strong belief in the future prospects of MegaFon,” Mr. Nyberg said in a statement. He called the investment “a way for me to show my commitment.”

Despite the gloom in Europe's financial markets, several large listings across the Continent have suc ceeded in recent months. The European Central Bank's unlimited bond-buying program begun in late August has helped to gradual reopen the financial markets and breathe life into European economies.

Recent successes include Telefónica Deutschland, the German unit of the Spanish telecoms giant, which raised $1.9 billion last month and the British insurer DirectLine, which also pocketed $1.4 billion through an I.P.O. Both offerings were valued at the lower end of their respective price ranges.

“The backing of the E.C.B. and reduced volatility in European stock markets have really helped to improve sentiment,” said Martin Steinbach, head of I.P.O.'s for Europe, the Middle East and Africa at the accounting firm Ernst & Young. “Confidence is slowly coming back.”

Morgan Stanley and Sberbank, a Russian state bank, are acting as joint coordinators while Citigroup, Credit Suisse and VTB, another Russia state bank, served as bookrunners.

Andrew Kramer re ported from Moscow and Mark Scott from London.