FOCUS: Russia’s Tele2 sets up unit for tower infrastructure with possible sale

By Yekaterina Yezhova

MOSCOW, Jul 25 (PRIME) -- One more Russian mobile operator, this time T2 RTK Holding, known under the Tele2 brand, intends to spin off its 10,000 base towers with a possible sale. Some analysts doubt the deal would take place, while others are weighing chances of a merger with other companies amid a consolidation trend.

“T2 RTK Holding has always efficiently managed costs and used all the chances to optimize business processes to offer customers high-quality products at low prices. We are potentially studying the sale of tower infrastructure since it could be profitable. We are involved in preliminary talks with a wide number of interested companies,” the operator’s press secretary Olga Galushina told PRIME.

“We see huge interest; the tower management business can offer large margins for firms from many industries.”

T2 RTK Holding CEO Sergei Emdin said in March that the operator was in talks with Russian Towers, a leader of the towers and antenna masts leasing market, VTB Capital and the Russian Direct Investment Fund, along with some foreign firms.

“In my view, chances that T2 RTK Holding’s shareholders would approve the sale of the towers are small. If they do, Tele2 will lose the chance of competing with the Big Three – MTS, MegaFon and VimpelCom – on equal terms because of limited coverage and potentially lower quality of servicing clients,” Finam financial analyst Timur Nigmatullin said.

“Most likely, the asset will be separated as a unit and a minor, non-blocking stake could be offered during an initial public offering or sold to an industry investor. The money will be spent on debt repayment and capital expenditures.”

Russian Towers and investment company Vertical are among potential bidders for the towers, he said.

MegaFon and VimpelCom are on their way to spin off the towers and could also sell them, while MTS will lease them out.

MegaFon decided to set up the First Tower Company in 2015 and is looking now into various formats of its progress. “At present, we want to develop the unit as part of business and focus on operating efficiency of tower infrastructure. The unit’s sale in the future will raise additional money and allow us to save on operating and capital expenditures,” Yulia Dorokhina, head of MegaFon’s press office, told PRIME.

Promsvyazbank senior analyst Ilya Frolov earlier estimated Russia’s tower market at 80,000–90,000 units, the largest number in Europe, which has only 600,000 towers with 29% of them controlled by independent tower companies.

Construction of a tower from scratch costs about 5 million rubles, and its maintenance consumes about 5% of this sum per year. With lease rates at 25,000–50,000 rubles per month, the payback period stretches from eight to 10 years, Frolov said then.

Consolidation gossips

Online edition ComNews reported on July 18, quoting several sources, that state-controlled telecom giant Rostelecom, which owns 45% in T2 RTK Holding, could buy the remaining stake from VTB, firms of Yury Kovalchuk and Alexei Mordashov by 2017.

The sources explained the deal by heavy costs of T2 RTK Holding on the network in Moscow, whose lucrative market the operator entered in October 2015, as well as by the lack of money to develop infrastructure in the Moscow Region and worsened financial indicators of the company.

One of the people familiar with the matter said Rostelecom estimated T2 RTK Holding at 450 billion rubles, excluding debts, meaning that a 55% stake would cost 250–270 billion rubles, as ComNews reported.

Rostelecom’s possible consolidation of T2 RTK Holding seems unlikely to Nigmatullin at Finam, as the state-controlled giant “does not have enough resources, even on condition that the other shareholders would reap special dividends from the sale of towers”.

“Moreover, under the recently adopted laws on data storage, Rostelecom will have to invest a lot of money in IT infrastructure,” the analyst said.

In addition to Rostelecom, mass media rumored early this year that shareholders of T2 RTK Holding and VimpelCom, or the country’s fourth and third biggest operators, had discussed a merger, but no progress was achieved.

Citi’s analysts pointed to T2 RTK Holding’s EBITDA margin that shrank 10.5 percentage points on the year to 12.2% in January–March. EBITDA plunged 43.6% on the year to 3 billion rubles. “We think consolidation is one of the potential options to improve the value that would be considered by company shareholders,” the bank said in a research note.

“Maturity of the market, strong competition, macroeconomic pressures on consumer spending, the high cost of capital and political issues are the factors that prompt Russian telecom companies to seek efficiencies. Network sharing and potential optimization of retail footprint are currently being considered by the mobile operators. Tele2 is considering changing its pricing strategy, moving away from deep discounting to value, while its capex guidance for 2016 has been revised down.”

A possible merger with VimpelCom would face less regulatory scrutiny than with MTS or MegaFon, Citi said.

T2 RTK Holding’s subscriber base widened 3% in January–March to 38.4 million as of the end of March, according to researcher Advanced Communications & Media. VimpelCom’s base in the country contracted 4% in the first quarter to 57.7 million as of the end March.

(64.6270 rubles – U.S. $1)

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