Global Insight Perspective | |
Significance | In the mature Russian mobile market, acquisition represents VimpelCom's best means of expansion and subscriber uptake, while Tele2 gains a near-nationwide roaming agreement. |
Implications | Acquisitions are rare in Russia's mobile market, but given VimpelCom's previous difficulties in expanding into the Far East, the move is expedient. Tele2 has been expanding successfully, but this divestment allows it to strengthen significantly its roaming coverage in Russia. |
Outlook | Having successfully made acquisitions across the CIS, VimpelCom will be confident of establishing itself in Irkutsk. Despite this sale, Tele2 will not abandon its broader strategy of regional acquisition in Russia. |
Russia's second-largest operator by subscriber numbers, VimpelCom, has acquired regional operator Corporation Severnaya Korona (CSK) from Tele2, for US$232 million. The deal has been approved by Russia's competition authorities. CSK holds GSM 900 and 1800, and D-AMPS licences, in the Irkutsk region, in eastern Russia. At the end of the first half of 2007 CSK had 571,000 subscribers, including over 3,000 D-AMPS subscribers, a regional market share of 21.5% in Irkutsk. Tele2 reports that CSK generated earnings before interest, tax, depreciation and amortisation (EBITDA) of 79 million Swedish kroner (US$11.7 million) in 2006, and revenue of 237 million Swedish kroner.
As part of the deal, Tele2 has singed a 10-year national roaming agreement with VimpelCom across all regions of VimpelCom's network in which Tele2 does not offer services. Tele2 aims to begin offering voice and GPRS roaming services within six months.
Outlook and Implications
Acquisition Makes Sense in Russia's Mature Mobile Market: Mergers and acquisitions have been rare in Russia's mobile market recently, but the deal makes sense for VimpelCom. The operator had offered services in 74 of Russia's 85 regions, but the maturity of the sector has to some extent stifled potential for further growth. Mobile penetration in Russia at the end of 2006 was 106.6% and, even taking into account multiple-SIM-card-ownership, there is limited room for organic subscriber growth. VimpelCom estimates the penetration level in the Irkutsk region at around 107.6%. As such, expansion into Irkutsk through the creation of the operator's own technical bases was not a viable option, even though such an approach has over the years been successfully used by rival operator MegaFon. The acquisition of an existing operator therefore represents the most obvious means of growth into the region for VimpelCom.
VimpelCom Adept at Expanding its "Beeline" Brand: Moreover, although acquisitions have recently been rare within Russia, VimpelCom has been adept at consolidating across other regions of the CIS. In recent years, the operator has bought units in Uzbekistan, Armenia, Georgia and Tajikistan. It has successfully launched its well-known "Beeline" brand in most of these countries, typically with low tariffs, thereby making inroads into subscriber markets. CSK is estimated by VimpelCom to have a 21.5% market share in Irkutsk, and this is a strong base upon which to build in the style it has successfully exhibited across the CIS.
VimpelCom Sidesteps Regulatory Problems in Far East: It is also worth noting that VimpelCom has previously encountered enormous difficulties in attempting to obtain licences to offer services in Russia's Far-Eastern districts, with regulatory disapproval and general bureaucracy continually rebuffing the operator's attempts. VimpelCom recently obtained three licences in the Far East, but saw Summa, an operator with no existing GSM network, gain 13 licences. The acquisition of an operator that already operates in Irkutsk, a region bordering Siberia and the Far-Eastern districts, is therefore a significant achievement for VimpelCom in an area in which it has previously encountered difficulties in establishing coverage. It is unlikely that VimpelCom would have been able to enter Irkutsk by any means other than acquisition.
Divestment Does Not Herald Change of Strategy From Tele2 Russia: Tele2 has been one of the fastest-growing operators by subscriber numbers in Russia this year, adding 644,000 subscribers in the first quarter, compared to just 280,000 subscribers added by market leader Mobile TeleSystems (MTS). Russia has been the jewel in Tele2's crown in 2007, with strong subscriber uptake comparing favourably to the sluggish growth the operator has experienced in its domestic Scandinavian markets (see Europe: 25 July 2007: Tele2 Sees H1 Profit Drop Despite Encouraging Growth in Russia). The group's policy in Russia has been one of steady regional expansion, with services now offered in 17 Russian regions, including three entered in the second quarter alone. Tele2 had 7.963 million subscribers in Russia at the end of the first half of 2007, and is targeting 11 million subscribers in the medium term. In this context, its divestment of its Irkutsk asset is somewhat surprising, as it appears to run contrary to a previously successful strategy. However, the gain of roaming across VimpelCom's network is a significant sweetener. Johnny Svedberg, Executive Vice-President of Operations and Market Area Director for Baltic & Russia, emphasised in a press release that the deal ought not to be seen as a change of Tele2's strategy of expansion in Russia, but instead represented an opportunity to offer seamless roaming across much of Russia "at very competitive prices". He also confirmed that Tele2 would continue to make acquisitions in Russia in the future. It appears that the sale of CSK was swung by the lure of almost-national roaming, which will supplement Tele2's existing, growing Russian network.