MegaFon Outlines US$1.7-bil Investment Plan for 2008

Russia's third-largest mobile operator, MegaFon, has announced that its investments in 2008 will increase by 31% on the previous year to US$1.7 billion, according to press reports. This sum will include US$250 million on 3G network construction, without which the total investment sum would amount to US$1.45 billion, 11.5% greater than the 2007 sum of US$1.3 billion.

MegaFon has indicated that the majority of its 2008 investment will be directed towards expanding network coverage. This will help it to cope with an expected further subscriber increase and concomitant increase in minutes of use (MOU), according to Raymond Ho, adviser to the company's chief financial officer, as quoted by Reuters. MegaFon is currently the only operator with coverage in every one of Russia's 84 regions. Funds will also be directed towards the improvement of service quality and the introduction of new value-added services, with 3G services prominent among these.

MegaFon has outlined that its principal aims for 2008 will be to continue its drive to decrease churn, which stood at an extremely high 42% in the third quarter of 2007; increase ARPU, which was the highest of the country's major mobile operators at US$15 in the third quarter; and the exploration of "external growth opportunities", although no further detail was provided on this point.

Data: Global Insight, MegaFon, VimpelCom Mobile TeleSystems

Data: MegaFon

Outlook and Implications

• MegaFon Hoping for More of the Same in 2008: MegaFon has enjoyed a strong 2007, notable for the fact that it has continued to close the gap on the other members of Russia's mobile "troika"—Mobile TeleSystems (MTS) and VimpelCom—in terms of both subscriber share and market-revenue share (see Russia: 3 May 2007: MegaFon Profit Doubles in 2006). The company's strong MOU figures provide some indication of why it boasts such high ARPU within a highly-penetrated market. These factors also seem to justify the projection of a further MOU increase in 2008, and the decision to invest in further expansion of network capacity. The emphasis placed on reducing churn is also understandable, when MegaFon's 41% third-quarter churn is compared to that of MTS (7.1%) and VimpelCom (10.1%). MegaFon will hope that the roll-out of 3G services contributes to ARPU and, although the operator last year became the first in Russia to launch 3G services, Global Insight expects uptake to be moderate at best this year, with more notable growth likelier in the longer term (see Russia: 25 October 2007: MegaFon Wins Russian 3G Race with St Petersburg Launch).
• Overseas Growth Would Be a Change in Strategy: The slightly cryptic declaration that MegaFon will explore external growth opportunities is eye-catching, as this would represent a drastic departure from the operator's strategy to date, given that its only overseas asset to date is in Tajikistan. Even within Russia, MegaFon has not carried out any M&A activity, preferring instead to build its own networks from scratch. However, company chief executive Sergei Soldatenkov hinted in 2007 that moves into the near abroad were not out of the question, with Kyrgyzstan, Armenia and Uzbekistan mentioned as possible targets (see Kyrgyzstan: 14 September 2007: Russians Eye US$600-mil. Kyrgyz Asset Sky Mobile—Reports). The Armenian market regulator has indicated that a tender for a new GSM licence will take place later this year, and with VimpelCom and MTS already present there, MegaFon would stand a good chance of success (see Armenia: 17 December 2007: Mobile Duopoly in Armenia to Face New Challenger in 2008).
• Developments at Boardroom Level Are Likely: This year could also herald important developments at a boardroom level for MegaFon. The recent resolution of a long-standing share ownership dispute between IPOC and Alfa has paved the way for shareholder changes (see Russia: 3 December 2007: Court Settlement of Altimo-IPOC Row Paves Way for Usmanov to Increase MegaFon Stake). Global Insight expects Uzbek billionaire Alisher Usmanov to increase his stake in MegaFon via Telecominvest, which holds 31.3% of MegaFon and in which Usmanov has an indirect stake. Moreover, simplification of MegaFon's ownership structure would also pave the way for an IPO, a move that appears to be gaining momentum. With 3G services already being offered, overseas expansion being mooted and an IPO in the pipeline, Global Insight expects that MegaFon will continue to narrow the gap on its bigger rivals in the Russian mobile sector in 2008.