Just two months ago, Russian telecom was a steadily growing industry with little of interest for scandal-hungry journalists. The market’s three major players, Alfa Group, AFK Sistema, and the so-called “Petersburg contingent” and their Scandinavian partners at TeliaSonera, had a firm hold on their assets. The most important direction for further development appeared to be regional Russia and the CIS countries. Now, however, things have changed dramatically.

On August 5th, Alfa Group, which owns the blocking stake in Vympelkom (the Bee-Line network), the second biggest mobile company in Russia, purchased 25.1% of the shares in Megafon, Russia’s third biggest cellular company owned by the Petersburg contingent. Since that day, chaos has taken over Russian telecom. The assets of the companies generating over half the revenue in the industry--Vympelkom, Megafon, and the partially state-owned holding in fixed communications Svyazinvest--are now in limbo. The conflict, centered on the standoff between the Petersburg group, headed by Minister of Communications Leonid Reiman, and Alfa Group, grows with each passing day.

Megafon under the gun

When Alfa Group purchased the Megafon shares, it did so without informing the other shareholders, in particular Petersburg-based telecom holding Telekominvest and TeliaSonera. Market players and observers soon waited for a counterattack, in particular from Reiman, a big supporter of the Megafon project. But the reaction did not come right away, nor did it come from Reiman.

For almost an entire month, Alfa felt it had won. The Ministry of Anti-Monopoly Policy okayed the deal. So did Vympelkom’s board of directors, which Alfa controls with the Norwegian company Telenor. In late August, the board even announced that “the two parties will seek possible ways to merge Megafon and Vympelkom.”

Then, Alfa demanded an addition to the agenda of Megafon’s September 10th special shareholders meeting. Alfa wanted to discuss reducing the authority of the company’s board of directors and replacing the current general director, Sergei Soldatenkov, who hails from St. Petersburg. That’s when things first began to get nasty. Neither Telekominvest nor TeliaSonera came to the meeting. Then on September 15th, Ilya Yuzhanov, head of the Anti-Monopoly Ministry, made a strong statement about the potential merger of Vympelkom and Megafon: “In essence, Russia has only three nationwide cellular companies, MTS, Vympelkom, and Megafon. In a situation like this, to even theoretically consider the merger of two of the three companies is insanity.” According to Yuzhanov, even if such a merger took place, it would lead “to very serious consequences for the mobile communications market.” Leonid Reiman’s gentle threats to Alfa were even more artful. “If all the shareholders of both companies decide that merger is in their best interest, I don’t see any reasons why it shouldn’t happen,” he noted three days before Yuzhinov’s statement. “However, the optimum number of telecom companies for today’s market is three. If Vympelkom and Megafon merge and the market is left with two companies, we’ll need to introduce a third one.” The ministers both have a point. In other countries, three telecom companies have proven best for developing the cellular market. A duopoly does not allow much room to maneuver, as companies are either engaged in a price war or a price conspiracy. There is simply not enough room on the market for four.

For Alfa, as a financial investor, the Vympelkom-Megafon merger would be advantageous at least formally. The company would immediately get 47% of the Russian cellular market, becoming Russia’s biggest cellular company and beating out the current leader, MTS, which now controls 37% of the market. Now, Alfa can hold on to its Megafon stake for as long as it wants and carefully throw a wrench into the company’s works.

The Petersburg contingent appears at first glance to be in a much tougher situation. Megafon is their biggest cellular company. If Alfa tries to slow its development, their financial future will look grim. But that is merely at first glance. The Petersburg guys began to look for an ally and turned to AFK Sistema.

In search of an ally

With the division of power on today’s telecom market, Sistema is the undisputed leader in terms of assets. It controls companies through various ways and means with total revenues of more than $2.1 billion last year. This money comes to Sistema first and foremost from MTS, the leader on the Russian cellular market, earning $1.36 billion last year. Another half a billion dollars comes from companies operating traditional landlines in Moscow, Moscow Telephone Network and several others. Alfa, especially without Megafon, is far weaker on the telecom front. The companies it controls generated $1.05 billion in revenue last year, half of what Sistema earned. However, Sistema only has telecom assets, while Alfa is also rich in oil, metal, and food production assets. Thus, Alfa has several times more money to invest than Sistema.

The Petersburg gang earns most of its money from Megafon, $409 million last year. However, it took a lot of resources to get the company started. In all, the revenue of companies more or less connected to the St. Petersburg-based holding Telekominvest, barely exceeded $600 million last year. It would seem that that a company of this size shouldn’t mess with Alfa Group. But the Petersburg gang still has several strong arguments in their favor.

The new nationwide operator Reiman hinted at was no slip of the tongue. Rumors have been circulating to this effect for almost two years. It will not use the GSM standard, where the entire frequency range is practically taken, but the new cdma450 system which operates at the 450 MHz used by the old analogue NMT-450 system. The Petersburg contingent founded the GROS Company a year ago to set up just such a system. However, they couldn’t succeed in uniting the NMT-450 companies owned by Svyazinvest, Petersburg cellular companies, and independent investors. And now, a new contender, Skylink, has appeared on the market.

This company, with the participation of St. Petersburg-based Delta Telekom (controlled, naturally, by the Petersburg group), launched Russia’s first cdma450 network in December 2002. Early last year, part of the shares in the Moscow NMT-450 company, Moscow Cellular Communications, also ended up in the hands of the men from Petersburg. Here, they decided not to compete with the second biggest shareholder in the company, Moscow-based AFK Sistema, but to work together to promote the project. Judging by a variety of statements by Sistema representatives, this may not be the end of the two company’s collaboration.

Every road leads to Svyaztinvest

The current war being waged in the telecom industry appears to be a preliminary battle before the state sells its stake in Svyazinvest. This partially state-owned holding, despite its ever shrinking market share, is still the industry’s biggest asset. The market’s three big players dream of getting their hands on it. Svyazinvest controls the companies who inherited almost all of the Soviet-era ground lines.

25% minus two shares in Svyazinvest is scheduled to be privatized this year. This stake, however, won’t give its holder any control over the company and is therefore of little interest to investors.

Then suddenly a week ago, German Gref, Minister of Economic Development, announced that “Svyazinvest will not be privatized before 2005.” From the state’s point of view, this seems a fairly reasonable decision. Currently, only two companies have officially announced their intention to participate in the Svyazinvest auction, Alfa Group and AFK Sistema. A stake in Svyazinvest will make either of the companies into a monopoly that will ruin the market. If Sistema buys Svyazinvest, it will immediately control more than half the Russian telecom market. Alfa’s victory would also bode ill for Russian telecom. Alfa could combine Svyazinvest and Vympelkom into a universal operator and then try to sell the company to Western investors. The road to the UK, thanks to the recent BP deal, is already wide open. For the market to develop, Svyazinvest needs to go to an outside investor, someone as yet uninvolved in telecom. And this investor has yet to appear.

News source: www.gateway2russia.com
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