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New Mobile Spectrum May Help Create 4th Nationwide Operator in Russia

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Russia's forthcoming tender of new mobile spectrum in Russia may foster the creation of a new nationwide operator in Russia, possibly in Svyazinvest or Tele2, reports Fitch Ratings. Both of these players, if awarded the license, or, in the case of Svyazinvest, through other developments, could challenge the dominance of the 'Big Three' operators, Vimpelcom, MTS and Megafon.

"The allocation of new frequencies will likely lead to gradual changes in the mobile competition landscape in Russia," says Nikolay Lukashevich, Senior Director in Fitch's TMT team in Moscow. "Of the mobile operators, Svyazinvest and Tele2 stand a good chance of significantly strengthening their Russian franchise and gaining the necessary critical mass to grow into national players on the back of a new license portfolio."

In early November 2009 the Russian frequency regulator announced a tender for voice (IP-based) and broadband mobile licenses covering 40 regions (out of a total of 83 in Russia). Operators will get 30 MHz of frequencies in the 2,300-2,400 MHz range in each region. Tenders are to be held separately for each of the regions on broadly uniform terms. License payments are set at a negligible RUB1m per region, and the minimum capex requirements of RUB4.77bn (approximately USD165 million) for the entire covered territory are not onerous and are unlikely to have a significant impact on leverage.

Fitch notes that as the only low-cost provider in Russia, Tele2 stands to capitalise on the discounter niche in most of the 22 new regions that the new licence may open up for the company, primarily in the Russian South, Volga and Far East areas. These are territories where the majority of customers are likely to be price-sensitive and where the discounter niche remains largely unexplored as small regional operators typically lack the scale and expertise to offer a truly attractive combination of value and price. So far, Tele2's business model has proven hugely successful in the regions it operates in. The company estimates its market share in its existing 17 regions at 37% compared to 22% for its closest peer Vimpelcom. Tele2 reported a strong EBITDA margin of 40.5% in Q309, and management is aiming to grow this to mid-forties over the medium-term.

Although Svyazinvest has not publicly expressed its interest to participate in the tender and is currently investigating separate opportunities for mobile growth, Fitch believes there is an economic incentive for Svyazinvest to participate even if only to 'peg' the spectrum territory and thus to cut off its competitors from gaining additional spectrum. Fitch notes Svyazinvest's likely near-term acquisition target, SkyLink, is holding a portfolio of unused GSM licenses and is in a strong position to receive licences in the 1,900 MHz range for its CDMA 3G service. While this makes participation in the 2,300-2,400 MHz tender less of a priority, Fitch notes that the terms of this tender do not contain any financial penalty for non-compliance with roll-out requirements. Therefore, even if the licence is ultimately revoked the damage will be limited to a negligible RUB1m (approximately US$35,000) per region.

The tender terms favour incumbent fixed-line operators (all controlled by Svyazinvest), and, to a lesser extent, smaller mobile players without 3G licenses including Tele2. The 'Big Three' operators, all of which have a 3G spectrum portfolio, are discouraged to participate which creates opportunities for other players.

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Tags: svyazinvest  tele2  radio spectrum  broadband  Russia