UPDATE 3-Rostelecom eyes mobile deal with Tele2 Russia this year

Wed Nov 20, 2013 12:48pm EST

* Board meeting on Wednesday put mobile spin-off to shareholders' vote

* Plans to contribute mobile assets to a JV with Tele2 Russia

* Q3 revenues rise 2 pct yr/yr driven by broadband, pay-TV (Adds board meeting results, detail on possible share buyback)

By Anastasia Teterevleva

MOSCOW, Nov 20 (Reuters) - Russian state-controlled telecoms group Rostelecom aims to merge its mobile business with Tele2 Russia, the country's fourth-biggest mobile operator, before the end of the year, its chief executive said on Wednesday.

The new venture will create a stronger rival to MTS, Megafon, and Vimpelcom, although analysts have said it remains to be seen whether the new combine will manage to defend its position and grow.

A former landline monopoly, Rostelecom was reorganised several years ago in an attempt to win a bigger share of fast-growing markets such as mobile, broadband, pay-television and information technology.

The fifth-biggest mobile phone operator by subscribers, it had long been expected to buy Tele2 Russia from Sweden's Tele2 but in April Tele2 sold the Russian business to state bank VTB which in turn sold half of it to Russian businessmen Yuri Kovalchuk and Alexei Mordashov.

Rostelecom now plans to spin off its mobile assets into a joint venture with Tele2 Russia, Rostelecom's Chief Executive Sergei Kalugin said on Wednesday, confirming media reports.

"We are less efficient in terms of operating results than our competitors including Tele2 ... We want to attach our small coach to this locomotive," Kalugin told reporters.

He declined to comment further. According to media reports Rostelecom may get a 45 percent share of the venture but also might have an option to eventually buy out VTB. VTB has said previously that it could part from its stake in Tele2 Russia through an initial public share offering for the mobile firm.

Rostelecom's board on Wednesday put the spin-off on the agenda of a Dec. 30 shareholder meeting and set a price for buying out those shareholders who do not support the move at 123.93 roubles per ordinary share and 87.80 per preferred share, a premium of 7 to 14 percent to Wednesday's prices.

"We are waiting for this deal to be approved and expect shareholders to vote in the nearest future," Kalugin said, adding there were reasons for doing the deal before the end of the year.

"We need to defend our (market) segment ... A strategy of developing both (fixed broadband and mobile) is more risky."

The company said, however, that it was not going to exit the mobile business but will develop it with partners.

BROADBAND FOCUS

Rostelecom said earlier on Wednesday a focus on broadband and pay-TV paid off in the third quarter as it reported a 2 percent rise in revenue to 78.2 billion roubles ($2.4 billion)despite a 3 percent fall in its core local telephony business.

Revenue from pay-TV and broadband rose 27 and 8 percent respectively and the company also increased inter-connection and transit services by 21 percent, while mobile revenues fell 6 percent despite higher subscriber numbers.

Rostelecom's board was initially due to discuss the mobile spin-off on Tuesday but the meeting was postponed due to a lack of government instructions on the vote, Rostelecom said.

The postponement came as Russia's state property agency, owner of a 47 percent stake in Rostelecom, complained that the lack of control over the mobile venture may dent the company's valuation ahead of its privatisation.

The government may sell its Rostelecom stake next year as part of a wider privatisation plan.

The state's only sale this year saw diamond miner Alrosa raise $1.3 billion in a share market flotation last month.

In a Nov. 18 letter to Deputy Prime Minister Arkady Dvorkovich, the head of the agency, Olga Dergunova, also called for the state to take greater control of Rostelecom's board, according to newspapers Vedomosti and Kommersant.

The government controls more than 51 percent of Rostelecom through the shares held by the state property agency as well as by state development bank VEB.

Earlier Rostelecom reported a flat third-quarter operating profit before depreciation and amortisation (OIBDA) of 29.4 billion roubles. Net profit rose 12 percent to 10.5 billion roubles ($321 million), helped in part by lower financial costs and better purchasing terms.

Rostelecom's shares last traded down 1.23 percent at 115.69 roubles. ($1=32.7265 Russian roubles) (Additional reporting and writing by Maria Kiselyova; Editing by Greg Mahlich)