Dial M for Megafon

The government's plans to shake up the lucrative telecoms industry to create a national champion appear set to struggle despite its strong political backing. Plans have centred on a merger between state-owned Svyazinvest and the country's third-biggest mobile operator, Megafon, as the Kremlin seeks to keep its hands firmly on strategic industries.
"These plans mean that the state (through Svyazinvest) wants to be seriously represented on the mobile communications market," said Dmitry Bogdanov, a telecoms analyst at Gazprombank.
However, Rostelecom's market capital is half that of Megafon and analysts believe that it will prove tough to create a flagship company in the telecoms industry due to strong rivalry from cash-rich competitors.
"Unless [the] funding is substantially changed, Svyazinvest will face very [stiff competition] from better-funded MTS and Vimpelcom," said Philip Townsend, head of research at Metropol. "Certainly its chances of being a [national] champion are slight."
The plan appears to be the brainchild of Leonid Reiman, the influential chairman of Svyazinvest and a former communications and IT minister, who is looking to increase his company's position in the mobile sector.
"Mr. Reiman is believed to have always wanted to have a pan-Russian telephone operator and is further believed to have tried to do it through Synterra, and is rumoured to have been a factor behind Summa Telecom," said Townsend, referring to attempts in recent years to shake up the telecoms sector. "This might be another way of achieving it."
Reiman, a telecoms executive in St. Petersburg in the 1990s, has been cited in various lawsuits as having an interest in Megafon-linked companies in recent years, but has always denied controlling shares in it or other telecoms firms while a minister.
Igor Shchyogolev, Reiman's successor as telecoms minister who mooted the latest plans in January, will also need to secure the agreement of Mikhail Fridman's Alfa Group, which holds a blocking 25.1 per cent stake in Megafon through Altimo.
It is thought that buying out Altimo would set the government back a tidy sum, as Megafon is valued at $20 billion.
"Every asset has its price and I think that if a good offer is there, Altimo might sell its assets," said Stanislav Yudin, a telecoms analyst at Aton brokerage.
A Megafon-Svyazinvest linkup could prove a cash cow, as it would have access to fixed lines while also providing Svyazinvest's Rostelecom with a significant share of the mobile market."The cellular telecoms [sector] has an EBITDA margin up to 50 per cent, which make it more lucrative than fixed lines communications," said Bogdanov, of Gazprombank.
And the market is likely to get even bigger in the next few years as Russians snap up new technology.
"The cellular market has grown 20 per cent lately," said Tibor Bokor, an analyst at Otkritie. "And it will keep going forward at 15 per cent within the next five years."
Metals magnate Alisher Usmanov, who controls 31 per cent of Megafon, has held talks with Shchyogolev's ministry regarding his stake in the company and has expressed his interest in the deal, provided he gets a share of Rostelecom.
"Some kind of joint venture would be a way of dealing with this, which might involve swapping shares of an overvalued Rostelecom with Megafon," said Townsend, of Metropol. "The benefit would be that Megafon might be able to provide funding to the regional operators in the same way as MTS and Vimpelcom do to their fixed-line operations."
Altimo's position on the deal remains unclear. Spokesman Yevgeny Dumalkin said the company has not received any proposal from the government to buy its stake.
The Alfa-controlled holding already has its own plans for Megafon, announcing last year that it plans "to create a joint venture in a Western country" with TeliaSonera that would manage the stakes in the Russian operator and Turkish company Turkcell.
Usmanov was also invited to join but declined.
However, due to a lawsuit in Turkey, Alfa's plans for international expansion are likely to be put on hold in the short term.
"So far we have agreed only to coordinate our efforts in courts for lawsuits on Turkcell stock, [the megafon] assets merger isn't priority for us," said Dumalkin, of Altimo.
Analysts say that the least likely to agree to the deal is TeliaSonera as it is the only strategic investor, while the others would be happy to take the cash.
Meanwhile, Alfa is tied up with another deal involving Vimpelcom, the owner of rival mobile firm Beeline, as it seeks to merge with Norwegian operator Telenor.
Both Russian and Norwegian companies have agreed to pool their assets, which include Ukrainian telecom leader Kyivstar, into a new company to be registered in Bermuda, listed in New York and with a head office in the Netherlands.
The company, to be called Vimpelcom Ltd, would benefit from a merger between Megafon and Svyazinvest as it would concentrate Alfa's assets.
"In this case all M&A deals of Alfa Group's cellular segment will go through this new New-York listed company, which will only enforce it," said an industry analyst, who asked not to be named in line with company policy.
The cellular shake-up is also likely to boost Megafon and its customers, as it would swallow up Svyazinvest's 9 per cent share of the mobile market and create access to fixed-line telecoms."Enlarged cellular companies usually bring the latest technologies as they are focused on this - unlike small ones, which are concentrated on marketing," said Bokor.
The deal is likely to take a while to go through, according to Bokor, noting that it took 18 months for MTS to acquire Comstar in a much smaller deal.
"The management team of Megafon may stay untouched, as Rostelecom does not have managers with experience in mobile communications," said Bogdanov.