Russian Telecoms Shake-Up Beckons as Communications Minister Confirms Svyazinvest Interest in MegaFon

Russian state-owned national fixed-line holding Svyazinvest has confirmed its interest in obtaining a controlling stake in the country’s third-largest mobile operator, MegaFon. Russian Communications and Mass Media Minister Igor Shchegolev is widely quoted by the national media as confirming that Svyazinvest is in talks with billionaire oligarch Alisher Usmanov about the purchase of the 31.1% stake he holds in MegaFon through his holding group, AF Telecom.

Shchegolev is quoted in the Moscow Times as suggesting that a number of options are being considered, stipulating that if the state goes ahead with any such deal for MegaFon, it would seek control of the operator rather than just a blocking stake in order to guarantee that its rights are safe. As such, it would also be interested in the 25.1% stake currently owned by Russian holding Alfa and the remaining 43.8% held by Swedish-Finnish telco TeliaSonera.

Outlook and Implications

• Long-Standing Mobile Ambition: Last year Svyazinvest indicated its plan to enter into the top tier of Russian mobile telephony through a purchase of one of the “troika” of leading national operators (MTS, VimpelCom and MegaFon) and, as noted at the time by IHS Global Insight, MegaFon is the most obvious candidate (see Russia: 24 June 2009: Svyazinvest Eyes Mobile Expansion Through Merger with One of Russia's Big Three). MegaFon would stand to gain from a takeover by Svyazinvest, given that the mobile operator has made public its interest in expanding into the fixed-line broadband sector, a move that would be facilitated by a Svyazinvest takeover as Svyazinvest owns nationwide fixed-line infrastructure. In contrast, MTS and VimpelCom have already begun to establish themselves in the fixed sector, so their need for such a tie-up is less urgent. With Svyazinvest standing to gain by being instantly catapulted to the status of third-largest national mobile operator, such a deal would appear mutually beneficial.

• Far From Straightforward: Complications may arise for Svyazinvest in winning the approval of MegaFon's shareholders. Alisher Usmanov has already hinted at his willingness to co-operate with Svyazinvest (see Russia: 13 November 2009: Billionaire Rejects Invitation to MegaFon-Turkcell Party, Eyes Svyazinvest). However, if the state is to gain control of MegaFon, it will also need to gain at least part of the stakes held by either Alfa or TeliaSonera. These two groups signed an agreement as recently as November 2009 to merge their directly and indirectly held stakes in MegaFon and Turkcell, a move that strongly suggests a commitment from both to involvement in the future of MegaFon rather than any possible divestment (see Russia: 13 November 2009: Altimo and TeliaSonera Agree to Merge MegaFon, Turkcell Assets Into New Company). This agreement is actually in danger of being vetoed by the Russian state, which fears excessive foreign influence in leading Russian telecoms assets, although Alfa spokesman Yevgeny Dumalkin has moved to assuage any such fears, quoted in the Moscow Times as suggesting that no MegaFon decision can be made without Russian agreement. The route to control of MegaFon is therefore far from straightforward for Svyazinvest.

• State Eager to Increase Telecoms Presence: The confirmation of government interest in MegaFon is further indication of the determination of the state to become a major player in Russia’s fast-moving telecoms market, using Svyazinvest as its vehicle. After hinting last year at its eagerness to enter the upper echelons of the Russian mobile sphere, Svyazinvest later outlined plans to unite its regional mobile subsidiaries within a single company and is pursuing an asset-swap deal that would see it gain CDMA operator SkyLink as a possible figurehead for mobile operations. Svyazinvest has also indicated plans to reorganise under the banner of long-distance operator Rostelecom, improving its broadband presence, while the state increases its stake in Svyazinvest from 75% minus one share to 100% (see Russia: 16 September 2009: Russian Government Backs State Plan to Gain Full Control of Svyazinvest, Mobile Offensive Also Mooted). Whichever of these plans eventually come to fruition, the fact that the government has made them public strongly suggests that the state’s presence in the Russian telecoms arena, covering mobile and broadband, will inevitably increase. With Svyazinvest and MegaFon both keen to merge the mobile and broadband lines, as MTS and VimpelCom have already begun to do, the Russian telecoms sphere is evolving along a converged services model in which it appears that three major players will emerge.