Tele2 Is Perfect Fit for Rostelecom, Shareholder Says

Tele2 Is Perfect Fit for Rostelecom, Investor Malofeev Says
Pedestrians walk past a Tele2 shop in St. Petersburg, Russia. Tele2, based in Stockholm, depends on Russia for more than half of its users. Photographer: Michael Razuvaev/ Bloomberg

OAO Rostelecom’s largest owner after the Russian state, Konstantin Malofeev, is urging the country’s dominant fixed-line operator to buy the local unit of Sweden’s Tele2 AB to form a fourth nationwide wireless carrier.

“Tele2 would make a perfect fit for Rostelecom because their networks are complementary, allowing the formation of a nationwide operator in the fastest and cheapest possible way,” Malofeev, whose Marshall Capital controls 10.5 percent of Moscow-based Rostelecom, said in an interview.

Rostelecom is following the evolution of international peers such as AT&T Inc. and TeliaSonera AB in building a wireless business to offset declining fixed-line revenue. The company provides mobile service in 30 of the country’s 83 regions and plans to begin wireless service in the two biggest markets, Moscow and St. Petersburg, within a year.

Tele2, based in Stockholm, depends on Russia for more than half of its users. Its Russian unit emerged as a takeover target after it failed to win one of four licenses to operate a so-called fourth-generation network that were awarded in July. Three of the four permit winners -- Rostelecom, OAO Mobile TeleSystems and OAO MegaFon -- have expressed interest in the unit, even though Tele2 CEO Mats Granryd said Dec. 12 that the company intends to stay in the Russian market and hasn’t felt “forced” to change its strategy.

Kirill Alyavdin, a spokesman for Tele2 Russia, declined to comment on a potential unit sale, as did Rostelecom officials.

Tele2 fell 0.2 percent to 117.20 kronor at 3 p.m. Stockholm time. Rostelecom rose 1.5 percent to 118.50 rubles in Moscow.

Chief Departing

Tele2 Russia may be worth 4.5 times its earnings before interest, taxes, depreciation and amortization, according to Anna Kurbatova, a BCS Financial Group analyst. Based on nine-month figures, that implies a value of at least $3.1 billion.

With no wireless frequencies for faster mobile services, Tele2 Russia’s “only realistic option” may be a deal with Rostelecom, Espirito Santo Investment Bank’s London-based analysts said today in a note.

Yesterday, Tele2 said the head of the Russian unit, Dmitry Strashnov, will leave the company on Dec. 31 after four years “to seek new challenges,” without being more specific. The departure probably wasn’t planned, Espirito Santo analysts including Will Draper said in the note.

Billionaire Vladimir Evtushenkov’s Mobile TeleSystems, or MTS, has the most mobile customers in Russia, at 71 million at the end of the third quarter, followed by billionaire Alisher Usmanov’s MegaFon and VimpelCom Ltd. at 63 million and 56 million, respectively, according to data compiled by AC&M Consulting. Tele2 has about 22 million Russian subscribers and Rostelecom has about 14 million.

Government Scrutiny

Ivan Streshinskiy, a MegaFon board member and head of Usmanov’s USM Advisors LLC, said in an interview Dec. 6 that Rostelecom “needs proper management because the current one is affiliated with one private shareholder.” Rostelecom lost its focus on fixed-line broadband and is wasting money on mobile expansion, Streshinskiy said.

Streshinskiy’s criticism of Rostelecom is shared by Prime Minister Dmitry Medvedev’s government, which is seeking to replace CEO Alexander Provotorov, who previously worked for Malofeev at Marshall Capital. Rostelecom declined to comment on the matter.

Communications Minister Nikolay Nikiforov criticized Rostelecom’s development strategy in October, while Deputy Prime Minister Arkady Dvorkovich called for a “renewal” of company management. In September, Dvorkovich told the Vedomosti newspaper he’s against state companies’ expansion in the telecom business when asked about potential Rostelecom deal with Tele2.

Police Raids

The pressure on Malofeev and Provotorov intensified in November, when police raided their homes. The Interior Ministry said at the time that the probe didn’t involve Rostelecom directly, but “certain individuals” who were “allegedly privy to embezzlement of a loan by one of the banks.” It didn’t elaborate.

Rostelecom’s stock has fallen 17 percent since reaching a six-month high Sept. 24, compared with a 1.4 percent decline for the benchmark Micex Index in the same period. The company now has a market value of about $11.2 billion.

“I am a minority shareholder and I am concerned when the representatives of the key shareholder -- the government, my senior partner in Rostelecom -- have taken actions leading to a reduction in the company’s market value,” Malofeev said.

Collateral Pledge

“It doesn’t matter if Provotorov runs Rostelecom or another professional manager picked by the government,” Malofeev said. “What is important to us is the shares’ appreciation and Rostelecom’s expansion into wireless business, which has proven to be the key growth driver for fixed-line operators globally.”

Malofeev’s stake of Rostelecom is pledged as collateral for loans from OAO Gazprombank, according to Vedomosti. The stock’s decline hasn’t prompted banks to ask him to hand over any stock, Malofeev said, declining to elaborate.

His stake is due to increase to 12 percent once Rostelecom completes its merger with its holding company, Svyazinvest, and cancels treasury shares. The Russian state controls 55.2 percent of Rostelecom’s votes.

In order to keep the government’s stake above 50 percent after the reorganization, Rostelecom’s unit Mobitel would need to buy preferred shares in the market for 3.1 billion rubles to

6.7 billion rubles, Kommersant reported today, citing a Renaissance Capital proposal.

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