August 8, 2013 / 6:17 AM / 7 years ago

UPDATE 3-Russia's Megafon ahead in wireless race with $1.2 bln deal

* Buys next-generation service provider Scartel

* Deal structured with deferred payments

* Megafon assumes $600 mln of Scartel’s debt

* Shares up more than 60 percent since Nov market debut

By Maria Kiselyova

MOSCOW, Aug 8 (Reuters) - Megafon , Russia’s second-biggest mobile phone operator by subscribers, is buying next-generation service provider Scartel for $1.2 billion to extend its lead in the race to provide high-speed internet.

The deal announced on Thursday unites assets belonging to Russia’s richest man Alisher Usmanov, and boosts Megafon’s long-term competitive advantage against rivals MTS and Vimpelcom.

Although only used by a small percentage of Russia’s 140 million population, the new wireless services using the extra- fast Long Term Evolution (LTE) technology are expected to become the industry standard when enough of the country switches on.

The LTE services, also known as fourth-generation (4G), are aimed at mobile phones, laptops and tablet computers which are relatively expensive in Russia and sold without the subsidies from mobile operators that are common in other countries such as the United States.

“The deal would only result in a major advantage (to Megafon) in the long term,” said Anna Kurbatova, an analyst at Moscow-based brokerage BCS. “The pace of fourth-generation development that Megafon and Scartel have been showing so far is enough to satisfy demand.”

The deal may pay off for Megafon when LTE becomes a mass-market product, Kurbatova said. She estimated that would take at least three years.

Having Scartel’s spectrum means Megafon will be able to build more base stations than rivals.

Megafon leapt ahead in the race to sell LTE services last year as it started offering them in Moscow using Scartel - which operates under the name Yota - two months before it and three rivals were awarded their own 4G licences.

The Scartel deal helped Megafon’s shares, which have risen more than 60 percent since it went public in November at $20 a share. The shares were up 3.6 percent in London on Thursday at $32.2.

“We believe in the mass popularity of this product in the future and we are clearly betting on it, including with this deal,” said Megafon CEO Ivan Tavrin. “This is why we will do everything to be a leader in this sector.”

Telecom equipment makers are also set to benefit from the 4G development in Russia. Scartel built its network with China’s Huawei Technologies Co Ltd, but Megafon has not signed any deals with vendors yet, its spokeswoman said.

MTS has signed deals for LTE infrastructure with Ericsson and Nokia’s unit Nokia Solutions formerly known as Nokia Siemens Networks (NSN), while Vimpelcom has awarded orders to Ericsson, NSN, Huawei and China’s ZTE .

TECHNOLOGY BETS

Megafon is buying Scartel from Garsdale, the telecoms holding company of Usmanov, who is also a controlling shareholder in Megafon with more than 50 percent.

It is the latest technology bet by Usmanov in a series of investments that makes him worth $18 billion according to U.S. magazine Forbes. He was an investor in social networking site Facebook and has a stake in internet group Mail.Ru .

Usmanov owns an 82 percent stake in Garsdale while the remainder is owned by Telconet Capital - owned by businessmen Sergei Adonyev and Albert Avdolyan - and state-backed Rostec.

Half of the $1.2 billion purchase price will be paid on the first anniversary of the deal’s closing, with the remainder on the second anniversary.

Megafon is also taking on Scartel’s debt of $600 million.

“The price will not surprise anyone,” analysts at Bank of America Merrill Lynch said in a research note for clients.

Megafon got clearance from Russia’s competition watchdog for the deal last month and expects it to close at the end of September. It requires approval by the majority of Megafon’s shareholders, excluding Garsdale. The largest minority shareholder TeliaSonera, with a 25.17 percent stake, said it intends to vote for the deal.

Scartel makes up a small part of Megafon’s revenues. Scartel had an EBITDA loss of 1.5 billion roubles in 2012 on revenue of 4 billion roubles. That compares to Megafon’s sales of 273 billion and operating income before depreciation and amortisation (OIBDA) of 117 billion roubles.

Megafon also reported second-quarter earnings that beat forecasts. Net profit rose to 13.6 billion roubles ($412 million) compared with a Reuters poll forecast of 12.4 billion roubles and 1.7 billion roubles a year ago, which was hurt by a foreign exchange loss.

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