Turkcell must be cautious in Vivacom acquisition

Turkish telecoms group Turkcell has confirmed that it is bidding for a 93.99% stake in Bulgarian fixed line incumbent and third mobile operator, Vivacom, presently owned by PineBridge Investments.
But Bulgaria is no emerging market promising bountiful revenue increases in the future. Fixed voice revenues are in steep decline and growth in fixed broadband access, pay TV and mobile will not fully compensate. While 2011 saw Vivacom achieve revenue losses of just 1%, it will be difficult to improve on this position so reducing costs will have to be an important part of the strategy to maintain margin.
Of course every asset has its price, but the US $1.4 billion (€1 billion) that it has been reported Turkcell may bid seems too high, particularly given that such an acquisition may reduce the company’s credit profile.
Vivacom has suffered significant revenue losses in the fixed voice market over the last two years, largely as a result of the convergence plays of mobile operators Globul and MobilTel which are offering fixed GSM voice. For example, Globul has been able to acquire 210,000 fixed GSM voice subscribers thanks to its aggressive pricing, increasing line losses for the incumbent.
Vivacom responded by launching bundles in an attempt to preserve its fixed line base. These bundles have been successful in acquiring hundreds of thousands of subscribers and do have the effect of reducing churn, but also reduce prices. The worst effects of the price discounts and competition are probably over with overall fixed revenue declines halving in 2011 compared to 2010. That should not obscure the fact, however, that overall fixed line revenues still contracted by 8.2% in 2011.
Growing the fixed broadband base will be difficult in major cities such as Sofia where competition is fierce. Arguably this competition is getting tougher as mobile operator MobilTel has acquired Megalan and Spectrum Net, and is pursuing a convergence strategy with its mobile assets. Vivacom has built its own fiber access network in Sofia and Varna but, thus far, coverage is limited. In smaller cities where no strong neighborhood network competition is present Vivacom is growing and will continue to grow its subscriber base, representing a revenue upside to anyone acquiring the company.
TV a big plus in fixed line
Vivacom launched DTH services in 3Q10 [garnering] 110,000 subscribers by the end of 2011. In the TV market competition is less intense than in fixed broadband with blizoo being the only sizeable cable TV operator. It is true that MobilTel is also placing a strong emphasis on growing TV revenues through offering IPTV under the Megalan and MobilTel brands, but unlike in the fixed voice market Globul is not a competitor in multichannel TV. The wildcard in the TV market is DTH operator Bulsatcom, which has been acquiring some neighborhood network FTTB players, but despite this Vivacom has the edge in terms of ability to bundle multiple services. Overall TV represents a significant upside.
Over the last couple of years Vivacom has been successful in the mobile market with strong growth in revenues up from 255.3 million Lev (€130 million) in 2009 to 368.3 million Lev in 2011. Part of this success is due to factors such as its fixed/mobile bundles, better 3G coverage and quality than its rivals, and problems with MobilTel’s billing systems, but the main reason is its aggressive pricing, undercutting Globul and MobilTel.
Nevertheless the prognosis in the long run for mobile revenues is not as positive as it has been over the past two years. Penetration has little room for growth, standing at 150% at end September 2011. Regulation will also have a negative impact, for example, the Bulgarian regulator the CRC, has an aggressive glide path for mobile termination rates. The plan is for termination rates to fall from 6.65 Euro cents per minute to 3.06 in April 2012 to 2.35 in January 2013.
All that said there clearly is still room for mobile revenue growth from Vivacom and this must be a big factor in making Vivacom an acquisition target for Turkcell.
Turkcell is also far from certain to actually manage to acquire Vivacom. There are likely to be issues with a Turkish company acquiring such a significant Bulgarian asset. In any case Vivacom is not in such a strong position as to be an asset that should be acquired at any price. Matching the 1% revenue declines of 2011 in 2012 will be difficult.
A more detailed version of this analysis will appear on Informa TM’s Europe Intelligence Centre.
Stephen Wilson is a senior analyst in Informa Telecoms & Media’s broadband and internet team