FOCUS: Euroset’s upcoming split to cool down price war, cut owners’ expenses

By Yekaterina Yezhova

MOSCOW, Mar 27 (PRIME) -- Mobile operators MegaFon and VimpelCom may soon split Euroset, one of Russia’s largest handset retailers, to ease price competition and cut distribution costs, analysts said.

“Euroset will be split sooner or later anyway, since the mobile connection market’s rapid growth has stopped, and competition between operators is becoming more vehement. Developing the independent Euroset brand no longer makes sense for the operators as it competes with their own chains in the mind of the consumer,” Yaroslav Kabakov, deputy general director of Finam, told PRIME.

MegaFon CEO Sergei Soldatenkov said on March 16 that the operators were in talks on a possible split, and a decision could be made within a month. VimpelCom’s parent company, Amsterdam-based VEON, said it “is evaluating options in relation to its co-owned investment in the Euroset business and can confirm that it is in discussions with MegaFon in this regard.”

On March 21, business daily Vedomosti reported, quoting sources, that the co-owners have already come to terms on the following: MegaFon will buy 50% from VimpelCom, which will pay about 1 billion rubles to cover some of Euroset’s debt of 9 billion rubles, and receive 2,000 out of the seller’s 4,200 stores.

The sources said Euroset will remain autonomous with its management unchanged.

“The Russian mobile market’s glut dictates to the operators the priority of maintaining the quality of their subscriber base rather than its growth. It means that costs of keeping expanded retail chains will not be quite justified,” UralSib Capital said in a research note.

“If conditions of the Euroset’s split are true, we think it’d be more profitable for VimpelCom, keeping in mind that MegaFon will consolidate the seller’s debt.”

Raiffeisenbank said in a research that the seller’s split should improve MegaFon’s margins.

Brokerage BCS said that the detailed description of terms of the deal proves its final stage. “The potential division of Euroset could improve economic features of the sector through softening price competition,” it said.

The mobile connection industry may benefit from the deal by allowing operators to cut distribution costs, according to BCS.

Euroset President Alexander Malis said that “if the conflict between Euroset’s shareholders provoked by a different vision on the company’s development strategy could be solved if one of them quits, it’s certainly good for the company.”

Euroset runs one of the widest retail chains, while MTS had 5,438 stores as of the end of September 2016, MegaFon – 4,100 and VimpelCom – 3,850 shops, according to UralSib Capital.

MegaFon and VimpelCom said they want to split the business in 2016 after their monobrand chains had developed strongly. MegaFon and its main competitor MTS also said they were ready to suspend further expansion of their retail chains.

An almost equal division of Euroset’s stores between its co-owners seems reasonable to Kabakov at Finam, because buying the whole chain, when the number of outlets is already excessive, makes no sense.

“The Euroset brand could remain for one to two years. I see no reason for the operators to invest in a name that is different from theirs. It seems to have no future,” Kabakov said.

“On the grounds of presumed profit, Euroset cannot be valued at more than U.S. $300 million–$400 million. Last year analysts valued it much higher, and its worth will vary now depending on the buyer. VimpelCom bought its half for the amount equal to a quarter of what MegaFon paid. Having purchased half of the chain for more than $1 billion, MegaFon will hardly value it much cheaper regardless of its current estimations.”

Business daily Kommersant reported on March 22, also quoting sources with knowledge of the situation, that the Euroset split could be followed by a possible merger with its competitor Svyaznoy, running 2,700 stores, into a company managing almost 5,000 stores.

In the future, the merged chain could be raised to 6,000 stores. The name of the new company is yet to be chosen, perhaps, it will be a new brand, the daily said.

MegaFon responded to the rumors saying that parameters of the deal are still unclear, but confirmed “that it is considering a potential transaction in relation to its investment in Euroset.”

(57.4247 rubles – U.S. $1)

End