6 октября '07
The Russian Telecommunications Market Development in September 2007
1. General Trends of the Market Development
1.1. Saturation Rate of Cellular Communications Market in Russia
According to the report of Ac&M Consulting, in August of 2007 MTS and its subsidiaries connected the most subscribers in Russia. MTS has got 39% of pure connections in the country. The operator is followed by MegaFon (32%) and VimpelCom (29%).
The overall number of cell subscribers in Russia has reached 163.73 mln people, increasing by 1.2% compared to the previous month (161.8 mln). Penetration of cellular communications has grown from 111.4% in July to 112.8%.
As of late August MTS had 53.675 mln subscribers (52.872 In July). MTS has taken a 32.8% share of the market in the country. In Moscow MTS provides services to 43.4% of subscribers, in St. Petersburg – to 28.7%.
Over August MegaFon subscriber base has grown from 32.748 mln in July to 33.396 mln, taking a 20.4% share of the market. In Moscow the company has 19.6% of users, in St. Petersburg it has 33.9% of subscribers.
VimpelCom subscriber base in Russia has increased to 50.365 mln people (49.772 mln in July), covering 30.8% of the market. As of late August Vimpelcom provided services to 36.2 % of cell subscribers in Moscow and to 24.4% of subscribers in Petersburg.
Tele2 (7.825 mln subscribers), Uralsvyazinform and its subsidiaries (4.775 mln), SMARTS Group of companies (3.864 mln), Sibirtelecom and its subsidiaries (3.842 mln), Nizhegorodskaya Sotovaya Svyaz (1.321 mln), Yekaterinburg Sotovaya Svyaz (1.261 mln), Novaya Telefonaya Kompaniya (Vladivostok) (1.025 mln) are among ten biggest cell operators in the country.
According to financial and operating results of MTS for the 2nd quarter of 2007, the consolidated subscriber base of the company has grown by 0.5 mln subscribers. At that in Russia the overall subscriber base growth has been 1.2 mln users. In Ukraine the subscriber base has reduced by 0.9 mln users. In Uzbekistan the subscriber base has increased by 250 thousand and in Turkmenistan the base has grown by 40 thousand subscribers. In Russia the factor of subscribers outflow has reduced from 6.1% (in the 1st quarter) to 5.2%. In Ukraine the factor has grown from 7.8% to 14.1%. After the 2nd quarter of 2007 due to MTS business limited growth its subscriber base increased by 0.3 mln users more and as of July 31, 2007 the company provided services to 74.99 mln users. MTS has remained a leader in Russia, covering around 33% of the market according to a subscriber base. In Ukraine MTS market share is 39%. In Uzbekistan and Turkmenistan the company’s market shares are 56% and 83% correspondingly.
1.2. Offer of New and Standard Services
Euroset and TCL Communication Technology Holdings (TCL Communication) have declared about their cooperation. Euroset has published results of the company activity as a mobile virtual network operator (MVNO). Over 6 month of work in 5 regions of the Volga region the company has obtained 6.2 thousand subscribers. Euroset began to provide cellular communications services, using its own brand, on the basis of SMARTS GSM-network in March of 2007. According to experts, Euroset experience is good as there have been no conditions for MVNO development on the Russian market yet. DIXIS Group of companies has declared the company signed a direct annual contract with Sony Corporation for its production delivery. DIXIS will also become an official dealer of the corporation. According to the contract conditions, Sony production delivery will be carried out according to DDP (Delivery Duty Paid ) conditions: all expenses and risks as well as payment of tax, customs and other duties, connected with import and transport will be assumed by a supplier. 1.3. Major Companies’ Potential (capitalization and profit)
MegaFon has declared the results of the 2nd quarter of 2007. Net profit has grown by 63% compared to 72.4% of MTS and 84.3% of VimpelCom. Before 2007 MegaFon was the first in the Big 3 according to this index. First MegaFon yielded MTS and VimpelCom in the 1st quarter of 2007, when its net profit growth rate was 65% compared to the same period of 2006 (MTS – 143%, Vimpelcom – 84.8%). Since early 2007 Megafon has started reporting in roubles instead of dollars and it could influence the operator’s lag. However, after evaluating of MegaFon’s results in dollars its net profit growth rates in the 1st and in the 2nd quarters of 2007 (78.6% and 71.4%) are still less compared to the competitors. According to some analysts, the reason is that MegaFon tariffs are lower compared to tariffs of the competitors. In the 2nd quarter an average price per minute of MegaFon was 0.05 USD, while MTS price is 0.06 USD and VimpelCom price is 0.063 USD. However, MegaFon is a leader according to proceeds growth rate. In the 2nd quarter the operator’s revenue grew by 55% compared to April-June of 2006. MTS proceeds growth rate is 31.9% (37% in Russia) and VimpelCom proceeds growth rate is 53.1% (43% in Russia). MegaFon is close to the competitors. In the 1st half of 2006 the operator subscriber base increased by 2.5 mln people while VimpelCom and MTS had 1.4 mln new subscribers each. As a result as of early July of 2007 the market share of MegaFon was 20.1% according to a subscriber base. MegaFon share in the Big 3 proceeds for the 2nd quarter was 31.1%, compared to 34.7% of MTS and 34.2% of VimpelCom. VolgaTelecom has introduced unaudited financial statements for the 1st quarter of 2007 according to International Accounting Standard (IAS): - the company consolidated revenue is 14 450.4 mln roubles, 25.25 growth compared to the same period of 2006; - profit on principal activity increased by 15.5% compared to 2006 to 2 841.7 mln roubles; - EBITDA increased by 21.1% to 5 508.2 mln roubles; EBITDA margin grew by 38.1% As Revenue growth is contributed by the following factors: - Growth of revenue from services, provided to Russian cell operators. Due to changes of the method of settlements on inter-operators connections since July 2006 the company has received 2 246 mln roubles of revenue from connection and traffic admission, 40.5% growth compared to the same index of 2006. - Growth of revenue from intrazone connections services. The revenue came to 2 319.4 mln roubles, 173.3% growth compared to the same period of 2006. The growth rate was mostly contributed by CPP principle introduction since July 1 of 2006. - Growth of revenue from Internet access services providing. Over the 1st half of 2007 subscriber base of the broadband Internet access users has grown by 56% to 187 thousand subscribers. In the company structure the share of Internet access services increased from 7.3% in the 1st half of 2007 to 8.7% in the reported period. - Growth of revenue from mobile communications services providing. The revenue of the sector came to 1 967 mln roubles in the reporting period (118.5% growth compared to the 1st quarter of 2006). Cellular subscriber base of the company increased by 42.3% to 2.5 mln people. According to analyst from USB, shares of AFK Sistema are underestimated and they will rise in price more rapidly than shares of its subsidiary MTS. Sistema shares can rise in price by 80% almost from 28.5 USD to 51.2 USD. AFK Sistema has got numerous subsidiaries in various fields of business, among which are telecommunications, high-tech, retailing, fixed property, finance, mass media, venture investment, tourism, radio techniques, space technology, medicine and biotechnology. The corporation also invests in oil business. In 2006 proceeds of AFK Sistema came to 10.9 bn USD. Net profit of the company reached 903 bn USD. In 2005 GDR of the corporation were included in the listing of the London Stock Exchange. According to USB, over last year Sistema had been underestimated compared to its subsidiaries MTS and Comstar-OTS. In early 2006 Sistema was underestimated by 10% and now its market capitalization is 40% lower compared to its assets. Sistema is underestimated by 25% even without taking into account value of its non-public subsidiaries. Alexander Goncharuk, president of Sistema, says AFK is underestimated because investors can invest in its subsidiaries passing over the mother-company and they often prefer such way of investment. In September 28 on the New York Stock Exchange MTS capitalization exceeded VimpelCom’s index (28.2 bn USD against 27.9 bn USD). In early September VimpelCom overtook its major competitor according to the market value and kept the position within 3 weeks. In September 26 MTS overtook VimpelCom: according to the trading day results VimpelCom was cheaper by 700 mln USD than MTS. According to most experts, growth of VimpelCom quotations was contributed much by speculative factors, for instance, its shares buying-up. Over the period from August of 2006 to June 2007 one of the biggest co-owners of the operator Altimo increased its share from 32.9% to 44%. 1.5. The Market Extension Due to Overseas Expansion MTS Board of directors has approved a new strategy of the company development. According to MTS president Leonid Melamed, the company has emphasized financial expediency of acquisitions so far, and now the company will take into account their strategic value. According to the previous strategy, minimal economic efficiency of the invested capital should be 25% a year within 5 years, i.e. a period of investments payback should be 4 years. Now the company intends to be more aggressive regarding mobile assets in the CIS and pay a required price in case the company decides that an asset is attractive. 2. Regulator’s Activity and Legal Field Dynamics 2.1. Assessment of Past Privatizations, Merges and Absorptions Legality by Legislative and Law-Enforcement Bodies
The Federal Agency of Communications (Rossvyaz) has brought a suit against FAS to the Arbitration Court of Moscow. The agency is contesting the decision of FAS according to which Rossvyaz violated a law when holding GSM license tenders. 2.2. Struggle with Illegal Entrepreneurship
The former president of Euroset Eldar Razroev was interrogated by the RF Prosecutor General Office in the framework of the criminal case on cell phones smuggling. The case about smuggling was opened in March of 2006. Rosroev has been working in Euroset since 2004. In July of 2007 he headed Sistema Mass Media company, which manages media assets of AFK Sistema, including Stream TV. In August 8 of 2007 in the framework of the case on cell phones smuggling in Euroset more than 10 flats and working places were searched including flats of the company top-managers, flats of one of Euroset vice president and the chief of security service, in particular. The next day offices of several other companies (DIXIS, Betalink and Cifrograd) were searched as well. In March 29 of 2006 as result of the special operation of K Department of the Ministry of Internal Affairs and FSB of Russia 167.5 thousand mobile phones, delivered from Pakistan, were detained in Sheremetyevo-2. The detained consignment value was around 20 mln USD, and Euroset was a consignee. FAS of Russia has imposed a 100 thousand roubles fine on VimpelCom for violation of the antimonopoly legislation. In August 8 of 2007 FAS declared VimpelCom had violated Part 1 of Article 14 of the Federal Law “ On Competition Protection”. VimpellCom called subscribers of competing operators, proposing them a contract for communications service providing. FAS regarded it as an act of unfair competition. 2.3. Assessment of Regulator ‘s Activity by Entrepreneurs and Mass Media The Association of Regional Operators of Mobile Communications (Association 800) has applied to the Ministry of Communications on behalf of its participants, perturbed by new rules of payments receiving for communications services by commercial organizations, which do not cooperate with banks directly. They say the Central Bank of Russia is introducing the prohibition of sub-dealers participation in transfer of payments for telecommunications services. The prohibition makes illegal the existing extensive network of receiving of payments for telecommunications services by sub-dealers, including use of terminals. The Ministry of Communications held the meeting on the matter, where officials and cell companies representatives discussed new rules of reception of payments for cell communications through terminals, which would be introduced under the resolution of the Central Bank since November 12. The participants has concluded, the present scheme, when a terminal owner transfers money to an operator as a sub-agent through a cellular dealer is legal as well, because it is stipulated by the rules of mobile communications services providing. The Central Bank has only added another scheme of payments without replacement of the existing scheme. 3. Companies’ Actions and Decisions, Influencing Most the Market Development
3.1. Investments in Growth and Development MTS has introduced vendors, charged with 3G networks construction in Russia. According to MTS estimates, 3G will cost 1 bn USD. The money will be invested in the networks within 3 years. Other companies intend to introduce their vendors by the end of the year. Ericsson and Nokia Siemens Networks will construct 3G networks for MTS. These companies have won the tender for equipment delivery for the new networks, which are planned to be developed by MTS in Russian regions. 3.2. Success and Failure in New Assets Aquisition The businessman Alisher Usmanov has confirmed he is interested in Telecominvest, a 15% share of which has already belonged to him today. He says he is negotiating about increasing of his stake in the holding. According to some data, the entrepreneur is discussing a purchase of 58.8% of Telecominvest from the Luxemburg First National Holding (FNH). TeliaSonera, Altimo and the Bermudan IPOC are involved in the negotiations. According to the market analysts, the deal can be probably made, though the participants need certain time to make an agreement (1-2 years). The most valuable asset, Usmanov is interested in, is MegaFon. The head of Alfa Group Mikhail Fridman has denied rumours about negotiations regarding selling by Alfa a 44% share of VimpelCom to the Norwegian shareholder of the operator. Meanwhile, Alfa has still kept the same alignment of forces in VimpelCom Board of directors, not using operating control, obtained due to VimpelCom shares consolidation. According to VimpelCom CEO Alexander Izosimov, Alfa does not try to increase its influence on the company management, positioning itself as a financial investor. Altimo has declared it intends to cell the Kirghiz largest cell operator Sky Mobile. The investment bank Morgan Stanley was charged with the tender organizing. Altimo wants to receive 600 mln USD. The market analysts have different opinions on the price of Sky Mobile, declared by Altimo. However, most of them say the price is reasonable. At that they remind about risks of the company, caused by claims of MTS, which is contesting rights to the Kirghiz operator’s assets with Altimo in the court. The present tender of Sky Mobile sale is the second attempt of Altimo. In October of 2006 Alfa’s subsidiary tried to make a deal with VimpelCom, a 44% share of which belongs to Altimo, but it was not approved by the second VimpelCom shareholder, the Norwegian holding Telenor (29.9%), because of risks, caused by MTS claims. The Big3 Russian cell operators intend to start transnational expansion. Russia has been already divided, and the CIS market will be saturated in the nearest 2 years, analysts say. VimpelCom, the Ministry of Security of Vietnam and the American Millennium Global Solutions have signed an agreement about foundation of a joint venture. The companies plan to create the 4th Vietnamese GSM operator GtelMobile. Vimpelcom will get the right to a prior part of revenue and strategic management. According to official information from VimpelCom, within several years the company will invest around 1 bn USD in the joint venture foundation. The market analysts estimate Vimpelcom’s decision as positive, emphasizing availability of the Vietnamese market, caused by low penetration of mobile communications (30%) MTS informs about acquisition of an 80% share of International Cell Holding (ICH), an owner of 100% of the largest cell operator of Armenia K-Telecom, according to a number of subscribers (1 mln people). The cost of the deal is 310 mln euro (431 mln USD), 50 mln euro of which will be paid by MTS in 2008-2010, in case K-Telecom obtains desired proceeds. In 2006 the operator’s revenue was 104.1 mln USD, OIBDA was 57.8 mln USD. MTS will also lend the Armenian subsidiary 140 mln euro to pay debts and to invest. Moreover, MTS has an option to buy the rest 20% of ICH from July 2010 to 2012. Armenia is the 6th country, MTS will work in. AFK Sistema has declared about a purchase of a 10% share of the Indian smallest cell operator Shyam Telelink. The company expects Shyam will become a base for the corporation expansion to the Indian cell market. It has become traditional for Russian telecommunication companies to buy outsiders outside the CIS. Sistema paid 11.4 mln USD for a 10% share of Shyam. The seller was the Indian telecommunication and industrial group Shyam. According to information from Sistema, the share holding can be increased to 51%, in case it is approved by antimonopoly bodies of India. German Gref (then Minister of Economic Development and Trade of the RF) asked Chairman of the State Committee on Development and Reform of China Ma Kai to help Russian cell operators to enter the Chinese market. Minister’s request was a respond to the request of 3 largest telecommunication companies of Russia. Gref asked the Chinese government to sell frequencies to one Russian company at least. Last March during his visit to China president Putin promoted first admission of a Russian operator to the Chinese cell market. According to analysts, penetration of cellular communication is low in China (around 40%), though the market is growing fast. However, due to a closed type of the Chinese Market, Russian operators can only expect a joint venture foundation. 3.3. Companies’ Activity on Russia’s Stock Markets MTS 3.4. Personnel Changes in Major Companies MTS has declared about new appointments in the company marketing subdivisions. Mikhail Gerchuk, having worked in Vodafone Group before MTS, has been appointed director of the Marketing Department of MTS Corporative Centre. Said Batt, having headed the consulting company the Pricing Practice in Britain, has been appointed Commercial Manager of MTS Corporative Centre. He will be charged with commercial activity of MTS Group, including business planning, development of the company commercial strategy in all countries, MTS Group works in, management of commercial operations and pricing. Mikhail Gerchuk and Said Batt are subordinates of MTS vice president on marketing Sintiya Gordon. Gram Millar, the former director of subdivision on retailing in Vodafone Netherlands, has been appointed deputy director of MTS Russia on Marketing. He will be in charge with the company marketing activity in Russia, including commercial operations, marketing communications, indexes. Garret Johnston, the former director on marketing in MTS Russia, has been appointed director on strategic development in MTS Group Corporative Centre, where he will develop long-term marketing plans. The Council of the Association of Regional Operators of Mobile Communications has appointed Vitali Slepakov Chief Executive of the Association. Slepakov is a professional in telecommunications. He graduated from the Moscow Electric and Technical Institute of Communications in 1964. For 30 years he had been working in the Central Research Institute of Communications. From 1995 to 2002 he was working in Gosnadzor of Russia as deputy chief of Telecommunications Department and chief of the Center of Supervision for Informatization. From 2002 to 2006 he was the 1st deputy CEO of the National Union of Organizations and Operators of Communications. Since 2006 he has worked as CEO of Setevaya Company. 4. Conflict Zones and Interests Opposition Fields 4.1. Contradiction between Entrepreneurs During and As a Result of Changes of Property Structure, Merges and Absorptions
Vedomosti reports, Telenor does not protest longer against the acquisition of the Ukrainian Radiosystems (URS) by VimpelCom. In 2005 the Russian operator bought the Ukrainian company for 231.3 mln USD. But Telenor had been already controlling the cell company Kievstar (Altimo’s subsidiary is its minority shareholder). It meant the Norwegians were competing with themselves. The company tried to appeal against the purchase of URS in court, but the claims were rejected. The key decision was made the Supreme Arbitration Court in June of 2007, confirming legality of results of the meeting, held by VimpelCom shareholders, where the deal had been approved. Telenor vice president on PR Dag Melgaard confirmed, the conflict had been settled, emphasizing, however, that Alfa had to comply with decisions of Arbitration courts and, in particular, with the decision of the Commercial arbitration court of New York, made this August. Alfa was ordered to stop boycotting meetings of Kievstar shareholders. However, Alfa continues boycotting meetings of Kievstar shareholders. Representatives of Storm company, owned by Alfa Group, were absent on the first meeting of the operator’s shareholders. 4.2. Competition in Struggle for New Assets and Market Overseas
VimpelCom has made a preliminary agreement about acquisition of the Kirghiz cell operator Sky Mobile from its major shareholder Altimo. CEO of VimpelCom Alexander Izosimov said already in August about their willingness to struggle for the right to buy the operator. MTS is trying to contest the rights to the major asset of Sky Mobile, the cell operator Bitel. The hearings on the matter are scheduled for this November on the Isle of Man.
