Fierce competition in Russian telecoms likely to lead to sector consolidation

Fierce competition in Russian telecoms likely to lead to sector consolidation
By Vladimir Kozlov in Moscow February 15, 2017

Russia’s telecoms companies are at war, as competition for customers gets intense. Easily the most sophisticated part of the Russian economy, the sector still has some catching up to do with Western Europe - but not much. Customers are the big winners as prices tumble, but products and customer services are relentlessly growing.

Telecoms was the first big sector that President Vladimir Putin reformed after taking office in 2000 and it went so smoothly that the fact that telephones work is now a given across the country. For much of the last two decades the race has to been to bring in new punters and build out the network to cover a country that stretches half way round the world. But after SIM card penetration passed 100% several years ago, the leading three mobile service providers – VimpelCom, Moscow TeleSystems (MTS) and Megafon – have become ever more aggressive in their strategies. The pressure was recently increased by the entrance of a fourth player – Tele2.

Four's company

The leading players have been fighting a price war that is now nearing an end. Consolidation is on the cards as experts believe that four major players could be at least one too many. Alexander Vengranovich, an analyst at Otkrytie, believes the market is ripe for consolidation as the competition situation has been changing, and that aggressive poaching of subscribers from competitors no longer looks like a viable growth model.

“If there were fewer operators, subscribers would switch less from one operator to another, and that would be positive for everyone,” Vengranovich tells bne IntelliNews.

In most other markets, three major national mobile phone operators has proven to be the optimal number. The same was true of Russia until 2014, when fixed-line giant Rostelecom entered a joint venture with T2 RTK Holding, creating the fourth national mobile phone operator, Tele2.

The arrival of Tele2 in Moscow in 2015 triggered a fierce price war in the country’s most lucrative region for mobile phone operators. As Tele2 offered attractive deals in a bid to lure subscribers away from other operators, the latter reciprocated by cutting their own prices to keep their subscribers.

But by early February 2017, the “big four” mobile phone operators seem to be tired of the price wars. MTS recently announced that it will soon raise rates for some of its subscription plans and will completely scrap subscription plans offering unlimited internet access.

“The battles for subscribers that we saw in 2015 and 2016, are over,” says Vengranovich. “Now all the operators want to focus more on maximising revenues from their existing subscribers rather than luring subscribers from the competitors at any cost.”

“As the market has been saturated, there is no more reason to fight for subscribers, and the operators could finally begin talking to each other, including discussion of a possible merger,” he adds.

Consolidation time

The idea of consolidation in the Russian mobile phone market was first floated last year in a report by JPMorgan. The report suggested that T2 RTK Holding and Vimpelcom are the most likely candidates for M&A. Some 45% in T2 RTK Holding is owned by Rostelecom and the remaining 55% is controlled by a group of financial investors, led by state-run lender VTB. Meanwhile, Norway’s Telenor has long been speaking about its plans to pull out of VimpelCom.

In mid-January, Russian media reported that Telenor, which owns a 23.7% stake in VimpelCom, is considering exchanging its share in the company for a controlling stake in GTH, a mobile phone operator in Pakistan and Bangladesh, in a long-awaited move to exit the Russian mobile operator.

“While we think that such a transaction might be logical, given Telenor’s desire to exit VimpelCom, Telenor’s monopolistic position in Pakistan and Bangladesh as a result of the potential deal are serious impediments to it going through, in our view,” says Ivan Kim, an analyst for VTB Capital.

Regardless of whether this deal will go ahead or not, Telenor seems to be determined about pulling out of Russia. In early February, the company announced the closure of its Russian office.

Meanwhile, the fact that Rostelecom co-owns Tele2 and rival MTS is owned by Sistema, a company that also has holdings in the fixed-line segment, prompted analysts to predict the convergence and integration of fixed and mobile services, which would also lead to a consolidation in the sector.

“We believe convergence can be a source of a sustainable competitive advantage for the convergent players, may drive mergers and acquisitions and can greatly impact the financial performance of all players,” a report release by UBS at the end of last year said. A spokesperson for USB told bne IntelliNews that there has been no update on the report since it was published several months ago, and the company’s stand by their forecast.

Rostelecom has over 100mn fixed line customers, while MTS has a fixed reach of 13mn households, followed by VimpelCom with 10mn and Megafon with 4mn.

“Due to extensive fixed infrastructure, we believe Rostelecom has the most potential upside in an aggressive convergence scenario, should there be a significant fixed plus mobile bundles push and take up,” USB said.

Although the idea of consolidation in Russia’s mobile phone industry is likely to have positive ramifications, there would also be challenges.

“If an operator wants to take over another company in the segment, it will most likely have to overpay,” says Vengranovich of Otkrytie. “Plus, compatibility of networks could also become an issue.”