Rostelecom and Svyazinvest Units Acquire 71.8% Stake in Cable Operator NTC

Russian fixed-line operator Rostelecom has announced that, alongside Svyazinvest regional subsidiaries North-West Telecom and Uralsvyazinform, it has acquired 71.8% in cable operator National Telecommunications (NTC) for a total sum of 27.9 billion roubles (US$949 million). Rostelecom has acquired 21.8% of NTC shares for an undisclosed sum and also acquired promissory notes in NTC for 1.2 billion roubles, while Uralsvyazinform and North-West Telecom have acquired 50% in NTC and promissory notes worth 2.4 billion roubles. The vendors of the stake are Russian media holding National Media Group, oil and gas company Surutneftegaz, and Raybrook Ltd.

NTC is Russia’s leading alternative cable operator with over 4.5 million TV subscribers and 431,000 broadband subscribers at the end of the third quarter of 2010. This included 3.1 million subscribers in Moscow, 1.5 million in St Petersburg, 240,000 in Yekaterinburg, and 186,000 in other Russian cities. Its broadband subscriber base included 140,000 in Moscow, 186,000 in St Petersburg, and 94,000 in Yekaterinburg. In financial terms, it consolidated normalised revenue of 7.4 billion roubles, and earnings before interest, tax, depreciation and amortisation (EBITDA) of 2.8 billion roubles in the first nine months of 2010.

Outlook and Implications

• Rostelecom Keen to Add Pay-TV to Service Portfolio: Rostelecom president and chairman of the management board, Alexander Provotorov, has indicated in a press release that the deal is geared towards strengthening its competitive position in Russia’s largest cities, while in the longer term it is aimed at helping Rostelecom establish itself as leader of the country’s pay-TV market. With the integration of all of Svyazinvest's subsidiaries into Rostelecom, due for completion in April 2011, Russian daily Vedomosti has suggested that Svyazinvest plans to merge all three of the stakes in NTC, totalling 71.8%, in March 2011 in a move that would trigger a mandatory share offer to NTC’s remaining minority shareholders. Whatever the next stage, it is clear from the completed deal that Rostelecom and Svyazinvest are eager to add pay-TV to their soon-to-be-combined portfolios, which will already boast significant fixed-voice and broadband offerings, with mobile also to be added and plans under way for LTE service provision. The forthcoming integration and acquisition of the leading alternative cable operator provide further evidence of the state’s ambition to become the dominant player across several segments of the Russian telecoms sector.

• Long-Standing Interest in Cable Sector: While officially a fixed-line, long-distance operator with its backbone network stretching 160,000 kilometres, for several months Rostelecom has been eyeing a move into the pay-TV sector. In the second half of 2010 Svyazinvest entered into talks with leading cable and broadband operator Akado, but discussions were suspended due to boardroom upheaval at the former, with Svyazinvest chief executive Yevgeny Yurchenko reportedly tendering his resignation because he considered the US$1.2-billion asking price for Akado to be too high (see Russia: 23 September 2010: Svyazinvest Suspends Talks on Purchase of Cable Operator Akado—Sources). Then in October 2010 Rostelecom was awarded five-year licences for cable TV broadcasting in 75 of Russia’s 83 regions (see Russia: 28 October 2010: Rostelecom Gains Cable TV Licences in 75 Russian Regions). The latest move in the cable arena further reflects the growing importance of the pay-TV market within the combined long-term strategy of Rostelecom and Svyazinvest. It has been estimated by Svyazinvest that the national pay-TV market could generate revenues of around US$2.65 billion in 2015, providing some explanation for Svyazinvest’s interest in the area. Having held a market share of only around 4% in 2010 with 750,000 pay-TV subscribers, it is clearly an area in which Svyazinvest and Rostelecom consider that they can grow as a combined entity.