Russia's MegaFon gains LTE edge with $1.2B Scartel/Yota purchase

MegaFon, Russia's second-biggest mobile operator by subscribers, said it is buying 100 per cent of LTE operator Scartel/Yota for $1.18 billion (€882.5 million) in a bid to gain an edge in Russia's nascent market for next-generation mobile services.

According to a statement from Fitch Ratings, the acquisition will put MegaFon at the top of a three-tier market in the provision of next-generation mobile services in Russia.

"Scartel's acquisition of LTE spectrum ahead of its rivals gave it a head-start in building network infrastructure, while MegaFon controls more spectrum than any other operator," said Fitch. "The deal therefore positions MegaFon as the leading operator in Russian LTE telecoms."

In a statement, MegaFon said it had recommended that its shareholders approve the acquisition of the stake from Garsdale, MegaFon's controlling shareholder, at a vote scheduled for Sept. 12. The largest minority shareholder TeliaSonera, with a 25.17 per cent stake, said it intends to vote for the deal.

MegaFon will also assume Scartel's debt of around $600 million.

Reuters noted that the deal unites assets belonging to Russia's richest man, Alisher Usmanov. Garsdale is the telecoms holding company of Usmanov, who is also a controlling shareholder in MegaFon, with more than 50 per cent.

The move is set to give MegaFon a competitive advantage over rivals MTS, VimpelCom and Rostelecom in the race to roll out LTE services in Russia and the CIS; Scartel/Yota is the only operator in Russia with an operational LTE network in multiple cities. MegaFon is also currently the only MVNO on the Scartel network. Fitch noted that Scartel's original intention was to license its LTE network to other operators, but it failed to sign up any customer other than MegaFon. "We had therefore seen a takeover by MegaFon as a likely outcome," the ratings agency added.

Scartel owns 2×30 MHz of nationwide LTE spectrum in the 2.5–2.6 GHz frequency band and a network covering 27 per cent of the Russian population. As of June 30, it had around 648,000 business and private customers for its LTE network.

"The deal would only result in a major advantage [to MegaFon] in the long term," Anna Kurbatova, an analyst at Moscow-based brokerage BCS, told Reuters. "The pace of fourth-generation development that MegaFon and Scartel have been showing so far is enough to satisfy demand."

Kurbatova added that it would take at least three years for LTE to become a mass-market product in the country.

"The acquisition of Scartel/Yota and combination of its resources with MegaFon would become a new stage of 4G network development," MegaFon CEO Ivan Tavrin said in a statement. "Within the shortest possible period of time we will be able to provide access to high-speed Internet in both large cities and rural areas across Russia."

MTS has also recently outlined its LTE ambitions for Russia and other markets, and said it would roll out services on a market-by-market basis. Commercial services are currently available from the operator in Moscow.

"MTS and VimpelCom have less spectrum than MegaFon but still have enough to successfully compete in Russia," added Fitch. "Rostelecom, the Russian fixed-line incumbent, will face the biggest hurdles to launching a successful LTE network."

Fitch noted that a Tele2 Russia/Rostelecom tie-up would be likely to increase competition in the sector, but it does not expect further consolidation among the big four Russian telecoms companies in the near to medium term.

MegaFon also reported second-quarter earnings that beat forecasts. Its net profits increased to 13.6 billion roubles ($412 million) compared with a Reuters poll forecast of 12.4 billion roubles and 1.7 billion roubles a year ago, the news agency reported. The company's OIBDA margin increased to 47.5 per cent from 42.2 per cent in the second quarter of 2012.

For more:
- see this MegaFon release
- see this Reuters article
- see this Bloomberg article

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