February 4, 2011
The focus of the discussion was the recent increase in interest among Russian telecom companies in international expansion. Panel members also discussed the data business and its potential. The market is expected to grow around 30-40% annually, but the growth might not be visible at this stage due to its low share in revenues. When the share of data in total revenues of telecom operators rises to a level comparable with voice, it will become a more visible driver of revenues.
Alexander Izosimov said the reason for the market’s negative reaction to the VimpelCom Ltd/Wind Telecom deal is the high level of uncertainty regarding both the global telecom industry and the deal itself. With the industry shifting from being voice-centric to data-centric, there is no clarity on how companies will be able to monetize data or what returns can be expected. Hence, we have seen the valuations of telecom companies become depressed. At the same time, he mentioned that the rationale for VimpelCom Ltd conducting this deal is that the industry will eventually consolidate; greater visibility of business models in the data segment will trigger sector re-rating; the 2010E EV/EBITDA multiple of 6.1 paid for Wind Telecom is justified given that the market is shifting from growth in voice to intensive growth in data, which can expand 30-40 times over the next five years; the deal will also have a positive effect on the new entity’s capital structure.
Mikhail Shamolin mentioned that the interests of the controlling shareholder, management and minority shareholders in any M&A deal coincide: any such deal must increase the value of the company. At the moment, MTS has assumed a wait-and-see approach and if attractive assets become available it might consider an acquisition, but at the moment there is no such deal on the table. Acquisitions for the purpose of increasing scale are not obvious, as synergies in procurement are very limited. Competition between equipment manufacturers has already moved equipment prices to low levels. Any additional synergies in procurement that could be extracted by larger companies are highly questionable.
Alexander Provotorov said that his company is not considering international expansion at the moment. To move outside Russia, any company needs to offer some competitive technology or business process. Currently, Rostelecom is in the midst of reorganization, and in the near future it will be fully focused on optimizing its business. If it were to expand internationally, the more obvious target markets would be those in the former Soviet Union, as they have the same business environment and traditions. He also mentioned that the domestic market, especially that for regional broadband access, presents a bigger opportunity than international expansion given Russia’s underpenetration in broadband services.
An interesting spin to the discussion was brought by representatives of the mobile sector, who stated that fixed-line broadband access is indeed a very exciting opportunity given that it allows one to download high volumes of data and for that reason could serve as the base for a “home entertainment” consumption model. In the regions, Russia has a unique chance to start laying fiber-optic lines to homes from the very outset, skipping the need to rely on legacy infrastructure. As far as possible M&A activity involving the mobile companies is concerned, Provotorov mentioned that it is not likely to lead to lower competition in the domestic market, as players remain highly committed to domestic operations.
Denis Sverdlov agreed with Provotorov that international expansion would not divert companies from profitable growth if their businesses are properly distributed between domestic and oversees operations. At Yota, separate groups are focused on business in Russia, infrastructure development and international operations, and thus he does not see international expansion as a threat to domestic operations. He said that the telecoms market is undergoing serious changes and that 4G, on which Yota is focused, offers completely new business and consumption models than those offered by 2G or 3G. For example, the high technology intensiveness of Yota’s networks results in low staff needs, with average revenue per employee being over R9 mln ($300,000). In new areas, Yota becomes EBITDA-positive one month after a network launch (as was the case in Ufa, Krasnodar, Sochi and other cities). One of the reasons is that Yota does not invest in infrastructure if it is not justified by demand.
Commenting on the competitive situation in the sector, Michael Alexeyev said that the existing largest companies with more ample resources have learned to protect their market position, and therefore the possibility for new players to significantly increase their market shares in the longer run is rather limited.