Russia’s Rostelecom has reportedly mandated two investment banks and an accountancy firm to advise it on a possible deal with Tele2 Russia.
The state-controlled telco has hired JP Morgan, Credit Suisse and PricewaterhouseCoopers (PwC), which have…
Russia’s Rostelecom has reportedly mandated two investment banks and an accountancy firm to advise it on a possible deal with Tele2 Russia.
The state-controlled telco has hired JP Morgan, Credit Suisse and PricewaterhouseCoopers (PwC), which have suggested creating a joint venture to be controlled by Rostelecom, local newspaper Vedomosti reported citing sources familiar with the matter.
Such a plan would however encounter legal and structural hurdles, the report stated.
A Rostelecom spokesperson only confirmed that the company “has been scrutinising a number of options for potential cooperation with some players, including Tele2”, but declined to comment further.
Speculation about a tie-up between Rostelecom and mobile-focused Tele2 Russia, acquired by the VTB banking group from its Swedish parent for US$3.55bn in March, has circulated for some time.
VTB has made it clear it intends to sell at least a stake in the asset. However, under a contract clause, if Tele2 Russia is sold within a year, the Swedish company is entitled to half the proceeds.
Gazprombank analyst Sergey Vasin said in an email that he believes a merger of some sort between Rostelecom and Tele2 Russia is the only way for them to survive in the long term.
“Tele2 Russia is short on frequencies and prospective standards in the country, while Rostelecom has far too small a market share, which makes it hard to compete with the ‘Big Three’ [mobile] operators: MTS, MegaFon and VimpelCom,” he said.
Vasin said that the creation of a JV would enable Rostelecom, mainly a fixed-line operator, to become a serious competitor in the Russian wireless market. He added that the Rostelecom-Tele2 Russia entity would be the fourth-largest player in the mobile market and the leader in the overall telecoms sector.
In his view, Rostelecom’s key challenge would be to ensure a controlling stake in the JV. “Rostelecom may pay for the controlling stake in the potential JV with its mobile assets and licences, as well as treasury shares remaining after the buyout from shareholders who voted against the reorganisation of Svyazinvest,” Vasin said.
Rostelecom is in the process of merging with state-controlled holding Svyazinvest in line with a presidential decree.
Vasin said such a deal may take place after the profit-sharing clause in VTB’s contract with Tele2 expires in March 2014.
Anna Kurbatova, a senior TMT equity analyst with BCS Investment Bank in Moscow, also believes Rostelecom and Tele2 Russia will eventually come together.
However, she noted that key issues remain unknown, such as the overall valuation of such a deal and which assets Rostelecom would contribute to the JV.
