FOCUS: Russia’s VimpelCom, MegaFon may split Euroset in half soon to raise margins

By Yekaterina Yezhova

MOSCOW, Dec 12 (PRIME) -- One of Russia’s most popular and well-established handset retailers, Euroset, could disappear in a year, as its owners, mobile operators VimpelCom and MegaFon could share its some 4,000 stores and debts. Analysts welcome the move that could raise margins of the companies’ monobrand chains and help stabilize the overcrowded mobile connection retail market.

“Competition on the mobile retail market is extremely high. In the conditions when operators focus on maintenance of loyalty of highly profitable subscribers, instead of new clients, monobrand chains could be more attractive than conventionally independent stores,” investment company UralSib Capital said in a research note.

“Fierce rivalry in the mobile retail, primarily in phones, undermines financial indicators of the market’s participants and dilutes margins of the operators that run their own chains.

“Investments in retail for the industry’s companies are not justified. We think presence on the oversaturated market of the mobile retail does not raise value of mobile operators, whose main cash flows are generated with connection services, that is why optimization of such presence and a more rational behavior on the device market could be good for all market participants.”

Business daily Vedomosti reported in late November, quoting sources, that VimpelCom, widely known under the Beeline brand, had suggested MegaFon agree to split the equally owned Euroset and sign documents by December 24. VimpelCom offered to share the retailer’s stores and debts of about 15 billion rubles and liquidate the Euroset brand in a year, the daily said.

VimpelCom and MegaFon declined to comment.

Brokerage BCS said that the split could cool down price competition in the industry.

Although no final word has been pronounced so far, Natalya Milchakova, deputy director of the analytical department at investment company Alpari, sees probability of the split until the end of 2016 as rather high.

“We think the main reason behind the possible division of Euroset could be the fact that VimpelCom and MegaFon’s revenue grows mostly thanks to the sale of broadband and data transfer services. Cell operator MTS boost its revenue, in addition to the mentioned services, by distributing phones and accessories. This is why the split of Euroset would be a good solution for them – it would be an option to enter a new market under own brands and raise revenue,” Milchakova said.

VTB Capital’s analyst Ivan Kim said the division of Euroset could pave the way toward normalizing mobile distribution in the country.

“We note that VimpelCom’s management has previously said that the question is not whether to split Euroset, but how. How any negotiations between Euroset’s 50/50 owners end remains to be seen,” Kim said in a research note.

“As we have stated on a number of occasions, the Russian mobile retail space is overcrowded. There is significant overbuilding, and we estimate that the number of stores could be reduced to 12,000–14,000 as an interim target, and then to 8,000–9,000 in the longer term – 1,500–2,000 per operator, roughly equivalent to their current owned-and-operated monobrand networks – from 21,000-22,000 at present.”

The country’s three big operators – MTS, MegaFon and VimpelCom – sold 105–110 million SIMs in 2015, which looks excessive to VTB Capital. All operators acknowledge the value of sales via monobrand stores. Splitting Euroset could trigger normalization of the distribution market, but the process is likely to be lengthy and could take 18–24 months, the analyst said.

“We think a 10–16 billion ruble positive effect for MTS is achievable in the long term, while MegaFon and VimpelCom would get 5–10 billion rubles in additional EBITDA. The positive effect would come from reduction of the retail chain, higher gross margins on handset sales and a drop in gross SIM sales,” Kim said.

Milchakova of Alpari said that Euroset significantly cut prices of smartphones in 2015–2016 that boosted demand and improved sales across the country, which rose 6% in January–September in natural terms.

“In such a way, the split of Euroset between the leading operators could result in higher prices of smartphones, which would be disadvantageous for consumers and would undermine demand for devices of the world’s top producers. We don’t rule out that the shareholders could stretch the process in time or even refuse to divide Euroset until real incomes of households start to rebound,” Milchakova said.

(63.3028 rubles – U.S. $1)

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