Tele2 is frontrunner to go national at Russia's new auctions

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Tele2 is frontrunner to go national at Russia's new auctions

By CAROLINE GABRIEL

Published: 1 December, 2009

Russia is one of the world's highest growth mobile markets, but its potential to drive new services is sometimes restricted by the status quo of its three main operators, Vimpelcom, MTS and Megafon. While smaller players like Yota can be disruptive, and wave the flag for mobile broadband, many market watchers believe a fourth 3G carrier is needed to shake up the sector, especially as Vimpelcom gets even larger and more powerful.

Russia plans to auction new spectrum next year and could well earmark it for a new entrant or smaller carrier. The frontrunners are likely to be Tele2, the Sweden-based international operator, or Svyazinvest, according to Fitch Ratings. Both would have the scale and potential to challenge the big three.

"The allocation of new frequencies will likely lead to gradual changes in the mobile competition landscape in Russia," commented Fitch's senior director in Moscow, Nikolay Lukashevich. "Of the mobile operators, Svyazinvest and Tele2 stand a good chance of significantly strengthening their Russian franchise and gaining the necessary critical mass to grow into national players on the back of a new license portfolio."

The new auction will be for internet/VoIP and mobile broadband licenses in 40 of Russia's 83 regions. Winners will get 30MHz each per region, in the 2.3GHz-2.4GHz band. Tenders will be held separately for each region on the same terms and to encourage newer players, license payments will be set at a nominal level (Rub1m per region), with affordable minimum capex requirements for the whole territory of around Rub4.77bn ($165m). While these proposed terms would make it relatively easy for new or tier two carriers to take part, they would also raise the risk of companies snapping up licenses but being unable to sustain a viable business model, especially as there will be no penalties for failure to roll out.

Tele2 is Russia's only low cost provider and will be interested in many of the new license territories, many of which - including the Russian South, Volga and Far East regions - will be price sensitive. The smaller regional providers that dominate these areas lack the scale to offer really low cost services. In the 17 markets where it does already operate, Tele2 has share averaging about 37%, while the national leader Vimpelcom has 22%.

Svyazinvest, says Fitch, would be most likely to participate as part of its multipronged mobile growth strategy, which will also probably include a bid for CDMA provider SkyLink, which could bid for 1.9GHz auctions, and also holds unused GSM spectrum.

The major operators are undergoing significant restructuring too. Recently, TeliaSonera and Alfa Group agreed to combine their respective direct and indirect interests in Russia's MegaFon and Turkey's Turkcell, to form a new company and end their legal disputes. The new entity, which will be listed on the NYSE, will create an international operator with over 90m subscribers across Russia, Turkey and the CIS countries. TeliaSonera currently owns 43.8% of MegaFon, the third Russian mobile operator, and 37.3% of Turkcell, the Turkish market leader. Alfa owns 25.1% of MegaFon via its telecoms arm Altimo and 4.99% of Turkcell. Under the new structure, the new company will own a majority of the shares in both operators.

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