News
Russian regulators could look favourably on a reduction in the number of facilities-based mobile operators, Fitch Ratings suggests.
Russia could see its big four mobile operators reduced to three as slow revenue growth triggers talk of in-market consolidation against a regulatory backdrop that could well be in favour of such a move.
That was the message delivered by Fitch Ratings on Thursday, which highlighted the fact that the lack of organic growth in Russia is increasingly pushing both fixed and mobile operators to seek out synergies.
These synergies could come from infrastructure-sharing or outsourcing, but mergers and acquisitions could also be on the cards, the ratings agency said.
"In-market consolidation in the Russian mobile industry would be the easiest way to achieve synergies," Fitch analysts said, in a statement. Operators taking part in consolidation could build scale – thereby improving financial performance – and increase their spectrum holdings, they suggested.
The firm believes Russian authorities could well back any proposed consolidation.
"The regulatory authorities may give their go-ahead for a merger that would reduce the number of facilities-based mobile operators to three from four, with likely moderate remedy requirements attached," it said.
Fitch notes that, being "not entirely independent from the government", Russian regulators could take into account the need for telcos to generate stronger cash flow to fund infrastructure rollout, particularly in light of the fact that Western sanctions are making it difficult for Russian companies to access global financial markets.
In addition, it predicts that consumer protection would not be at the top of the regulatory agenda in an M&A case, since prices are already at a modest level in the market, with price increases lagging inflation.
"Declining EBITDA generation is likely to be a catalyst for operators to reconsider their strategic positioning, seek alliances and explore new options to increase efficiency." Fitch said. Year-on-year revenue growth in the first quarter of 2016 averaged around 1% for Russia’s major operators, while EBITDA contracted in each of the three quarters to Q1; only MTS reported earnings growth in the first quarter.
Consolidation is one way to tackle the problem, but we are perhaps more likely to see operators engage in spectrum and infrastructure-sharing, which are both permitted in Russia.
Outsourcing is also an option, but the creation of independent towers companies in the market could be difficult, due to the fact that such companies prefer to receive payments pegged to the dollar, rather than fixing long-term lease rates in roubles, the ratings firm said.
MTS is Russia’s largest mobile network operator, its 77.3 million customers giving it a market share of 31% at the end of Q1, according to specialist analyst firm Advanced Communications & Media (AC&M). MegaFon is close behind with a 30% share, followed by VimpelCom at 23%.
Fourth-largest player Tele2, which merged with fixed-line operator Rostelecom almost two years ago, had 38.4 million mobile customers and a 15% market share at the same date.
