VimpelCom, MTS Bid for Tele2 Russia Would Shut Out Rival

Russian cell-phone operators OAO Mobile TeleSystems and VimpelCom Ltd. are seeking to topple VTB Group’s agreement to acquire Swedish Tele2 AB’s Russia unit, which may prevent the creation of a fourth nationwide mobile operator.

MTS and VimpelCom have jointly offered to acquire Tele2 Russia for as much as $4.25 billion, the companies said in a statement March 28. VTB Group, Russia’s state-run bank, agreed on March 27 to acquire Tele2’s Russian unit for $3.55 billion in cash and debt.

“MTS and VimpelCom are afraid that VTB may resell Tele2 Russia to Rostelecom, which may form a fourth countrywide mobile operator, boosting competition in the industry,” said Alexander Vengranovich, analyst at Otkritie Capital. State-run telecommunications operator OAO Rostelecom has a mobile license for the Moscow region, a nationwide fourth-generation license and better access to funding, Vengranovich said.

VTB may have agreed to buy Tele2 Russia for Rostelecom, which needs time to complete a merger with its parent company OAO Svyazinvest, Alexander Kazbegi, analyst at Moscow-based Renaissance Capital Holdings Ltd. said in a note March 28. “VTB might keep Tele2 on its balance sheet for six to eight months before transferring it to Rostelecom,” he wrote.

A representative of Rostelecom declined to comment on the Tele2 agreement. A VTB official, who asked not to be named according to company policy, said VTB is open to cooperation with any market players.

‘A Perfect Fit’

Tele2 is a “perfect fit” for Rostelecom because their mobile networks are complementary, allowing the formation of a fourth nationwide operator, Rostelecom investor Konstantin Malofeev said in December.

Malofeev’s private equity firm Marshall Capital Partners sold its 10.7 percent Rostelecom stake to President Vladimir Putin’s judo partner Arkady Rotenberg last month. Former Rostelecom Chief Executive Officer Alexander Provotorov, backed by Marshall, was replaced this week by Sergey Kalugin, who previously worked for another friend of Putin, Yury Kovalchuk.

The deal to acquire Tele2 Russia is “concluded and legally binding,” Yury Soloviev, VTB’s first deputy president, said March 28 in an interview. VTB is looking at potential strategic partners to develop Tele2, he said, without elaborating.

“VTB already struck the deal, and I am not sure if Tele2 minorities can overturn it now,” said Vengranovich from Otkritie. “These alternative offers may have another aim: to force VTB into taking Vimpelcom’s and MTS’s interest into account -- so they could participate in dividing the Tele2 Russia assets.”

No Meeting

VimpelCom Chief Executive Officer Jo Lunder and MTS President Andrei Dubovskov sent a letter making the joint counterbid to Tele2 CEO Mats Granryd and Chairman Mike Parton.

“Neither MTS nor VimpelCom were permitted to meet with Tele2 AB financial advisers or management to discuss the potential acquisition,” they said in the statement.

Russian billionaire Mikhail Fridman’s Alfa Group, which controls VimpelCom, may consider buying all of Tele2, which operates in 10 countries besides Russia, including Sweden, Norway and Kazakhstan.

Russia’s largest mobile operator is billionaire Vladimir Evtushenkov’s MTS, with 71.2 million users. Billionaire Alisher Usmanov’s MegaFon and billionaire Mikhail Fridman’s VimpelCom have 62.6 million and 56.1 million Russian users respectively, according to researcher AC&M Consulting.

Tele2 has mobile coverage in 41 out of 83 Russian regions and 22.7 million users, while Rostelecom covers 30 regions and

13.6 million mobile users.

The Stockholm-based company is quitting Russia after failing in July to win a license for next-generation services that enable faster data transmission.

MegaFon may consider parts of Tele2 if they are offered, Director Ivan Streshinskiy said in December, adding such an acquisition may make sense if carried out jointly with other operators. OAO MegaFon isn’t in talks with VTB, spokesman Petr Lidov said.

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