5 октября '06
The Russian Telecommunications Market Development in September 2006
1. The General Trends of the Market Development 1.1. The Saturation Rate of the Cellular Communications Market in Russia Some companies have published reports of their financial results in the first half of the year. Besides, Sotovik, the information and analytical agency, has published results of the own research, concerning active subscribers of the cellular communications in Russia. ‘An active subscriber’ is the cellular communications customer, having used the cellular communications once within the month at least. Besides, one ‘active subscriber’ is one user of the cellular communications, regardless of the amount of active SIM-cards he owes. By the end of the 2nd quarter 2006 the number of ‘active users’ in Russia has been 95.9 mln people. At that an increase of active subscribers has been 40% less as compared to SIM-cards amount increase. The penetration level, according to the number of ‘active subscribers’ has been 66.1%. By the end of the 2nd quarter the ‘active subscribers’ share in the volume of the operators’ subscriber bases has been 67.1%. The North-Western and Central licence regions have the highest penetration level according to the number of ‘active subscribers’. Their leadership is mostly provided by the markets, having high penetration level: Moscow and the Moscow region, St. Petersburg and the Leningrad region. The Povolzhye region is a licence region , having the highest penetration level according to the amount of ‘active subscribers’, not including the capital markets. The Far East and Siberian licence regions have the lowest penetration level according to the number of ‘active subscribers’.
1.2. The Demand Evaluation 2. The Regulator Activity and the Legal Field Dynamics
2.1. News in the Legislation and Other Changes in the Legal Field 3. The Companies’ Activity and Decision Making, Having Influenced Most the Market Development 3.1. Success and Failure in New Assets Buying System telecom is handling the problem of expediency of participation in the tender for buying of 65% share of the state communications operator Telekom Srpske (the Serbian Republic in Bosnia). 11 companies has shown interest to the shares buying. Beside System telecom, they are Telekom Srbije, Mobilkom Austria (Austria), Magyar Telekom (Hungary), Elisa (Finland), Telenor (Norway) and others. In addition to payment of the share holding value, the tender winner will have to invest 50 mln euro in Telekom Srpske development within the first year after the share holding buying. The company’s capitalization is valued at 250.6 mln euro. The number of fixed connections subscribers is 344.47 thousand people, the number of cellular connections users is 571.78 thousand people. In September 18, the time of the price offers introduction in the tender for sale of 90% shares of Armentel telecommunications company, belonging to the Greek company OTE, was up. 16 companies participated in the tender. Vimpelcom, MTS and two Arabian companies has reached the second round. After the applications introduction OTE must offer the government of Armenia, the owner of the rest 10% shares, to sell its share to the company. If the government rejects, it will have to say which company from amongst pretenders it gives preference to. It is known that the starting price, declared by OTE, is 637 mln USD. Megafon is negotiating with the American company MCT Corp the buying of 85% shares of the third largest Uzbek cellular operator Coscom. Buying of this asset will become the first step on the assets market outside Russia for MegaFon. According to participants of the Russian cellular market, Coscom costs about 180-200 USD. The company was founded in 1996. 85% shares of the company belongs to MCT Corp., 15% shares belongs to a group of private persons and the management. The company possesses GSM network, covering all large cities of Uzbekistan. Presently the only foreign asset of MegaFon is a small Tajik operator TT-Mobile, founded by Megafon in cooperation with Tajiktelecom in 2001. Analyst notes, the level of competitiveness may be high for MegaFon against the background of mass poverty of the population. In Uzbekistan 8 cellular companies work, the largest of which, Uzdunrobita and Unite, belong to MTS and Vimpelom correspondingly and serve 1.4 mln users in total, that is more then two thirds of cellular communications users in the country. 3.2. The Companies’ Activity at the Stock Markets of Russia.
Volgatelecom has started placement of the bonded debt to the sum of 3 bln roubles. On money received the company is planning to improve fixed network and increase the service revenue by 40%. They’re also planning to increase the subscriber base of the cellular operators, controlled by the company, by more then 34%.
3.3. The Distribution of Securities Overseas
According to MegaFon the company will not enter IPO. This year the company is figuring on the positive money flow. Besides, the company has already had several open credit lines, that has not been chosen yet. One of the credit lines was closed by MegaFon ahead of schedule. The company cancelled the credits of the European Bank Of Reconstruction and development and Ithe International Financial Corporation (IFC)
3.4. The Personnel Changes in the Companies.
The board of directors of Vimpelcom has taken the decision of making a new 2-year contract with general director Alexander Izosimov by simple majority of votes. At that Alfa-group’s representatives (32.9% shares) voted for Izosimov and Telenor’s representatives (26.6%) shares) voted against him. As the qualified majority of votes “for” has been got, the result of the elections can be disputed in court.
Among other personnel changes in the company it is significant that Alexey Kuznetzov, having taken the position of the financial director of the Far East regional department, has been appointed for the same position in the North-Western regional department of Vimpelcom.
Altimo holding, managing Alfa-group’s telecommunications assets, has introduced to the US Securities and Exchange Commission a documents, according to which Jam Holding Asset Management (the subsidiary of Deutsche UFG investment bank) would buy ADR, provided by Vimpelcom shares, from the free market. They emphasize in the statement, the agreement is no more then a tool for investing in the growing telecommunications company, contributing Vimpelcom’s capitalization increase. However, Telenor’s representatives guess, thus Alfa is trying to increase the price of the share in Vimpelcom. According to many analysts, the agreement with Jam Holding Asset Management is quite an appropriate action of Alfa to get the majority in Vimpelcom’s board of directors. The two largest shareholders of Vmpelcom has different opinions about further development of the company: Telenor plans to limit its activity to Russia; Alfa, having control over Altimo, aims at the business development in Ukraine and other republics.
According to Altimo’s statement, presently they are thinking over different ways to cancel relations with Telenor. One of the ways is an exchange of assets between them. The conflict occurred because Vimpelcom had entered the Ukrainian market. According to Altimo’s management, the contradictions show that the company is interested in Vimpelcom’s development, and Telenor is interested in its own expansion at new markets. Telenor has admittedly advantage in the open auction , being a very large company, and can be supported by the state authorities of Norway. They hope in Altimo they will be able to come to an agreement with Telenor about another way of the separation, that would provide both companies’ interest fulfillment. The market analysts mention, any variant of the separation will be positive for reputation of the parties. Probably, that will be an exchange of Alfa’s share in Kievstar for Telenor’s share in Vimpelcom.
Besides, Altimo stated of forming of the international advisory council for the strategic development coordination. The members of the Council are Western experts, having international authority, the experience of work in developing countries and being close
to telecommunications business. Sessions of the council will be held several times a year and according to results Altimo hopes to get recommendations on the strategy issues. According to commentators, that will be useful for Altimo to reconcile many disputes and establish strategic mutual relations with partners, especially taking onto account the conflict with Telenor and the company’s aspiration to expand its activity outside Russia and the CIS. Sigma group has become a creditor of the Volga region cellular operator SMARTS and now it pretend to 45% shares of the company, that did not pay the debt of 58 mln USD to Vneshtorgbank on time. Sigma has bought this debt from the bank. Analysts find it quite probable, that Sigma will manage to become the main shareholder of SMARTS.
Consequently, analysts are rather reserved and even negative in the evaluation of SMARTS management’s statement about intention of the company to found the forth federal GSM operator in Russia. The company is going to achieve this on the basis of consolidation of other regional operators. SMARTS is planning to found a Russian company, compared to Big 3 operators in size. Thus, by 2012 SMARTS as a federal operator is planning to serve 30 mln subscribers, that will be 18% of the total cellular market of Russia. But in the opinion of the most of commentators this operator possesses neither any financial possibility nor political support. Moreover, the company has become a target for absorption. Besides, the market share of independent operators is not large. In total they take about 3% of the market. In case of their consolidation, they will not be able to compete with the Big 3.
4.2. The competition for New Assets and Markets Overseas
The conflict, concerning Bitel, the largest company on the Kirghiz cellular market, is going on. This time Bitel’s management has brought an action for 25 mln USD against three subsidiaries of MTS to compensate funds, having been paid to these companies as dividends in the 1st quarter 2005. In June 29, 2006 the operator’s management sold its property complex to Sky Mobile, the subsidiary of Alfa-group. All Bitel subscribers were transferred to Sky Mobile service, too. Analysts believe, the Kirghiz operator’s claims are no more then an element of pressing MTS in response to MTS attempts to dispute the decision of the Kirghiz Court, made in favour of Rezervsppetzmet company, affiliated with Alfa. In Turkey the conflict between the Scandinavian cellular operator Teliasonera and the Russian Alfa-group is being continued in the local cellular company Turkcell. The Scandinavian company has brought an action to the Istanbul Court to declare invalid the results of the annual meeting of shareholders, at which the present board of directors had been elected. Last year Altimo bought 49% share in Cukorova Telecom holding, that owes 27% of Turkcell, and thus the company got control over 13.22% shares of the operator. At the annual meeting shareholders confirmed a new membership of the board of directors. Teliasonera and the Turkish group Cukurova (owing 40 and 37% Turkcell shares correspondingly) got two places each. Alfa got two places and the seventh was an American Colin Williams. Two places in the board of directors were put aside for Altimo in accordance with the contract of shares buying. But Teliasonera has raised objections against membership of the board of directors, pointing out that three of seven members must be independent directors as it is written in instructions of the US Securities Commission
4. The Conflict Zones and the Interests Opposition Fields
4.1. The Contradictions Between Entrepreneurs as a Result of Changes in Property Structure, Merges and Absorptions
Due to the summer vocation of the legislative authorities, finished in September, there were not evident changes in the legal field.
Amendments to the act “On Banks and Bank Activity”, consummated in August, forbid the sale of express payment cards for cellular communications and the Internet without making an agent contract with a bank. According to analysts and Mass Media, this makes impossible their sale in most retailing outlets and prices will raise because of bank’s commission charges..
2.2. The State Assets Privatization
In spite of the fact, that Svyazinvest privatization in 2007 has remained doubtful, the market participants and analysts keep discussing any events that could be related somehow to the problem. Recently this has been caused by promoting by Lider company, managing assets of the pension fund, their general director to the board of directors of Svyazinvest’s interregional company “Uralsvyazinform” (USI). Lider’s shareholders are “Gasfond”, the Joint-Stock Bank of Gas Industry of Gasprombank Ltd, “SOGAS”. Besides, recently Lider has bought 7.5% shares of the other Svyazinvest’s interregional company – the Southern Telecommunication Company (STC). Almost all commentators believe, the telecommunications assets are not interesting to Gasprom and Gasprom’s participation in Svyazinvest privatization is improbable. Concerning the minority share holdings of the interregional companies. Lider owes, they speak of investment only to make profit. But some observers think, some participation of Gasprom in Svyazinvest privatization can be provided to keep the state control over the company.
2.3. The Legislation and Law Enforcement Authorities’ Evaluation of Legality of the Privatizations, Merges and Absorptions Held
2.4. The Struggle with Illegal Entrepreneurship
FAS could not prove the fact of Big 3 (MTS, Vimpelcom and MegaFon) cartel collusion after CPP principle taking effect. But on the plaintiff’s, the Association of Regional Operators of Cellular Communications, insistence a new claim was raised : as if regional operators can lose profit or will be forced to raise tariffs on their services because of the Big 3 activity. Leonid Reiman stated, the Ministry of Information and Connections will analyse MTS tariff policy.
Bee Line has stated the intension to address FAS, concerning the confrontation policy of regional operators. According to Vimpelcom authority, some operators in regions set wittingly low tariffs and do not respond to the company’s offers to establish mutually beneficial conditions. But regional operators regard this as an infringement of freedom of competitiveness. Bee Line has accused Uralsvyazinform (Utel trade mark) of monopolism on the basis of the fact, that being simultaneously the operator of wire and cellular connections, the company set a group of tariffs, giving users of wire phones baseless advantages for calls on cellular phones. The Moscow Arbitrage rejected the 291 mln roubles claim of Motorola cellular phones producer on protection of reputation to the Russian company RussGPS. The claim on protection of Motorola’s business reputation was the result of the scandal, concerning the seizure from Euroset company a lot of phones on more then 19 mln USD, legally imported to Russia. In the late March RussGPS stated they have several patents, protected in Russia, for most of the seized Motorola phones.
2.5. The Regulator’s Activity Evaluation by Entrepreneurs and Mass Media.
The changes at the cellular communications market after introduction of CPP principle since July1, 2006 are still being discussed. In MGTS they said that within July they had sent 8 mln bills, including the column ‘intrazone connection’, but they did not mention any statistics of amount of calls from fixed phones to cellular phones. The amount has admittedly decrease much at first, and in August it started growing again. The cellular operators’ representatives think they could hardly speak of considerable tendencies before the end of summer season. A large lot of 117.000 Motorola phones, arrested on the Russian border in March , has been returned to the rightful owner, and this has changed the situation in the field of mutual relations between the law enforcement bodies and trader companies. Actually the racket action of the security agencies has been foiled. The goal of the action was sales of the seized goods without the court decision. The dismissal of the action and restitution of the goods to the owners were preceded by Euroset’s and Motorola’s protest and other delays from the direction of the prosecutor’s instances.
The State Commission On Radio Frequency stated it had found the frequency resource for Vimpelcom in the Far East and was ready to give it to the operator under the tender by early 2007.But Vimpelcom intends to assert its rights on licenses and frequency without the tender.
In September 9, 2006, the Court of Appeal left the decision of the Moscow Arbitrage, favouring Vimpelcom on one of the claims, registered by Telenor, changeless. Recently the Norwegian company has demanded the court to declare invalid Vimpelcom’s decision of buying of the company “Ukrainian Radiosystems” (URS), but that claim has not been allowed either. Now in Telenor they are waiting for the decision of the Moscow Arbitrage about the deal’s legality. The session is scheduled for October 18, 2006.
According to the forecast of International Data Corporation (IDC) the mobile phone sale in Russia is expected to decrease by 9% as compared to the previous year, when 31.9 mln were sold. It is a result of the previous rapid increase, analysts of the company said. IDC believes, the mobile phone market will recover, but the process will be long. In the 2nd quarter 2006 the sales decreased by 8.8% as compared to the same period of the previous year and were 7.12 mln phones. In the 2nd quarter in the sales volume the share of Nokia delivery was 24.4%, the share of Samsung delivery was 20.3%, Motorola – 16.6%, BenQ-Siemens – 15.4%, SonyEricsson – 11.5%, LG – 3.5%. The share of other suppliers was 8.3%
1.3. The Offer of Standard and New Services
MTS company has started developing its own network of outlets, selling its phones and contracts. The first such outlet has been already opened in Moscow. By the end of the year 545 MTS outlets will have worked according to this scheme. In accordance with cellular dealers evaluations, the constructing will cost the company more then 15 mln USD . “Eldorado” network has stated its interest to the market of the cellular retail. By the end of this year the company is planning to open more then 450 outlets of communications, doubling its mobile phone retail network.
1.4. The Main Companies’ Potential (capitalization, profit)
MTS company has declared financial implications of the 2nd quarter 2006. If compared with the same results of Vimpelcom, having been published before, it is obvious that MTS keeps leading the Russian and CIS markets in proceeds and amount of subscribers. Within the quarter the company has increased the proceeds by 15.8% or by 20.7% as compared to the same period of the previous year. The operation income before depreciation deduction and intangible assets amortization (OIBDA) has increased correspondingly by 22% and 12.1%. The pure profit has decreased by 3% as compared to the same period of 2005. As they explain in MTS, this happened because of increase of the costs on the amortization and the unfavourable change in exchange rate. MTS keeps taking the head over Vimpelcom by the figures, but the company is losing by the growth rate as in previous quarters. For the year MTS pure profit has decreased while Vimpelcom’s pure profit has increased by 22.7% and by 29.8% as compared to the 1st quarter 2006. For a year MTS has increased OIBDA by 12.1% and the company’s competitor has increased this figure by 42%. In 2006 MTS has increased ARPU as well as Vimpelcom has done. They connect this in the company with the season growth of the traffic, the launch of rouble tariffs and the aggressive marketing policy. As a whole the results are positive, experts said. The negative factor for MTS is a fact that the company’s competitor on the Russian market Vimpelcom keeps reducing the gap in proceeds. MTS share price growth was observed at exchanges. According to experts that is connected with the declared programme of buying 10% ADR, confirming the shareholders’ rights to the company’s simple nominal shares.
The successful financial results of MTS and the news of buying of 10 % ADR induced analysts to revise the estimation of the operators’ share fair value in favour of increase. For instance, UBS investment company has raised the fair value of MTS ADR from 40 to 51 USD per share by changing the recommendation from HOLD to BUY. Other companies also publish their forecasts, changed in favour of the rise.
MegaFon has published the financial results of the 1st half of the year 2006 on US GAAP. The pure profit has increased by 70% as compared to the same period of 2005 and achieved 318.6 mln USD. The proceeds have increases by 51% and achieved 1.551 bln USD. EBITDA figure has increases by 72% up to 786.5 mln USD. In the 2nd quarter the proceeds was 851 mln USD (the increase of 51% as compared with the same period of the previous year), EBITDA was 443 mln USD< (the incease by 76%), the pure profit was 186.5 mln USD (the increase by 67%). According to analysts’ evaluation dynamics of the operator’s figures is quite comparable to MTS and Vimpelcom. According to the data of iKS-Consulting, in the 1st half of this year MegaFon passed ahead of MTS and Vimpelcom on APRU.Megfon’s APRU has achieved 10.2 USD, APRU of MTS is 7.3 USD, and APRU of Vimpelcom is 6.7 USD.
1.5. The Market Expansion due to Overseas Expansion
According to iKS-consultin, since 2001 the Big 3 (MTS, Vimpelcom and MegaFon) has spent 1.38 bln USD on the purchase of operators in the CIS. Vimpelcom and MTS spent in equal parts: 691 USD each. The most significant deals were carried out in Ukraine and Kazakhstan. MTS bought the Ukrainian operator UMS for 373.47 mln USD, Vimpelcom paid 350 mln USD for Kazakh Kar tel, taking debt instruments of 75 mln USD. Later 50% of Kar tel was sold to Crowell Investments, affiliated with one of the largest Kazakh bank APF bank. Now each of these companies is working in 5 republics: Vimpelcom in Georgia, Ukraine, Kazakhstan, Uzbekistan and Tajikistan; MTS in Byelorussia, Ukraine, Uzbekistan, Turkmenistan and Kirgizia. But in Kirgizia MTS , buying 51% of Bitel operator 150 mln USD, still has not taken control over its network and office.
