7 сентября '07
The Russian Telecommunications Market Development in August 2007
1. General Trends of the Market Development
1.1. Saturation Rate of the Russian Cellular Communications Market
According to AC&M Consulting, in July 2007 the overall cellular subscriber base in Russia grew by 13% compared to the same period of the previous year (to 161.8 mln people). Penetration of cellular communications increased by 12.9% to 111.4%. The share of regional operators according to the amount of subscribers grew to 16.3%.
The regional operators’ subscriber base growth was mostly contributed by Tele2 company. Over a year its subscriber base has increased by 60.8% to 8.2 mln people. The Big3 subscriber bases were growing slower. MegaFon has only managed to increase its share on the market from 18.7% to 20.2%. In July regional operators connected new subscribers more actively compared to the Big3 operators. Their share in connections has grown by 13.2% to 35.6%. However, it will hardly influence the market division according to revenues: the Big3 is still holding the leading positions.
MTS informed as of July 31, 2007 its consolidated amount of subscribers reached 74.99 mln people. In July MTS consolidated subscriber base increased by 0.32 mln users.
As of July 1, 2007 SMARTS Group subscriber base was 3 816 360 subscribers. Thus, over a year the subscriber base has grown by 15.9%.
1.2. Demand Evaluation
According to Finam company forecast, in 2007 the volume of the mobile content market in Russia will reach 420 mln USD. Dmitry Smirnov, Finam head on mobile services direction believes the growth will be contributed mostly by development of partnership programmes (Web and WAP), community-services and mobile commerce projects. At the same time, according to Kirill Petrov, the head of I-Free, sales can be contributed much by new schemes of relations with operators. Researchers from ComNewsResearch expect new business models for content services to appear. Experts of the company forecast сontent-providers’ revenues will increase to 520 mln USD.
According to analysts, the mobile content market has certain potential for growth. Experts have different opinions on the market prospects. However, most of them agree that 3G communications technology can raise users’ interest to mobile service. To increase demand for music and stream video 3G penetration should be 20%, that is expected in 2-3 years after the networks launch, experts say.
1.3. Offer of New and Standard Serviceshas constructed and launched its own telecommunication networks in 57 Russian cities and towns. The networks were necessary to meet requirements of the company subscribers in direct local numbers. MTS networks of local telecommunications have been launched in Moscow, St. Petersburg, Kaliningrad, Belgorod, Orel, Bryansk, Kursk, Krasnodar, Sochi, Volgograd, Postov-na-Donu, Chelyabinsk, Novosibirsk, Vladivistok, Kazan, Yaroslavl and Cherepovets.
MTS
MTS
1.4. Major Companies’ Potential (capitalization, profit)
VimpelCom has declared its financial and operating results over the 2nd quarter and the 1st half of 2007. In the 2nd quarter net operating proceeds reached a record index of 1, 717, 2 mln USD, increasing by 53.1% compared to the index in the 2nd quarter of 2006 and by 15.4% compared to the same index in the 1st quarter. OIBDA reached 896.8 mln USD, growing by 59.7% compared to the 2nd quarter of 2006 and by 17% compared to the 1st quarter of 2007. OIBDA margin reached 52.2%: in Russia OBIDA margin was 53.4% and in Kazakhstan it was 53.7%. Net profit also reached a record level for the whole history of the company – 359.3 mln USD, increasing by 84.3% compared to the 2nd quarter of 2006. Operating money flow was 659.6 mln USD, increasing by 61.7% compared to the same period of 2006. ARPU and MOU indexes increased on all markets as compared to the same period of the previous year, including 12.8% ARPU growth. Alexander Izosimov, CEO of MTS, said the company has managed to reach record indexes for the first time of the whole VimpelCom history.
According to results of VolgaTelecom activity over the 1st half of 2007, profit under RSBU has been 12 249.4 mln roubles (120.4% growth rate compared to the 1st half of 2006 ). The revenue from communications services has been 11 610, 9 mln roubles (growth rate – 120.9%), sales income has been 3 108 mln roubles (growth rate – 118.6%).
Over the 1st half of 2007 VolgaTelecom proceeds according to RSBU have been 12 249.4 mln roubles (growth rate – 120.4% compared to the 1st half of 2006). Revenue from communications services has been 11 610.9 mln roubles (growth rate – 120.9%). Sales profit has been 3 108 mln roubles (growth rate – 118.6%). The proceeds include the revenue from local communications services (5 576,4 mln roubles or 45% of the proceeds, growth rate 107.4%), the revenue from intrazone communications services (2 329.7 mln roubles or 19% of the proceeds, growth rate 175.2%), connection and traffic admission services (1 756 mln roubles or 14.3% of the proceeds, growth rate 108.4%), hi-tech services (1 476 mln roubles, growth rate 148.9%), including Internet access services (1 250.4 mln roubles, growth rate 1147.5%). Over the 1st half of 2007 expenses of VolgaTelecom have been 9 141.4 mln roubles. Profit before taxation has increased to 2325.3 mln roubles (growth rate 116.0%). VolgaTelecom net profit has become 1665.2 mln roubles (growth rate 116.0%), EBTDA of the company has reached 4397.3 mln roubles (growth rate 115.0%).
As of July 1 of 2007 there were 1398 Svyaznoy centers of mobile communications in 302 towns of the Russian Federation, including 117 galleries of digital technology “Svyaznoy3” and 21 internet-shops. The overall area of Svyaznoy and Svyaznoy3 stores is 70 000 sq.km. Over the 1st half of 2007 236 stores have been opened, including 213 Svyaznoy centers of mobile communications, 21 Svyaznoy3 galleries and 2 Internet-shops. As of the end of the 1st half of 2007 the staff of Svyaznoy was 12 135 people. In the 1st half of 2007 the company’s turnover was 1.02 bn USD. The company retail turnover was 980.9 mln USD, taking into account payments and value added tax (37% growth compared to the same period of 2006).
Over the 1st half of 2007 2.08 mln GSM cell phones and 2.07 mln SIM cards have been sold. In the 1st half of 2007, Svyaznoy market share in Russia was 15.5% according to the number of sold GSM cell phones, J&P estimates. Over the mentioned above period the market shares of Nokia and Sony Ericsson have increased significantly. An average price of a sold cell phone was 225 USD, 18.4% growth compared to the same period of 2006.
Russian shares quotation on the New York Stock Exchange (August 31, 2007):
Vimpelcom – 24.4 USD per share, MTS – 66.1 USD per share.
2. Regulator’s Activity and Legal Field Dynamics
2.1. News in Legislation and Other Changes in Legal Field
According to the declaration of Boris Boyarskov, the head of Rosohrankulturi, GSM license tenders, postponed and abolished before, will take place. They are scheduled for October 18 and will be held according to new rules, corrected in accordance with FAS requirements.
This July Rossvyazohrankulturi has held 2 GSM license tenders in 13 regions of Russia, in the Far East mostly. Most lots has been received by Summa Telecom, founded 2 years ago and providing services to around 100 corporative clients. However, a year ago the company received a license for communications services providing all over Russia, though, according to criteria of a tender offers evaluation, the most points can be received by operators, which have already worked in a region or had a license there. In the late July Boris Boyarskov ordered to postpone the rest 8 tenders and change evaluation criteria. Later the tenders were abolished in accordance with the Civil Code requirements.
The Federal Agency of Communications (Rossvyaz) has denounced the intention of Rossohrankulturi to revise conditions according to which regional GSM license tenders were held. Rossvyaz is afraid of the change in the strategy of frequency distribution for mobile communications services providing, targeted on inequality eliminating in regions. Evgeni Strelchik, the head of Rossohrankulturi press-service said FAS was ready to negotiate regarding possible ways of the problems solving. According to the market analysts, the situation is ambiguous. Experts agree with Rossvyaz position concerning keeping of the previous tender conditions.
At the same time Rossvyaz declared it had stopped activity in the field of communications services licensing due to transfer of these functions to Rossvyazohrankulturi. In particular, Rossvyaz intends to give Rossvayzohranculturi all materials on the declared tenders on license reception for cellular services of GSM-900 and GSM-1800 standards in 61 regions of Russia.
In August 28 the general meeting of Svyazinvest share holders did not approve amendments to the holding charter. AFK Sistema, owning the blocking holding of Svyazinvest, expected the amendments would increase significantly influence of the mother company on its subsidiaries. The amendments, offered by Rosimushestvo, extended significantly Svyazinvest Board’s rights in key decisions taking in the holding’s subsidiaries. In particular, the subsidiaries’ annual budget and investment programmes were offered to be discussed on the Board.
In August 24 Vice Prime Minister Sergey Narishkin held a meeting, where the state representatives were recommended to vote against the amendments, proposed by the Ministry of Economic Development and Rosimushestvo. All interested departments were ordered to find a way of compromise. According to the source of RBK-Daily, the Ministry of Communications had got most of the amendments to the rejected variant of the charter. The department offered to remove most of the amendments, connected with Svyazinvest Board’s authorities regarding the subsidiaries.
2.2 Struggle with Illegal Entrepreneurship
In August 8 officers of Prosecutor General’s Office searched the flats of Euroset President Alexey Chuikin, co-owners of Euroset Timur Artemyev and Evgeni Chichvarkin, Euroset Vice President on security Boris Levin, Euroset Vice President on finance Alexander Papin, co-owner of DIXIS Andrey Shlikov, co-owner of Cifrograd Valerian Revin. The office of Cifrograd, the warehouse and the head office of Euroset, the warehouse and the head office of DIXIS and the warehouse and the head office of Betalink were searched as well.
The representative of Prosecutor General’s Office confirmed the fact of searches as held according to a criminal case on count of mobile phone smuggling, initiated in August 2005. At that time in Sherementyevo officers of the Ministry for Internal Affairs detained around 200 thousand smuggled mobile phones, though they could not find out quickly who the phones were for. In 2006 the case was taken by Prosecutor general’s Office and Alexey Shirokov, Chief Executive of Euroset-opt was charged according to Article No 188 and Article No 210 of the Criminal Code (Smuggling and Criminal Organization Creation). Recently, the investigators have got information about a customer of the phones, which led to the searches. The searches were approved by Deputy Prosecutor General Alexander Bastrikin who heads the Investigation Committee, created recently to operate alongside Prosecutor General’s Office.
2.3 Regulator’s Activity Assessment by Entrepreneurs and Mass Media
The 9th Arbitration Appellate Court has rejected the claim of Dalsvyaz, demanding to dismiss the decision of the first instance court which had validated decisions and orders of FAS to the company to pay to the federal budget revenue amounting to around 200 mln roubles derived as a result of violating the anti-monopoly legislation.
FAS admitted Dalsvyaz had violated Item 1 of Article 5 of the Federal Law “On Competition and Monopoly Activity Limitation on Commodity Markets”. The case was initiated on a claim of Primtelefon (provides service of mobile radio telecommunications under MTS brand). According to FAS Dalsvyaz fixed high monopoly prices and created unequal conditions of access to the commodity market.
The Moscow Arbitration Court has postponed to October 15 a preliminary hearing on Vimpelcom’s petition to declare Rossvyaz decision illegal about holding the GSM license tenders in 61 regions, announced in April 17 of 2007. The hearing was postponed due to calling FAS to the court as a third person.
The company had informed before, the petition was brought on the basis that the tender conditions, according to the company, were discriminatory and did not coincide with the Russian Antimonopoly Legislation. The tender do not solve a problem of defining an operator, able to provide high-quality services of cellular communications, VimpelCom says. According to the tender conditions, operators of mobile communications (except GSM) and operators of local communications are preferred. As a rule, these operators have no enough funds and experience for networks development. The same petition was sent to FAS by VimpelCom.
Summa Telecom company has brought a suit to the Moscow arbitration Court on compensation for loss, inflicted on the company by abolishing of the second stage of regional GSM license tenders. Rossvyazohrankulturi is a respondent. According to the resolution of the department of August 14 of 2007, GSM license tenders were postponed. According to the claim of Summa Telecom, due to the postponed tenders the company will have to pay a forfeit to several suppliers of equipment. The sum of the loss is around 5 mln euro. The market analysts doubt the company will manage to win the case as, despite lawfulness of the claim it will be difficult to prove the loss was inflicted as a result of the tenders postponing.
SMARTS petition on the court verdict of June 19 will be considered in September 4 by the Arbitration Appellate court of Moscow. According to the verdict, the court rejected the company’s claim against Rossvyaz about declaring a decision of April 6 of 2007 invalid, in which the company was refused to be a participant of the tender N 3 (PЧ) 2007 on 3G license reception. The reason for the refusal was the company’s debts to the budget as of January 1, 2006. SMARTS, in its turn, informed that as of January 1 of 2006 there were claims on tax debts from the Interdistrict Inspection of FNS (the Federal Tax Service) of the Samara region, which were disputed later in the court.
Several telecom operators has written a letter to Chairman of the RF government Mikhail Fradkov, in which they raised objections on the procedure of GSM license tenders holding and the current situation on the cellular communications market. The Big3 was charged of monopoly policy. Rossohranculturi and FAS were charged of cooperation with VimpelCom. The letter was signed by general directors of Summa Telecom, Sky Link, Aurora Telecom, Akos and BIT.
The dispute of MegaFon and FAS, concerning tariffs on interconnect, is close to final. The cell operator is ready to sign an amicable agreement, which will change tariffs on interconnect from small cell companies. The market participants consider MegaFon’s initiative is rational, noting the operator’s chances to win in the court were not big. The Federal Arbitration Court of the Moscow Circuit has postponed the trial of MegaFon and FAS to October 3.
3. Companies’ Actions and Decisions, Influencing Most the Market Development
3.1. Success and Failure in New Assets Acquisition
VimpelCom has completed a deal on acquisition of a 100% share of Corporation ‘Severnaya Korona” from the Swedish holding Tele2. The company provides cellular communications services in the Irkutsk region. The cost of the purchase is 232 mln USD. In the frames of the deal the operator has also provided profitable roaming conditions for Tele2 subscribers in Russia for a 10-year period. Due to the purchase the amount of regions, VimpelCom covers, has increased to 75. VimpelCom Vice President Executive Nikolai Pryanishnikov explained the acquisition was important for the company as among regions, the operator did not cover, Irkutsk and Vladivostok were the largest, while the goal of the company was to work in all Russia’s regions.
MTS is finishing negotiations about acquiring of the biggest cell operator of Armenia,
K-telecom. The company is valued by analysts at around 600 mln USD. As a result the Armenian market will be divided between MTS and VimpelCom. It is the second attempt of MTS to enter the Armenian market. In 2006 the Greek telecom company Hellenic Telecommunications Organization displayed for sale a 90% share of Armentel, a monopolist on the market of wired communications and the second biggest cell operator in the country. MTS participated in the tender, but Vimpelcom won. Before 2004 Armentel had had an exclusive right to provide GSM services and services of satellite communications in Armenia. However, in 2004 the government of Armenia took the right off from the company because of the bad quality of the services. Simultaneously, they held a tender on license for GSM-900 services providing, which was won by K-Telecom. K-Telecom major shareholder is the Lebanese investment structure Fattouch Group, owned by Pierre Fattouch from Lebanon. At present, according to ACM-Consulting, the company’ subscriber base is over 1 mln subscribers, two times as much than Armentel subscriber base. Penetration of cellular communications in Armenia is 50%.
Altimo
3.2. Companies’ Actions on Russia’s Stock Markets
At the beginning of this week GDR of AFK Sistema cost 26.4 USD. According to Troyka Dialog report, the price is phenomenal. It means investors only pay for 53% of MTS shares, owned by Sistema, without taking into account other assets. Experts of the stock market explain such a discount not only by current state of the market. Sistema’s business also contains non-exchange companies and problem public assets. According to analysts from Troyka Dialog, the fair price for Sistema GDR is 47 USD.
According to information from AFK Sistema, in September 17 at the extraordinary general meeting (EGM) its shareholders will discuss a share split of 1:1000.Now the chartered capital of the corporation is 868.5 mln roubles and consists of 9.65 mln common shares of 90 roubles each. As a result of the split the capital will be divided into 9.65 bn common shares of 0.09 roubles. Thus, GDR of AFK Sistema will correspond to 20 shares.
Senior Vice President of AFK Sistema Alexey Buyanov believes the share split will raise liquidity of shares and interest to them on the Russian market. Now shares of AFK Sistema are traded in RTS and on the Moscow Stock Exchange.
VimpelCom has informed the USA Security and Exchange Commission it will spend 300 thousand shares (0.52% of the charter capital) to reward managers. Most of the holding (200 thousand shares) was acquired by Vimpelcom on the open market in May, the rest shares had been acquired before, Ekaterina Osadchaya, a press-secretary of the company, explains. Vimpelcom representatives do not reveal which of the managers will receive shares, what is a share price and when they will be able to sell them.
3.3 Distribution of Securities Overseas
Since August 22, 2007 American Depository Receipts of VimpelCom will be traded 20:1 (4:1 before) at the New York Stock Exchange. Owners of VimpelCom ADRs will receive four additional ADRs per every ADR held.
3.3. Personnel Changes in Major Companies
In September MTS Russian subdivision will be headed by a new marketing director, Gram Millar, an Englishman, having worked in Motorola and Vodafone for 9 years before. Millar will deal with development and realization of the marketing plan in Russia as a whole, coordination of regional marketing plans, training of regional personnel.
VimpelCom has declared about the appointment of Nikolai Nifontov for the position of Technical Director of the Moscow region. He has replaced Dmitri Urivaev, who will head the directory on 3G networks development. Nifontov has been working in VimpeCom since 2002, when he headed the technical directory of the North-Western region.
According to information from Sky Link, Sergey Khanenkov has been appointed the 1st Deputy General Director – Commercial Manager of the operating company Moscow Sotovaya Svyaz. He will be in charge of commercial activity in the largest region Sky Link works in. Before he was holding a position of the 1st deputy director, Commercial Manager of MMT Rostelecom. Today the Sky Link macro regional company is being founded on the basis of MSS company in the Central region, which will consolidate regional operating companies in 13 licensed areas. Khanenkov’s major objectives will be to increase revenues and to raise economic efficiency of the business. He will be also in charge of sales channels optimization and service quality growth in the Central region.
Nikita Sergienko has been appointed Executive Vice President of Tele2 Russia. He will be in charge of corporate development and legal matters. Earlier Sergienko was Financial Director of the company. His position will be held by Kai-Uve Melhorn. He will deal with financial and managerial accounts, supervision, tax management and money flow management.
In August 10 at the meeting of Sibirtelecom Board of directors a new composition of the Board was approved. Alexander Isaev, CEO of Sibirtelecom, was appointed Chairman of the Board of directors.
4. Conflict Zones and Interests Opposition Fields
4.1. Fields of the Most Active Struggle for Markets and Assets Revision
Today the main conflict has blazed up on the decision to abolish results of the GSM license tender. Cellular companies (Summa Telecom, VimpelCom, etc) as well as government departments (Rossvyaz and FAS) have been involved in the conflict.
Telenor and Altimo continue disputing about the Ukrainian cell operator Kievstar.
4.2. Contradictions between Entrepreneurs During and As a Result of Property Structure Changing, Merges and Absorptions
The Ukrainian Supreme Court has dismissed Telenor’s appeal, in which the company attempted to challenge prohibition of auditing and consolidation of Kievstar financial indexes. According to Vice President of Altimo Kirill Babayev, Telenor will not be able to get an auditor’s conclusion until the operator’s Board gathers to appoint an auditor. However, according to lawyers, Telenor can appeal the decision of the Ukrainian court.
At that the New York Arbitration Court has charged Alfa Group subsidiary Storm LLC of violation of the Kievstar Shareholders agreement. The verdict has been handed down according to the claim of Telenor, which since February 27 had demanded to confirm that Alfa’s actions did not coincide with the Kievstar charter. According to the charter, all conflicts between shareholders must be settled in New York. The arbitration tribunal has ordered Alfa to sell its Kievstar shares within 120 days or to divest itself of its holdings in competing Ukrainian operators Turkcell and Ukrainian High Technologies.
Telenor has sent a letter to 6 members of Altimo Consulting Council, in which it is asking authorized consultants of the Russian holding to influence the situation and make the Russian company meet conditions of the Kievstar charter and the decision of the New York arbitration Court. The Norwegians expect a “right” advice from Altimo international consultants. The market analysts say the letter is a good PR action, emphasizing the Norwegians use all methods to influence the Russian holding management. However, it would be very difficult to make Alfa meet conditions of the Kievstar charter.
Vedomosti reports TeliaSonera is no longer going to get control over the Turkish Turkcell. According to experts, Alfa has got more chances to agree with the Scandinavian operator on the assets exchange.
4.3. Competition in the Struggle for New Assets and Markets Overseas
Vimpelcom CEO Alexander Izosimov declared his company was interested in acquisition of the Kirghiz operator Sky Mobile, owned by Altimo. In case Vimpelcom makes the deal, it will face MTS claim according to which the Kirghiz asset had been acquired illegally by Alfa. That could result in a conflict between the largest owners of telecom assets in Russia: Alfa Group and AFK Sistema, experts say.
has declared about an acquisition of a 90% share of Sotelco, providing GSM services in Cambodia. Sotelco company possesses licenses for providing a whole range of telecom services of GSM 900/1800 standard, Internet, VoIP. The company is provided with frequencies in the 900 and 1800 MHz band and provides services of WiMax standard. Altimo long-term strategy of development stipulates for investment in the mobile communications sector of South and South-Eastern Asian countries. In 2006 the company opened its representative offices in Jakarta (Indonesia) and Hanoi (Vietnam). Dmitri Vozianov, Altimo director on development in South-Eastern Asian countries said the new asset buying in South-Eastern Asia would become one another step on the way of Altimo ambitions realization on creating a new big player on high growth markets of the region. In Cambodia penetration of mobile communications is a little bit more than 10%.
started constructing the networks in November 2006 after getting licenses for local communications. 7.9 mln USD were invested in the project. According to the company, MTS does not plan to become an operator of fixed-line communications. Local network will be used for redirection of incoming calls on MTS network for subscribers, using direct numbers. According to the legislation, a cell company should have an own capacity of numbers to give direct numbers to subscribers independently.
