RPT-Fitch: MegaFon Deal Creates Three-Tier LTE Market in Russia
Aug 9 (Reuters) - (The following statement was released by the rating agency)
MegaFon's planned acquisition of Scartel will put it at the top of a three-tier market in the provision of next-generation mobile services in Russia, Fitch Ratings says. Other than a likely sale of Tele2 Russia, we do not expect further M&A among the main players in the Russian telecom market.
Scartel's original intention was to build up a high-speed Long Term Evolution (LTE) network that could be licenced out to other operators. But it failed to sign up any customer other than MegaFon and we had therefore seen a takeover by Megafon as a likely outcome. Scartel's acquisition of LTE spectrum ahead of its rivals gave it a head-start in building network infrastructure, while Megafon controls more spectrum than any other operator. The deal therefore positions Megafon as the leading operator in Russian LTE telecoms.
The acquisition is likely to push leverage close to the top of MegaFon's own target range of 1.2x-1.5x net debt/EBITDA, but the strengthening of the company's market position should help offset the impact of higher leverage. The deal should be neutral for MegaFon's rating.
Rivals MTS and Vimpelcom have less spectrum than MegaFon but still have enough to successfully compete in Russia. Rostelecom, the Russian fixed-line incumbent, will face the biggest hurdles to launching a successful LTE network. If it were to gain control of Tele2 Russia, a budget mobile operator currently controlled by VTB Bank, it would have to significantly increase capex in order to compete effectively with the other three operators.
A Tele2 Russia/Rostelecom tie-up would be likely to increase competition in the sector, but we do not expect further consolidation among the big four Russian telecom companies in the near to medium term. Strong margins in the country due to the absence of handset subsidies and the size of the overall market suggest Russia can support four operators.
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