FOCUS: Analysts praise merger of Russia’s MegaFon, Yota as good for both

By YekaterinaYezhova

MOSCOW, Jan 18 (PRIME) -- One of Russia’s top three cell phone operators MegaFon will merge with its unit, Internet provider turned mobile operator Yota, in the next two years with analysts welcoming the move as beneficial for both firms.

“The market welcomes the merger of the companies, and MegaFon’s shares have been rising since the middle of 2015 despite the weakness of the stock market. Investors expect integration of the companies to boost competitive advantages and service quality,” Zerich senior analyst Viktor Markov told Russian Connection.

“The consolidation process on the telecom market will intensify in the future. The merger will make MegaFon and Yota more attractive for investors. On the whole, we cannot rule out the process to complete by the end of 2016.”

The merger was revealed in late December by magnate Alisher Usmanov, founder of MegaFon’s major holder USM Group.

Yota, a brand used by Scartel, and MegaFon started integrating their infrastructure, networks and IT components in 2013 and the process is still under way.

“The asset has already been paid for: the last tranche was transferred in October. It is only left to wrap up the technological process of merger of the operators and coordinate the marketing policy,” Promsvyazbank senior analyst Ilya Frolov said.

Usmanov said that MegaFon received “a huge margin of safety for LTE future technologies and a frequency resource,” when it acquired Scartel. MegaFon is a bit heavier since the market is highly competitive, and Yota can exploit the parent company’s infrastructure as an affiliate, he said.

MegaFon paid the last installment of U.S. $134 million to its shareholder, Garsdale for 100% of shares of Scartel. The amount included $120 million and 6% annually, accrued since the closure of the deal in October 2013, when MegaFon agreed to buy Maxiten Co Ltd., owning Scartel, for $1.18 billion, or $1.85 billion with debts.

In June 2014, MegaFon paid Garsdale $1.06 billion in advance that allowed the operator to reduce the amount of liabilities in U.S. dollars and foreign currency risks.

Scartel transferred its infrastructure to MegaFon and now works on the network of the parent company as a mobile virtual operator. Scartel was the first operator that deployed in 2008 WiMAX networks in Moscow and St. Petersburg. The company was also the pioneer of the LTE standard, which it tested in 2010.

“At present, operating activities are held under the two brands, but we can already see a strong synergy effect: Yota received the opportunity to sell SIM cards on the territory of 45 out of 85 regions of the country, while MegaFon received a high-quality 4G/LTE network that enabled it to strengthen its leading technological positions in the sector,” Frolov at Promsvyazbank said.

“Keeping in mind the fact that data transfer is the main point of growth, the received frequency resource will allow MegaFon to tighten its grip on the market in the mid-term.”

Yota’s PR Director Lina Udovenko told Russian Connection that Scartel will keep on cultivating its own brand. “The company’s business model, brand positioning on the market, as well as approach to development of products will remain unchanged. Clients will see no changes, and Scartel will remain MegaFon’s affiliate,” she said.

“Such a multi-brand approach proves to be effective, that is why Yota and MegaFon will remain two independent brands.”

Integration seems to be a win-win partnership. “The operators take advantage of lower operating expenses, a better frequency planning of networks, higher return on investments, as well as wider coverage and better quality of connection,” Udovenko said.

Markov at Zerich agreed, adding that integration will allow the companies to offer clients additional services and cut costs. “MegaFon possesses an advanced technological infrastructure, and Yota enjoys a good client base,” he said.

Yota’s voice product had 1.5 million subscribers as of the end of September 2015. Its SIM cards are available in 74 regions, and services are provided across the whole country.

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