A Svyazinvest merger would change the Russian mobile market

OvumRussia’s Communication and Press Minister has confirmed that Svyazinvest – a holding company for several regional fixed and mobile networks – plans to merge its mobile operations into a single company. While the resulting company will not match the three leading players, it will nonetheless alter the competitive dynamics of the Russian mobile market.

Svyazinvest readies to flaunt its weight

For a company that controls close to 9% of the Russian mobile market, Svyazinvest has so far not pulled much weight in the market. Its two biggest units – Uralsvyazinform and Sibirtelecom – are regional stalwarts, but at the national level their combined clout cannot match the dominance of MTS, VimpelCom and MegaFon. Tele2, with about 5% market share, appears to fair even better.

As such, the latest effort to amalgamate the units to create Russia’s fourth largest mobile operator is interesting. The resultant company will enjoy increased economies of scale and better synergies by leveraging expertise in each of its units. ­Russia’s Communications and Press Minister Igor Shchegolev has described it as ‘optimal’, and the decision on the format of the post-consolidation Svyazinvest, due later this year, will rejig the market.

Merger with MTS is the most likely, but MegaFon would be better

Given public statements about the desire to merge Svyavinvest’s mobile operations with one of the big three, it is clear that a merger with MTS would involve the least changes in shareholding. MTS will already control 25% plus one share of Svyazinvest thanks to its soon-to-be-completed takeover of Comstar. Having said that, the combination of MTS and Svyazinvest will create a giant with close to 44% of the Russian mobile market – clearly a threat to market competition.

On the other hand, if the Russian authorities want to foster competition, a merger with MegaFon will be the most ideal. Such a deal will give the joint company about a 32% mobile market share. And crucially, given the MTS/Comstar plus the VimpelCom/Golden Telecom/Corbina Telecom partnerships, Svyazinvest will give MegaFon a stake in Russia’s fixed telecoms market.

The competitive landscape will no longer be the same

Regardless of the shape the consolidation and/or merger takes, the emergence of Svyazinvest as a player in the mobile terrain will have implications for the market. A merger with any of the top three will further widen the gulf between them and the smaller players in the Russian market. Indeed, if the merger is with MegaFon, it will complete the transformation of Russia’s big three mobile operators from mobile-only players to integrated telcos.

But life would not be the same again for the likes of Tele2. Cut off from the leading pack, with limited dominance across its regional footprint and shallow political clout, the change in Svyazinvest could mark the beginning of the end of Tele2’s adventure in Russia.

Emeka Obiodu is a senior analyst in Ovum's mobile strategy practice