FOCUS: Too many vacuities spoil joy from long-awaited Euroset’s split

By Yekaterina Yezhova

MOSCOW, Jul 24 (PRIME) -- An agreement between Russian mobile operators MegaFon and VimpelCom to split their phone seller Euroset was supposed to become a long-awaited measure in the companies’ efforts to cut costs and rationalize the retail businesses, but the lack of details raises more questions about future steps of MegaFon, which is going to consolidate the heavily-indebted Euroset.

“The maturity of the Russian telecom market is driving the operators’ retail focus from SIM card sales to retention and better services for existing customers, which requires operators to develop their own high-performing retail chains,” VimpelCom CEO Kjell Morten Johnsen said in an official statement.

MegaFon CEO Sergei Soldatenkov said the deal “will allow MegaFon and (VimpelCom’s only owner) VEON to pursue their independent retail strategies and optimize mobile distribution in Russia.”

The partners agreed that MegaFon will fully consolidate Euroset through a purchase of a 50% stake from VimpelCom, which will buy half of retailer’s 4,200 stores. Euroset was said to survive as an operating company. The financial side was not disclosed.

Mass media reported, quoting sources, that VimpelCom will pay 1.3 billion rubles for half of the retailer’s chain, while Euroset will service all its debts, earlier valued at 9 billion rubles. Employees of the stores to be handed over to VimpelCom will be offered either to stay or get back to Euroset.

VimpelCom will add the stores to its monobrand chain, currently counting some 1,500 own stores, and shut down about 200 stores within the integration process, while MegaFon, which has more than 4,000 points of sale, will retain the Euroset brand as an individual operating unit. The deal, which is subject to regulatory approval, will be closed within five–six months. Media sources also said that Euroset, possibly with MegaFon’s monobrand chain, could be merged in one–two years with Svyaznoy, which runs over 2,700 stores in the country.

Bright side

The operators will win from the optimization of presence on the oversaturated retail mobile market, as they get most money from connection services, but spend much on distribution chains.

Sberbank CIB said the split-up has been long anticipated by the market, and welcomed the agreement. “The deal should eliminate direct competition between MegaFon and VimpelCom on Euroset’s shelves and marks an important step towards the Russian telecom market’s being able to deliver sustainable growth,” its analysts said.

Otkritie Broker analyst Timur Nigmatullin said the deal could raise the operators’ OIBDA margins slightly in the mid-term thanks to lower operating expenses.

“As practice shows, ownership without a major holder often undermines fulfilment of a market strategy and dilutes the value of an asset, since it provokes contradictions between shareholders. Besides, operators have been forced recently to cut costs aggressively amid stagnation on the Russian mobile connection market,” Nigmatullin said.

Dark side

While the situation is clear with VimpelCom, which will rebrand the Euroset stores and align them with its policy and strategy, consolidation of Euroset could turn into a headache for MegaFon, which disappointed analysts with “the lack of transparency”, as some of them said.

For MegaFon, the good side is offset by the need to consolidate Euroset’s debt and its low-margin business, Sberbank CIB said. “Should Euroset later be merged with Svyaznoy, we see risks either on the financial side, if MegaFon consolidates them, or in corporate governance, if it does not consolidate them, the transparency of the merged business will likely be low,” the analysts said.

VTB Capital equities analyst Ivan Kim pointed to multiple questions, most importantly, what ultimately happens to Euroset and its brand, and how many shops are going to be shut down, if any.

“MegaFon’s decision on Euroset is going to be crucial, not only for itself but also in terms of potential benefits for the industry overall. One thing that is not really in doubt is that the whole process is likely to be lengthy,” Kim said in a research note.

“The lack of details leaves many unknowns with regards to the mobile retail repair theme. While this could be just the first step towards a more significant scale-back, keeping the multi-brand retail intact could limit the prospects of distribution normalization. Besides Euroset, Svyaznoy also stays as a multi-brand retailer. We note that the door is open for a Euroset /Svyaznoy merger.”

Citi said that MegaFon has not clearly stated its rationale for buying Euroset or its further intentions. It is not even certain whether MegaFon will consolidate its 100% stake in Euroset or may held it as an “asset for sale”, the bank said.

“We think that MegaFon’s management still has work to do to assure investors that the transaction, once closed, will be value accretive, as opposed to driven by interests possibly not entirely aligned with shareholder’s interests, such as protecting Euroset’s company structure and management, some creditors, other stakeholders, avoiding accounting losses, etc.”

“We also note that Euroset stated that the transaction will not lead to job losses, which may be seen as contradicting MegaFon’s previously perceived rationale for the transaction. Finally, investors may, in our view, need reassurance that MegaFon will fully control Euroset, especially given potential questions to what extent it actually controls the recently acquired (local Internet giant) Mail.Ru Group,” Citi said in a research note.

(58.9325 rubles – U.S. $1)

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