FOCUS: Russia’s Beeline, Tele2 can cut capex by 30% with joint use of reg nets

By Yekaterina Yezhova

MOSCOW, Sep 5 (PRIME) -- The minor two of Russia’s four biggest mobile operators – VimpelCom and T2 RTK Holding – have agreed to jointly use networks on one third of the country’s area, excluding the most lucrative Moscow Region. Analysts said the decision is logical to maintain profitability and possibly reduce capital expenditures by up to 30% in a difficult economic environment.

VimpelCom, working as Beeline, and T2 RTK Holding, working as Tele2, inked an agreement of intent to create a joint network in 27 out of the country’s 85 regions, as business daily Vedomosti reported in late August, referring to the document signed by the companies. The partners will share connection channels, equipment along with 2G, 3G and 4G frequencies.

“Joining efforts of operators in the current conditions on the telecommunications market is a needed measure to maintain margins. It’s economically unreasonable to build infrastructure in a parallel mode now,” Vasily Koposov, head of the financial market analysis department at brokerage KIT Finance, told PRIME.

“First, we keep in mind the Yarovaya law with monetary consequences of its implementation being still unclear for connection operators. Second, frankly speaking, financial results of telecom companies for January–June are weak. The industry’s growth potential is limited, while competition is vehement that essentially hits margins of operators.”

The law, called after its co-author Irina Yarovaya, obliges mobile operators, among others, to retain metadata for three years and content of talks and messages for up to six months with the exact period to be later specified by the government. Operators clamored against the move, saying its implementation would cost over 2 trillion rubles.

VimpelCom and T2 RTK Holding declined to comment on the network partnership.

“A merger of networks by the virtual operator technology is not an extremely complicated process. It could be completed until the end of 2016, but lots of things depend here on legal formalities,” Timur Nigmatullin, a financial analyst at Finam, said.

“The best result the partners could reach is to cut capital expenditures by 15–30% and operating expenditures by 5–10%. At that, the balance of competition on the market won’t change with the same number of players. I won’t rule out that a decreasing price trend will stay in force thanks to lower prime costs.”

Koposov at KIT Finance said the partners could save on capital expenditures some 25–30%. “The figure is huge in view of projected spending the companies will face in the coming years,” he said.

“Both companies lose to MegaFon and MTS by the number of base stations. Besides, they have a heavy debt burden as compared to market average. In such a way, they find it rather difficult to overcome the gap with the leaders. It’s easier to unite efforts: it’s logical to jointly use networks. A part of their frequencies lies in adjacent bands, making their merger profitable. It will amplify capacity of networks, meaning a higher speed of the mobile Internet,” Nigmatullin at Finam said.

Tele2 had 96,219 base stations and VimpelCom had 95,928 units in July, Vedomosti reported, referring to data of the communications service. They both limped far behind MegaFon with 164,091 and MTS with 137,290 stations.

VimpelCom and T2 RTK Holding also agreed to merge networks in eight more regions on condition that the current contracts signed by VimpelCom with other operators are turned into trilateral deals.

The deal includes St. Petersburg and the Leningrad Region, but excludes Moscow and the Moscow Region, which bring VimpelCom over 40% of revenue, as Nigmatullin said.

“Moscow and the Moscow Region were not included into the deal, because Tele2 could have failed to offer a decent compensation. Besides Tele2 does not have 2G frequencies here, which are key for expansion,” the analyst said.

Koposov explained that Moscow is an exception, because its market is already well-distributed, and Tele2 has only started its expansion. “In other words, Moscow is a region where Tele2 still keeps its potential of eating out a part of market slice from the Big Three, including VimpelCom,” he said. “The consolidation trend will continue.”

(65.8684 rubles – U.S. $1)

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