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MegaFon Eyes Tele2 Assets as Debt Blights Rostelecom

December 06, 2012

MegaFon Eyes Tele2 Russian Assets While Debt Blights Rostelecom

Mobile devices and prices sit on display inside an OAO MegaFon store in central Moscow. Photographer: Alexander Zemlianichenko Jr./Bloomberg

OAO MegaFon, billionaire Alisher Usmanov’s mobile-phone operator, may look into acquiring assets of competitor Tele2 AB (TEL2B) in Russia, while OAO Rostelecom doesn’t appear attractive, a board member said.

MegaFon is interested in expanding in the country and would consider parts of Tele2 if they are offered, Ivan Streshinskiy, MegaFon director and head of USM Advisors LLC, which manages Usmanov’s assets, said in an interview at Bloomberg headquarters in New York this week.

“Tele2 positions itself as a discounter and fully combining it with MegaFon could potentially destroy this competitive advantage without adding customers for MegaFon,” Streshinskiy said. For a deal to add value for MegaFon shareholders, it could be carried out with other operators, he said, declining to elaborate.

Sweden’s Tele2, which failed to win a fourth-generation license in Russia in July to offer faster data services, has been looking into selling its unit in the country or forming an alliance with local competitors, RBC Daily and Kommersant have reported. OAO Mobile TeleSystems and Rostelecom confirmed their potential interest to Tele2. Pernilla Oldmark, a Tele2 spokeswoman, declined to comment.

Tele2 Russia may be worth 4.5 times its earnings before interest, taxes, depreciation and amortization, said Anna Kurbatova, an analyst at BCS Financial Group. Based on nine- month figures, that implies a value of at least $3.1 billion.

MegaFon rose 1 percent to $21.86 at 9:44 a.m. in London, while Tele2 gained 0.6 percent to 117.70 kronor in Stockholm.

‘Governance Problems’

Russia’s government, which owns about 53 percent in Rostelecom, may sell shares in the former fixed-line monopoly in 2014, the Economy Ministry said in June.

“I can’t think of any reasonable private investor who will agree to buy Rostelecom in its current shape with a $6.5 billion debt burden and corporate governance problems,” Streshinskiy said. “They need proper management as the current one is affiliated with one private shareholder,” he said, referring to Marshall Capital, which owns a stake of about 10 percent.

Rostelecom lost its focus on broadband Internet and built debt trying to expand into mobile business and overpaying for pay-TV assets, Streshinskiy said, echoing criticism of the company in October by Telecommunications Minister Nikolay Nikiforov.

Rostelecom Network

Rostelecom is expanding its mobile and pay-TV operations to compensate for a decline in the fixed-line business, the company said in an e-mailed statement, adding that other operators are doing the same. The company follows the best standards of corporate governance and its decisions are approved by the board of directors, it said.

Prime Minister Dmitry Medvedev’s government has been trying to replace Rostelecom Chief Executive Officer Alexander Provotorov since October, according to Kommersant.

Three years ago, the government weighed a potential merger of Rostelecom with MegaFon, which “could have created a so- called ‘national champion’ in telecommunications with dominant positions in both fixed-line and mobile businesses,” said BCS’s Kurbatova. “I doubt this is still on the agenda.”

Network Coverage

Rostelecom has said that its business would most complement that of Tele2, partly because neither of their networks cover all of Russia. Rostelecom Senior Vice President Pavel Zaitsev denied talks with Tele2 earlier this week, telling reporters there is no mutually beneficial plan for a potential tie-up.

OAO Mobile TeleSystems (MBT:US), Russia’s largest wireless carrier, may also be interested in buying Tele2 assets if offered, MTS Chief Financial Officer Alexey Kornya said Nov. 14.

The press office at the Russian unit of mobile operator VimpelCom Ltd. (VIP:US) declined to comment on whether the company is interested in Tele2 assets. MegaFon and VimpelCom jointly own handset retailer Euroset Holding NV.

Russia has three country-wide mobile operators. Billionaire Vladimir Evtushenkov’s MTS was the biggest with 70.7 million users at the end of the third quarter, Usmanov’s MegaFon, which raised $1.7 billion in a London IPO last month, was second with 62.8 million and billionaire Mikhail Fridman’s VimpelCom was third with 56.2 million, according to Moscow researcher AC&M Consulting.

Tele2 and Rostelecom are lagging behind and have mobile coverage only in less than half of the country’s regions. Tele2, which provides services on a second-generation network, had 22.3 million Russian users, while Rostelecom had 13.6 million.

Russia’s mobile market will grow about 5 percent this year to $27.6 billion, with about 20 percent of this from non-voice services, according to AC&M Consulting.

To contact the reporter on this story: Ilya Khrennikov in Moscow at ikhrennikov@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net


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Companies Mentioned

  • MBT
    (Mobile TeleSystems OJSC)
    • $8.11 USD
    • 0.06
    • 0.74%
  • VIP
    (VimpelCom Ltd)
    • $4.08 USD
    • -0.26
    • -6.26%
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