Russia’s Nikiforov Sees Tele2-Rostelecom Merger Benefit

By Halia Pavliva - Nov 17, 2013

Russia’s telecommunications Minister Nikolay Nikiforov said a possible merger of OAO Rostelecom’s mobile assets with VTB Group’s Tele2 Russia would boost competition for the nation’s three largest carriers.

“We definitely see some synergy in the potential merger,” Nikiforov said in a Nov. 15 interview at Bloomberg’s headquarters in New York, adding that no decision had been made yet. “Four to five operators is the ideal scenario for a country as Russia.”

Rostelecom, Russia’s state-controlled telecommunications operator, asked shareholders to vote on separating its mobile assets into a newly formed entity, called RT-Mobile, according to a Nov. 13 regulatory filing. The move would increase competition for the three largest carriers, OAO Mobile TeleSystems, OAO MegaFon and VimpelCom Ltd. (VIP)

MTS, as Mobile TeleSystems is known, posted a fourth week of declines, the longest in a year. Shares of Russia’s largest mobile-phone carrier have slipped 7.3 percent since Oct. 17, when VTB Group said Yury Kovalchuk, President Vladimir Putin’s billionaire ally, was buying half of Tele2 Russia. The Bloomberg-Russia-US Equity Index fell 0.5 percent in the week to 100.39, while RTS stock-index futures increased 0.3 percent to 144,780 in U.S. hours.

“I really admire Tele2’s business experience,” Nikiforov said. “They are the most cost-efficient company compared with the big three.”

Rostelecom’s board will meet tomorrow to determine the price for buying out minorities who don’t support the split of mobile phone assets, according to the statement. Rostelecom’s new strategy has to be approved before any decision regarding the merger can be made, Nikiforov said.

Stake Sale

The government plans to sell its stake in Rostelecom in the next two years “if the price is good” and the company’s status as “strategically important” is revised, Nikiforov said.

A phone call to Rostelecom’s Moscow offices after normal business hours on Nov. 15, seeking comments on Nikiforov’s predictions, wasn’t immediately returned. Calls to Tele2 Russia’s Moscow-based press secretary Irina Rybakova outside of normal business hours on Nov. 15 went unanswered.

MegaFon, the No. 2 operator, lost 10 percent in a three-week decline in London. VimpelCom, which operates the third-biggest mobile phone company, tumbled 8 percent last week.

“It will intensify competition, which consumers should be happy about,” Evgeny Golosnoy, analyst at IFC Metropol in Moscow, said by phone from Moscow Nov. 15. “What is good for consumer is not necessarily good for an investor. The big three mobile phone operators’ margins will shrink longer-term.”

‘Fair Competition’

Russian authorities seek to approve by Dec. 11 a principle of “technological neutrality”, or permission for operators to develop different technologies on the radio frequencies they have, Nikiforov said. The country is set to introduce mobile number portability from December, a move that will also increase competition, he said. Russia plans to work out legislature allowing mobile companies to share frequencies by “next spring,” he said.

“We want to liberalize everything possible,” Nikiforov said. “We want fair competition.”

Russia’s Internet penetration will rise to as much as 90 percent by end-2018 from about 55 percent, benefiting companies such as Yandex NV (YNDX), Russia’s biggest Internet company, and Mail.ru, Nikiforov said.

“There is some huge potential for Russian Internet companies to grow,” Nikiforov said. “Fiber optics is coming to small villages throughout the country in three to five years from now and there are other ways to get people online. A lot of business will be created online.”

Yandex, Mail.ru

Shares of Yandex, the biggest gainer on Russia-US gauge this year, rallied 6 percent last week to $38.53, extending the surge this year to 79 percent. Mail.ru Group Ltd. (MAIL) rose 1.4 percent to $38.68 last week and is up 12 percent in 2013.

E-commerce represents 2 percent of Russia’s overall retail market and will grow 15 percent a year through 2018, Nikiforov said. Russia is the biggest Internet market in Europe by user numbers, he said.

The Bloomberg-Russia-US Equity gauge retreated for the fourth week to 100.39. The Market Vectors Russia ETF (RSX), the largest exchange-traded fund dedicated to Russian equities, ended the week little changed at $28.66. The RTS Volatility Index, which measures expected swings in stock futures, decreased 3.1 percent to 21.90.

ADRs of MTS slid 2.7 percent last week to $21.97, settling at a 9.5 percent premium to the company’s Moscow shares. MegaFon fell 2.9 percent last week to $33.99 in London, trading at a 0.3 percent discount to the Moscow-listed shares.

United Co. Rusal (486), a Moscow-based aluminum producer, rose 0.5 percent to HK$2.21 in Hong Kong trading as of 10:30 a.m. local time. The MSCI Asia Pacific Index gained 0.8 percent.

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