FOCUS: Russia’s MTS to re-enter Uzbek market via JV with state

By Yekaterina Yezhova

MOSCOW, Aug 11 (PRIME) -- Major Russian mobile operator has signed an amicable agreement with the Uzbek authorities to resume operations through a joint venture with the state, after a 2012 bankruptcy following accusations of tax evasion and scheming. Analysts said the deal provides the company access to a fast-growing market, but it will take MTS up to five years to regain the revenue it used to yield.

“The amicable agreement is beneficial for MTS, because the company will resume its activities on the unsaturated market,” Investcafe analyst Timur Nigmatullin said.

Under the July 31 deal, MTS will own 50.01% in the joint venture, and the remaining will belong to an Uzbek state enterprise. The joint venture will use the property and infrastructure, which belonged to MTS’ bankrupted local branch, Uzdunrobita, according to MTS’ press release.

“The restoration of business in Uzbekistan should be viewed as a long-term strategic and reputation success for MTS, rather than a short and medium-term revenue source from operating activities,” Roman Kulik, business analyst of the corporate finances department at J’son & Partners Consulting, told Russian Connection.

“The Uzbek government is getting back a reliable and efficient partner to manage the asset. Such a partner will tackle the challenge of a loss of a market share and the development of new technologies and connection standards. In its turn, MTS can now write off risk reserves to the tune of U.S. $500 million and will manage the joint venture’s property worth $579 million.”

Ilya Frolov, senior manager at research and analysis at Promsvyazbank, said that investments in the initial launch of services may be low, though additional funds will be required for the launch of 3G and LTE infrastructure. J’son & Partners Consulting’s Kulik estimated that the restoration of infrastructure and investments to maintain competitiveness may require up to $200 million during the coming two–three years.

The form of a joint venture, chosen for the deal, will help the parties reduce the risks, but will not eliminate them fully. “The country will hold presidential elections in April 2015, and its irreplaceable head of the state, Islam Karimov, may step down triggering the risks of revision of agreements with foreign companies, signed under his rule, including the one with MTS,” Promsvyazbank’s Frolov said.

Finam Management analyst Maxim Klyagin said that the Uzbek market is large and undoubtedly important for MTS, despite possible risks. “The risks are mainly the unstable social and political situation and the lack of legal guarantees of property rights for foreign investors,” he said.

MTS had been working on the Uzbek market until June 2012, when Uzdunrobita’s General Director Bekhzod Akhmedov fled the country. Several top managers were arrested for tax dodging and financial scams. The firm was later deprived of an operator’s license and went bankrupt. Its property and equipment was handed over for storage to national telecom company Uzbektelecom.

MTS’ revenue in Uzbekistan reached $436 million in 2011, or 3.5% of the operator’s consolidated revenue, Vitaly Solonin, director of the wireless technologies department at J’son & Partners Consulting, said.

“As of early 2012, MTS counted nearly 9.3 million subscribers in Uzbekistan. Even considering the amicable agreement, it will take MTS at least two to three years to regain a similar subscriber base and four–five years for revenue,” Investcafe’s Nigmatullin said.

As of the end of 2013, the Uzbek cellular market was shared by two operators: Unitel, an affiliate of Amsterdam-based telecom giant VimpelCom Ltd., with 53% and Ucell, an affiliate of Swedish-Finnish telecom group TeliaSonera, with 43%, according to J’son & Partners Consulting’s Solonin.

“The bankruptcy of Uzdunrobita played into the hands of VimpelCom Ltd.’s unit, Unitel, which raised its subscriber base by 3 million subscribers…A quick growth and a larger subscriber base will become possible for the joint venture through the promotion of packet offers and price competition. The steps, however, may squeeze the OIBDA margin,” Promsvyazbank’s Frolov said.

Analysts said, however, that the agreement will have a moderate influence on MTS’ current quotes due to its small contribution to the consolidated revenue.

MTS and the Uzbek government plan put the network in operation by the end of 2014. Under the agreement, the Uzbek government will furnish the operator with the 2G, 3G and LTE licenses, the required frequency band, numbering capacity and will ensure the lease of channels.

The agreement is governed by the English law and stipulates the consideration of all disputes between the parties at the International Court of Arbitration of the International Chamber of Commerce in Paris.

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