7 июля '07
The Russian Telecommunications Market Development in June 2007
1. General Trends of the Market Development
1.1. Saturation Rate of the Cellular Market in Russia
In June the major data about the Russian market of cellular communications in the 1st quarter of 2007 were published. The intermediate data for the 1st half of the year have not been sufficient yet. In May the subscriber base of Vimpelcom increased by 1.58% up to 58.403 mln people as compared to April, 2007. In Russia Vimpelcom has 49.355 mln users, i.e. by 1.13% more than in April. In Moscow the number of users increased by 0.62% up to 10.433 mln people. In Ukraine the subscriber base grew by 2.4% up to 2.501 mln, in Armenia – by 1.29, i.e. 488. 701 thousand users. According to MForum Analytics, in 2006 58.4% of Russian households used fixed-line communications. 60.1% of Russians were active subscribers of cellular operators. An active subscriber had around 1.15 active SIM cards. The growth of the penetration level of the fixed-line communications per a household was from 0.7% to 2.3%, depending on a region last year. The number of the fixed-line communications users grew from 4.1% to 10.3%. According to results of 2007, fixed-line and mobile segments of the telecommunications market may become equal in number of users, the company supposes. The penetration level of cellular and fixed-line communications may grow by 7-10% and reach 70%. In June 19 the president of MTS Leonid Melamed published a forecast of the company on the Russian market of cellular communications. According to his assessment, within the period from 2006 to 2012 the market volume will increase by 132% up to 34.1 bn USD. The annual growth rate will be 15%. Several factors influence the market potential. Firstly, the growth of the population’s revenue will lead to the growth of subscribers’ charges for communications. The Russian economics growth will be 5-7% in 2007. The consumers’ revenue growth will be 17%. On the average Russian users spend for communications less than users from other countries. Average annual charges for communications are 99 USD in Russia, 158 USD in developing countries and 513 USD in developed countries. According to MTS, the share of subscribers, using only cellular communications, will be 18% in 2008 and 22.% in 2012. MTS also hopes for new services development by subscribers. MTS forecasts that in the nearest future the structure of cellular operators’ proceeds will change. In 2006 15% only fell to the share of VAS (value-added services), the rest 85% fell to the proceeds from voice services. In 2012 10% will fall to the share of data communication, 12.3% to the share of VAS and 77.7% to the share of voice services.According to the analyst from Troyka Dialog Andrey Bogdanov, the concept of MTS on the market development is quite logical. Though the market is saturated and the growth of the subscriber base will be slow, it is quite achievable to double the market within next 5 years. The major factor, reflecting the market potential is a low talkative activity of Russian subscribers. The voice traffic in cellular networks in Russia is about 140 minutes a year, while in Western European countries the traffic is 2-3 times as much. The market has a potential even in cheap tariffs. The value of mobile services does not fit a real level of the population’s income, so tariffs will go up. The leading analyst from Veles Capital supposes, the assessment of MTS is too optimistic. To make the market develop in accordance with the rates, forecasted by MTS, the value of services must be increased significantly. The growth of tariffs will not contribute to outflow of subscribers from the fixed-line to cellular communications. The Chief Executive of Golden Telecom Jean Pierre Vandromm says in the nearest 5 years the fixed-line communications market will develop faster than the mobile market. According to his forecasts, an average annual growth rate of the mobile market will be 19%. The market will increase from 14.4 bn USD in 2006 to 29.9 bn USD in 2010. A growth rate of the fixed-line communications market will be 26% (from 10.1 bn USD to 25.7 bn USD). Mr. Vandromm believes that the fixed-line communications market and the market of wideband access to Internet in particular, will be consolidated. In 4-5 years the market will have its own Big3, which “may be controlled by the same financial groups as those, taking control over cellular companies”. 1.2. Demand Evaluation
According to the rating on the most popular mobile phones, held on sotaland.ru., the top five are following: Nokia 95 (100), Nokia 6300 (91), Samsung U600 (53), Nokia 76 (34), Sony Ericsson W880i (28). Sistema Telecom has promulgated new plans on development of the company’s retail branch. TS-Retail company will construct a unified network on sale of services of all Sistema Telecom’s subsidiaries (MTS, Comstar, MGTS, Stream). By late 2007 the company is planning to open more than a thousand stores in Russia. At present there are two participants in the chartered capital of TS-Retail (MTS and AFK Sistema). In future other subsidiaries of Sistema Telecom must get shares in the company.According to representatives of the branch, it will be very difficult to create a big network of cellular stores. It would be more logical to buy one of the existing retailers. Sky Link has launched services of mobile television and video. The company expects the services will be used by one tenth of the subscribers and the video services will return the operator up to 1.2 mln a year. According to experts, the plans of Sky Link are too optimistic as most of the operator’s subscribers are businessmen, lacking time for mobile entertainments. The holding Sinterra has announced a tender among suppliers and integrators for construction of WiMax, a network of wideband data communication. Sinterra intends to cover 1000 cities by the network and earn 5 bn roubles in 2009. The company will work through regional operators-partners. According to the senior consultant of iKS - Consulting Margarita Zobnina, there is demand for mobile access to Internet. In late 2006 GPRS access of GSM operators was used by 16.5 mln people. In contrast to Zobnina, the associated partner of J’son&Partners doubts that Sinterra will be able to earn 200 mln USD by WiMax within the 2-year period. Euroset has announced about the sale of Gsmart i300, the first GPS-phone, consisting of PDA-phone and GPS-navigator. In Russia Gsmart i300 of Gigabyte Communications company will be only sold in Euroset stores. 1.4. The Major Companies’ Potential (Capitalization, Profit)
The Board of directors of MegaFon, devoted to preparing of an annual meeting of shareholders, has not made a decision on payment of dividends. According to the charter of MegaFon, to make a positive decision on dividends 6 of 7 members of the Board should vote “for”. However, only 5 members voted “for” and 2 memebers “against”. Representatives of Telecominvest voted “against”, thinking that the company should invest the profit in development as the company had only started generating a positive pure cash flow in 2006. The question of dividends was submitted by TeliaSonera. Vimpelcom, having received first a pure cash flow (459.2 mln USD) last year, is planning to pay 330 mln USD, i.e. 40% of pure profit as dividends to owners of the voting shares of the company. MTS is planning to pay shareholders 60% of profit, i.e. 747.44 mln USD. 52.8% MTS share belongs to AFK Sistema, the rest shares are circulating at stock exchanges. The proceeds of the company for 2006 are 6.38 bn USD, OIBDA of the company is 3.23 bn USD, net profit of the company is 1.08 bn USD. In June 28, 2007 capitalization of the operator is 23.7 bn USD. Sitronix has reported according to US GAAP for the 1st quarter of 2007. The proceeds were 310 mln USD, increasing by 10% compared to the same period of 2006. Net loss of the company was 28 mln USD. The OIBDA loss was 11.4 bn USD. They say in the company, postponing of some big projects for the 2nd half year of 2007 has negatively affected the company’s revenue. The projects include one of the stages of the 3G network construction by the cellular operator MTS. The Swedish holding Tele2 has informed investors about new strategic objectives of the Russian business development. The company will gamble on the efficiency raising of Russian operations. In particular, Tele2 is planning to increase economic efficiency according to EBITDA from 28% to 35-40% in Russia in a medium-term prospect. The company intends to obtain 10-11 mln users and increase its ARPU up to 10 USD. The president and CEO of Tele2 Lars-Johan Jarnheimer says, the Russian subsidiary of the holding is growing faster than subsidiaries in European countries. According to the results of 2006, net loss of Tele2 was 352.7 vln USD, and the proceeds reached 7.4 bn USD. The Russian subdivision brought the holding 417 mln USD, three times as more than in 2005. The president of Tele2 says the company intends to continue regional expansion and does not exclude a possibility of selective absorption of regional operators. Moreover, the company intends to fight for a license for 3G services providing. At present the indexes of the operator’s efficiency in Russian is far from indexes of the Big3 competitors. According to the results of the 1st quarter of 2007, the economic efficiency according to EBITDA of MTS and Vimpelcom is more than 50%. In 2006 economic efficiency of MegaFon was 49.5%. In 2006 in Russia ARPU of Tele2 was 6.7 USD, while ARPU of MTS and Vimpelcom was 8.2 USD and 8.9 USD correspondingly. ARPU of Megafon was 13.3 USD.According to the consultant from iKS-Consulting Margarita Zobnina and the expert from Mobile Research Group Sergey Potresov, it is impossible to increase ARPU and a subscriber base simultaneously in the conditions of the saturated market. 2. The Regulator’s Activity and Dynamics of the Legal Field. 2.1. News in the Legislation and Other Changes in the Legal Field
The full version of the regulations on the Federal Service on Supervision over Keeping to Legislation in the Sphere of Mass Communications and Cultural Heritage Protection has been published. The department is authorized to solve problems of control and supervision in the sphere of mass information, information technology, communications, cultural heritage protection, copyright, etc. At that the department will submit directly to the government. In particular, the new department will take up all matters of radio frequency regulating and hold tenders for distribution of licenses.Experts doubt the department will be able to work effectively, having so many powers. The market participants, in contrast, are expecting the situation of licenses distribution will improve. The Ministry of Economic Development has initiated reduction of custom duties to imported mobile phones. The customs duty to ready-made cellular handsets may be cancelled (at present the duty is 5%). They are also taking up stimulating of phones assembling in Russia. At present the custom duties to components for phones are from 5 to 20%. The Ministry offers to reduce them up to 0-5%. 2.2. The State Assets Privatization
The Ministry of Economic Development has published a new variant of Svyazinvest restructuring. The Ministry offers to give shares of the holding to Rostelecom, 50.7% of which belong to the holding. Thus, Rostelecom will be able to issue additional shares and Svyazinvest will have to be wound up. In contrast, according to the head of Rosimishestvo Valeri Nazarov, the sale of Svyazinvest as a whole will be more profitable for the state. The analyst from Alfa Bank Vitali Kupeev says, the allotment of Rostelecom is preferable for Sistema, owing the blocking share holding of Svyazinvest and controlling another operator of telecommunications MTT. If the variant of a consolidated company creation by consolidation of assets on the base of Rostelecom is realized, major minority shareholders of Rostelecom, buying a large amount of the operator’s shares, will benefit as the shares will be more liquid. Experts agree that before the President election in Russia serious changes, influencing transfer of the state assets to private investors, will hardly take place or some other certain concept will be confirmed.The cellular assets of MRK (interregional companies) of Svyzinvest, may be sold within a year and a half, said Alexander Kisilev, CEO of Svyazinvest, to journalists in June 22. According to his words, MRK have no chance to obtain licenses for 3G communications, so their cellular assets have no market prospects and should be sold. The possibility to sell is limited by such a period, so at present the price of the assets is the highest. Kisilev agreed with Leonid Reiman, Minister of IT and Communications and Chairman of the Board of directors of the holding, who said last Monday that market capitalization of MRK is maximum at the moment and it will hardly grow. However, the director of External Communications Department of Svyazinvest Oleg Mikhailov informed RBK daily, that the final decision on prospects of the cellular business had not been taken yet and the sale of it “is only one of the variants of MRK development”. 2.3. Assessment of Legality of Privatizations, Merges and Absorptions by Legislative and Law-Enforcement Bodies.
Vimpelcom has raised a claim to FAS on actions of GKRC (the State Commission on Radio Frequency) and the Federal Agency of Communications. According Vimpelcom, the tender declaration for distribution of 26 sets of radio frequencies in 11 regions of the Far East is illegal and the company demands from FAS to cancel the tender. At that the operator says, conditions of the tender give priority to operators of local communications, having been introduced already on territory of the tender. The Federal Agency of Communications (Rossvyaz), which prepared conditions of the tender, has rejected the charges of Vimpelcom. But the results of the tender will be summed up by a new megaregulator, the Federal Service on Supervision over Keeping to Legislation in the Sphere of Mass Communications and Cultural Heritage (Rosohrankultura). Vimpelcom has also sent a letter to its head Boris Boyarskov, asking to interfere in the matter, but no answer has been received yet. The Moscow Arbitration has dismissed the claim of SMARTS to the Federal Agency of Communications. The operator was disputing a decision of the commission, which distributed licenses for 3G communications services providing. The commission excluded SMART from the tender because the company was indebted to the budget. Despite the decision of the court the operator intends to struggle for review of Rossvyaz’s decision.Experts say, even in case SMARTS is included to the finished tender, the company has no chance to obtain 3G license. 2.4. Struggle with Illegal Entrepreneurship
The owner and chairman of the Board of directors of SMARTS Gennadi Kirushin has been charged by the Prosecutor’s office according to 4 articles of the Criminal Code. He is suspected of fraud, illegal entrepreneurship, connected with an income deriving, and legalization of funds, obtained in illegal way. The charges are preferred in the frames of violation of the licensing requirements to base stations exploiting. CEO of SMARTS Andrey Girev confirmed, that earlier Rossvyaznadzor had really revealed violations in exploiting of the base stations. At that time the company had not a license for 9 stations use. However, according to Girev, now they have remedied the situation. Using such methods, swindlers are trying to reduce the market price of the Volga region operator, he says. Analysts suppose that raiders are connected with the charges. The charges are probably supported by Sigma, pretending to a share holding in the Volga region operator, says the managing partner of the law firm Dobronravov&Partners Yuri Dobronravov. “In the frames of the charges of violations of base stations exploiting it seems strange that the owner of the operator was only charged”, says the chief executive of the analytical company Direct INFO Aleksey Kondratov. In contrast to them, Vladislav Kochetkov from Finam supposes that the dispute with Sigma allows the operator to charge raiders of many circumstances.Sellers of an imitation Vertu have activated on the Russian market. An imitation copy can be bought for 20 thousand roubles, while its real price is about 5 thousand USD. However, producers of Vertu believe that the imitations do damage neither to their image nor to sales. According to the information of the analytical agency Sotovik, about 1300 Vertu are sold in Moscow monthly. The price is about 5 thousand USD. Chinese imitations of luxury phones appeared on the Russian market a year ago. 3. Companies’ Actions and Decisions, Influencing Most the Market Development 3.1. Investments in Growth and Development
Vimpelcom is planning to develop mobile television on the base of Dominanta company in DVB-H standard, says CEO of the operator Alexander Izosimov. According to his words, they think this format is more effective for mass development of mobile television compared to 3G standard. 3.2. Success and Failure in New Assets Buying
The company Altimo, managing telecommunication business of Alfa Group, has informed the USA Commission on Securities and Exchanges about the next increase of its share in Vimpelcom up to 44%. Thus, Altimo has got a right to nominate 4 candidates to the Board of directors of the operator.Analysts of the market suppose that reaching 44% by Altimo will not guarantee a real benefit to the company. According to the senior analyst from UralSib Konstantin Chernishov, the increase of Altimo’s share in Vimpelcom will influence relatively the correlation of forces in the Board of directors. Firstly, not all shares will be taken into account during voting. Secondly, all candidates to the Board of directors have already been nominated. Thirdly, reaching of a 44% share will allow Altimo to get only one additional place. In accordance with the charter of Vimpelcom, in order to take important decisions, 8 of 9 members of the Board must vote “for”. To change the charter or the regulations about shareholders 75% of shareholders must vote “for”. Irina Bulkina from the information company RMG has the same opinion. According to her, the company’s actions are targeted to the end of opposition with another largest shareholder, Telenor. In this case it is important to take into account the decision of the court of New York, where Telenor is charging Alfa Group’s subsidiaries of the illegal acquisition of 9.5% of Vimpelcom shares in 2006-2007.The Norwegians say that in order to make the deals Alfa’s structures used the inside information, and demand to prohibit Alfa to use the acquired shares of the operator. Consolidation of 44% of Vimpelcom shares in Altimo allows the company to elect 4 its representatives to the Board of directors. According to Ilya Fedotov, an analyst of IC Veles Capital, obtaining the benefit, Alfa has deprived Telenor of the possibility to increase its influence in Vimpelcom. Nevertheless, Alfa will not be able to take decisions, important for Vimpelcom, through the Board of directors. Since 2006 Altimo’s share in Vimpelcom has increased by 11.1% in total. Today Altimo has invested more than 1.6 bn used in the acquired securities.MTS has bought a 26% share of the Uzbek operator Uzdunrobita for 250 mln USD, increasing its stake up to 100%. MTS became a shareholder of Uzdunrobitain in August 2004, paying 121 mln USD for a 74% share. At the same time the company made an optional agreement with the seller, which allowed it to buy the rest 26%. The 3-year partnership allowed MTS to “take a leading position on the market,” said the president of the company Leonid Melamed in the press-release of MTS. According to him, full consolidation of the Uzbek subsidiary, which possesses the license for mobile communications services and 3G services all over Uzbekistan, will allow MTS to use fully the high potential of the Uzbek market”. Within 3 years the penetration level of mobile communications in Uzbekistan has grown from 1.5% to 11.5%, the amount of subscribers has increased from 210000 to 1.85 mln people. The annual turnover has grown from 32 mln USD (2003) to 136.7 mln USD (2006). Chairman of the Board of directors of Alfa Group Mikhail Fridman is not interested in acquiring a share in the Scandinavian telecommunication company TeliaSonera, which is planned to be sold by the government of Sweden. According to Fridman, quoted by Dow Jones agency, during the meeting with Swedish Minister for Financial Markets Mats Odell they will not discuss the question about the exchange of cellular assets of Alfa to shares of TeliaSonera. 3.3. Personnel Changes in Major Companies
The president of AFK Sistema Alexander Goncharuk resigned the position of CEO of Sitronix. The position has been taken by the vice president on innovations and science of AFK Sistema Denis Muratov. Alexander Boreiko, a former director on relations with investors of Sitronix, has been appointed a director on international relations and relations with investors of Vimpelcom. Dmitry Kromski has been appointed a chief executive of Vimpelcom on development of new acquired companies in the CIS countries. At that he is holding a position of CEO of Kar-Tel in Kazakhstan. In 2002 Kromski was employed to Vimpelcom as a regional director of the Central region. Earlier he had worked in the field of telecommunications. Vimpelcom has created the management on 3G networks development. The management has been headed by the director of the Moscow region Dmitry Urivaev. In the nearest future the management must choose a supplier of equipment for 3G networks development. After AFK Sistema decided to give the operating control over Sky Link to its partner, the Danish businessman Jeffrey Galmond and to substitute CEO of Sky Link Alexander Nesterov to Gulnara Hasyanova, most of the management team decided to quit. Beside CEO of Moskovskaya Sotovaya Svyaz (the Moscow subsidiary of Sky Link) Dmitry Saprikin, the first deputy CEO Vladislav Vasin, the deputy CEO on regional development Andrey Sinelshikov, the deputy CEO on strategic marketing and sales Alexander Piotrovski, the director on marketing Ivan Sukhorukov and the whole commercial block have quitted. Before being employed to Sky Link Hasyanova was working a deputy CEO on commercial activity in Rostelecom and MTT. According the source from RBK daily, the wish for the quit was mutual from the new management and the old team. The whole team quitted as they had not managed to work on with the new CEO after Nesterov and Vasin had quitted. CEO of Dixis network of saloons Alexey Chuikin quitted. According to the source from Dixis, the commercial director of the company GlebGroshenko has temporally taken the position. Later he will probably head the company. 4. Conflict Zones and Interest Opposition Fields 4.1. Contradictions between Entrepreneurs During and As a Result of Changes in Property Structure, Merges and Absorptions. At the special meeting of shareholders of MegaFon the subsidiary Mobicom-Center was not taken over to the mother company again. The decision was blocked by CT-Mobile, through which Alfa owes the shares of MegaFon. The shareholders want to be sure that after reorganization of the operator Alfa’s share will not decrease in the whole structure of MegaFon.The market analysts say that postponing of MegaFon’s subsidiary taking over to the mother company is connected directly to the present conflict between the operator shareholders. They have not still agreed on belonging of 25.1% of MegaFon shares, Alfa is disposing of now, says the analyst from the Bank of Moscow Rostislav Musienko. Altimo says the company intends to get rid of the control share holding of its Kirghiz operator Sky Mobile in 2007.According to Oleg Sudakov from AK Bars Finance and the analyst from Veles Capital IlyaFedotov, legal risks of the asset, displayed for a sale, will certainly influence its value. Vimpelcom is the most probable candidate for acquiring, supposes the analyst from Antanta Capital Anna Krilova. The No 9 Arbitration Court of Appeal of Moscow has rejected to declare a transaction invalid in which Vimpelcom acquired Ukrainian RadioSystems (URS) in November 2005. Thus, the Court upheld a ruling from the Moscow Arbitration Court. According to Telenor, an owner of 29.9% of Vimpelcom and the control share holding of the cellular operator Kievstar, the acquiring of URS is unprofitable. According to Vimpelcom, it will be difficult for the Norwegian shareholder to insist on invalidity of the transaction after two suits failed. Experts are skeptic regarding prospects of the suit. Telenor, from its part, has not made any further decisions. The London Arbitration Court has answered a suit of Fellowes, controlled by Russia’s Alfa Group against 3 offshore companies: Kyrgyztan Mobitel Ltd., Flaxendale Ltd. And George Resources Ltd. The companies have been accused by Alfa of that they failed to execute the option for Bitel sale. According to the decision of the Arbitration, the 3 structures, controlled by MTS, which owe Bitel officially, must recover losses to Alfa subsidiary. The indemnity will be defined in the frames of another trial.Analysts have different opinions in their assessment. According to some experts, the rights for Bitel will be appointed by Kyrgyz Court regardless of the London Arbitration award. A right of property and losses recovering are not connected, says Chairman of the Board of directors of Nekster Anton Bogatov. MTS will be able to motivate the Court award as termination of Alfa’s claims on Bitel, comments the head of the arbitrating group of Vegas-Leks, a law firm, Andrey Korilski. Other analysts believe, the regulation on losses recovery for the illegal sale of Bitel will benefit MTS in case the company proves its rights for the Kyrgyz operator.Sweden-Finnish operator TeliaSonera and Russian Altimo have resumed the negotiations for a share increase of Teliasonera in Turkcell and MegaFon. The details have not been known yet, though the market analysts say, partnership between the parties is mutually beneficial and sooner or later they will take a constructive decision. The companies have common assets on the key cellular markets of Turkey and Russia: Turkcell and MegaFon, comments the leading analyst of Troyka Dialog Andrey Bogdanov. Moreover, both operators have an access to the Ukrainian market. Altimo and TeliaSonera are the most beneficial partners for each other. However, there are numerous matters, the companies cannot agree on. Altimo does not intend to become a minority shareholder in TeliaSonera while changing the assets. The Scandinavian company, in its turn, is fearing to give ruling to an overseas investor. The Norwegian company Telenor brought a suit to the Federal Circuit Court of New York against 5 daughter companies of Alfa Group. Telenor is charging the Russian shareholder of Vimpelcom of illegal acquiring of a 9.5% share of the operator within the period from August of 2006 to May of 2007. Telenor representatives say to make the deal the subsidiaries of Alfa have used lawlessly the information about financial indexes of the operator. Telenor is demanding to prohibit Alfa structures to continue acquiring of Vimpelcom shares and to use the acquired 9.5% share. Moreover, the company is insisting that a court makes the defendants give minority shareholders of the operator, who have sold Vimpelcom shares, a right of reverse redemption of the stake or sale to third persons.Experts note the result of the case depends on proofs, shown by the Norwegian party. They also emphasize that in accordance with the international practice a criminal action can be brought against Alfa’s structures. 4.2. Competition in the Struggle for New assets and Markets Overseas
The Supreme Administrative Court of Turkey has upheld a verdict of the court of 1st instance on Turkcell case. According to the verdict the Russian company Altimo is obliged to make an offer to minority shareholders of Turkcell about a purchase of the largest Turkish cellular operator at more than 10 bn USD in total. But the court obliges Altimo to offer a price, lower than the market price. The reason for the verdict was a legal recourse of the Association of Turkish investors. In November of 2005 in the frames of refinancing the debt of Cukurova Group at 3.3 bn USD Altimo bought from the Association a 49% share of Cukurova Telecom Holdings, owing the control share holding of Turkcel Holding, which in its turn holds a 51% share of the cellular operator Turkcell. The Council on Markets of Capital allowed Alfa not to make an offer to minority shareholders of Turkcell as the deal did not led to changes in composition of the company’s shareholders. The Russian holding has just become an indirect owner of a 13.22% stake of the operator. However, after Altimo put forward its two representatives to the Board of directors of Turkcell, the Association of Turkish Investors has disputed the decision of the Council in a court and won in the middle of January of 2007. However, according to experts, another danger is threatening the company. In the attempt to get control over Cukurova Telecom Holdings, a co-owner of Turkcell, Altimo condemns itself to an offer at market prices already.
