Sweden's Tele2 exits Russian mobile market

STOCKHOLM/MOSCOW (Reuters) - Nordic telecoms company Tele2 TEL2b.ST said on Wednesday it would sell its Russian operations to bank VTB Group VTBR.MM in a $3.5 billion deal that could ease competition in the market.

The logo of VTB Bank is displayed on the roof of a building, with towers of the Moscow International Business Center, also known as "Moskva-City", seen in the background, in Moscow March 18, 2013. REUTERS/Sergei Karpukhin

Tele2 has been rumored for some time to be considering a sale of the Russian unit as it does not have a 3G or 4G license in Russia and analysts have said that without the ability to offer data services, its growth prospects were limited.

“We believe that Tele2 Russia is a good financial investment which will be growing faster than the market,” Andrey Kostin, VTB President and Chairman said in a statement. “VTB plans to cooperate with financial and strategic partners in order to further develop it’s investment”.

VTB is Russia’s No. 2 bank and has made a number of private equity investments such as buying a stake in hypermarket chain Lenta, which it aims it sell by 2015.

Private equity investors typically buy with a 3-5 year timeframe in mind and seek to exit their portfolio companies either by a trade sale or an IPO.

It is unclear how long VTB wants to keep Tele2 as an investment and the bank was not immediately available to comment on its plans for the business.

Analysts said VTB could break up Tele2 Russia as none of the major operators could buy all of it for competition reasons.

“Looks like VTB will resell it by parts as none of the operators want it to buy (it) fully,” Alexander Vengranovich at brokerage Otkritie in Moscow said in an emailed comment.

“It is positive as the competitor could be eliminated.”

Tele2 is Russia's fourth-biggest mobile operator with around 23 million subscribers in 2012 after MTS MBT.N, Megafon MFON.MM and Vimpelcom VIP.N.


Russia’s market was shaken up last year when MegaFon - the second biggest operator - controlled by the country’s richest man Alisher Usmanov, went public in London in an IPO. Investors have shown interest in the stock, currently trading at $30.90 per share, up from its $20 IPO price.

Russian telecoms companies are benefiting as Russia’s middle class grows and disposable incomes rise, giving them the chance to boost profits by selling add-on services based on fast wireless access to the internet.

Ownership of smartphones designed to surf the web also remains low, promising growth in data which should offset typically flat revenues from voice calls made by mobile-loving Russians, who own an average of 1.6 SIM cards per person - more than most other countries.

After years of rapid growth, however, Tele2 has been facing headwinds.

The Russian market has matured, competition has intensified and Tele2 has lagged behind in offering data services to the growing numbers of smartphone users.

It had been pinning its hopes on authorities allowing operators to use existing radio frequencies to offer the higher speed connections needed for mobile internet access, but this has so far failed to materialize.

In the fourth quarter, Tele2 warned that it faced slower growth ahead.

Tele2 said the deal comprised $2.4 billion in equity and $1.15 billion in net debt.

Tele2’s Russian unit had a core profit (EBITDA) of 4,744 billion Swedish crowns ($728 million) in 2012, pricing the deal at 4.9 times EBITDA, the company said.

MTS has an enterprise value of 4.2 times EBITDA, and Vimpelcom is at 4.9 times, according to Reuters data.

The Swedish company said it would now focus on growth in its existing core markets - Sweden, the Netherlands, Norway and Kazakhstan. It will use the proceeds from the sale to buy back shares worth around 12.5 billion Swedish crowns ($1.92 billion).

Tele2 also issued new growth targets, saying it expected compound annual revenue growth of 5-7 percent up to 2015 and compound annual growth in earnings before interest, tax, depreciation and amortization of 10-12 percent over the same period.

($1 = 6.5162 Swedish crowns)

Additional reporting by Megan Davies in Moscow; Editing by Alden Bentley