Moody's compares Russia's "Big Three" mobile operators by key rating factors
Published on: 13th Dec 2012
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Among Russia's "Big Three" mobile operators, MegaFon, Mobile TeleSystems (MTS) and VimpelCom, MTS has the strongest business profile, says Moody's Investors Service in a new CreditFocus report. Moody's expects MTS to retain its lead in terms of subscribers and revenues for now, but it could face competition from MegaFon in the longer term.
MTS is the leader both in terms of mobile subscriber base in Russia (31% of total as of September 2012 according to Advanced Communications and Media, a research agency) and revenues ($12.2 billion in the 12 months to September 2012), and has a substantial presence in the fixed-line segment along with core mobile operations. The next-strongest in terms of business profile is MegaFon, due to its leadership position in the mobile data segment, which is the most promising segment in terms of revenue growth. VimpelCom lags both companies in terms of market share and 3G network coverage, and has seen a decline in its subscriber base in 2012.
Historically, MegaFon's operating efficiency, measured by adjusted EBITDA margin, has been higher than that of MTS and VimpelCom. However, the gap has been decreasing gradually and currently all three companies' margins are comparable. Moody's expects this to remain the case over the next 12-18 months, as all three companies are focused on operating efficiencies, reducing churn and increasing the loyalty of their subscriber base, as opposed to its quantity, which should support operating efficiency.
MegaFon has the most conservative financial policy in the peer group, and has declared its commitment to an investment-grade credit rating. VimpelCom Ltd's (Ba3 stable) public financial policy is the most conservative after MegaFon, but does not contain any details regarding its Russian subsidiary VimpelCom -- which remains its main source of cash -- giving rise to some uncertainty. MTS's public policy is less conservative than that of VimpelCom Ltd and is shaped by its controlling shareholder, Sistema JSFC (Ba3 stable), a Russian private conglomerate investing in a broad range of industries. Sistema is acquisitive in its nature and therefore could potentially increase its cash requirements from MTS.
MegaFon led the peer group in terms of financial metrics before the debt-financed $4.9 billion extraordinary dividend payout and $2.1 billion purchase of its shares in April 2012, which resulted in its debt/EBITDA growing dramatically to 1.9x as of September 2012 and retained cash flow (RCF)/debt turning negative (compared with 1.1x and 81% as of end-2011, respectively).
However, Moody's expects that MegaFon will largely restore its strong financial metrics over the next 12 months by implementing cost-saving measures and reducing capex. This expectation is one of the key factors explaining the differences between the ratings of MegaFon and MTS, whose current financial profile is similar. MTS's financial metrics are likely to remain broadly stable over the next 12-18 months, with leverage in the range of 1.7x-1.9x debt/EBITDA, funds from operations (FFO) interest coverage above 6.0x and RCF/debt around 30%.
VimpelCom's financial metrics are likely to remain somewhat weaker than those of its peers, reflected by debt/EBITDA above 2.0x, FFO interest coverage around 4x-5x and RCF/debt around 20%.