MegaFon Weighs Buying Scartel to Expand Data Business

OAO MegaFon, Russia’s second-largest wireless carrier, is considering buying smaller operator Scartel to expand its network as mobile Internet use increases, Chief Executive Officer Ivan Tavrin said.

“Scartel is a very interesting asset,” Tavrin, 36, said in a phone interview from Moscow. “We do not exclude the possibility of an acquisition in the future but, obviously, depending on its terms.”

The deal would help Moscow-based MegaFon increase its lead in Russia’s fast-growing wireless-data market over OAO Mobile TeleSystems and VimpelCom Ltd. MegaFon, seeking to expand after an initial public offering in London in November, would get mobile spectrum and a network using faster long-term evolution technology.

An acquisition would also mark an internal shuffle of assets by billionaire Alisher Usmanov, whose USM Holdings Ltd. controls just more than 50 percent of MegaFon and 82 percent of Scartel. He is seeking an edge over fellow billionaires Vladimir Evtushenkov, who controls OAO Mobile TeleSystems, and Mikhail Fridman, who controls VimpelCom Ltd.

Though Scartel holds more LTE spectrum than rivals, it is difficult to estimate Scartel’s value because the closely held company hasn’t disclosed many details about its network or subscriber numbers, said Anna Lepetukhina, a Sberbank Investment Research analyst in Moscow. Usmanov bought Scartel, which operates under the Yota brand, in a deal that valued it at $1 billion last year, the Vedomosti newspaper reported at the time.

‘Logical’ Move

“It’s logical for MegaFon to acquire Scartel, still it’s hard to estimate the fair price for such a deal,” Lepetukhina said. “Scartel is a black box, all we know is that it has 60 megahertz of LTE frequencies.”

Usmanov’s USM believes a Scartel takeover by MegaFon would “make sense” and lead to “synergies” in developing faster data services using LTE technology, Ivan Streshinsky, head of the investment firm, said in an interview. MegaFon already offers LTE service on Scartel’s network through a partnership.

USM bought Moscow-based Scartel last year for an undisclosed sum and is willing to sell it to MegaFon for the same price to avoid any conflicts of interest, Streshinsky said.

Such a large acquisition would have to be approved by MegaFon’s owners, and since Usmanov’s USM is a holder in both the acquirer and the seller it might be excluded from the final decision-making by Russian rules, Lepetukhina said. That means the deal would have to be approved by Sweden’s TeliaSonera AB, which owns about a quarter of MegaFon.

Salomon Bekele, a TeliaSonera spokesman in Stockholm, declined to comment on a possible Scartel deal.

Lucrative Customers

Scartel would help MegaFon as Tavrin tries to reach 1 million LTE customers by the end of 2013. The company is vying for lucrative data users as most Russians already have mobile phones and voice revenue slows. Average revenue per LTE user is “substantially” higher than for other customers, Tavrin said.

The relationship with Scartel helped MegaFon start LTE services ahead of competitors and reach 150,000 subscribers, Tavrin said. Scartel’s network covers 100 Russian cities, while its financials aren’t publicly disclosed, said Streshinsky, 43.

MegaFon is seeking to sustain growth after boosting its share price more than 50 percent since the November IPO. The stock rose 1.4 percent to $32.36 at 1:44 p.m. in London.

Soaring Market

Russia’s wireless market grew 9 percent last year to more than $26 billion, while data revenue surged 33 percent to $3.2 billion, almost doubling since 2010, according to AC&M Consulting. Older 3G technology generates the majority of data revenue, and LTE so far accounts for “just a tiny percentage,” Anton Pogrebinsky, an AC&M analyst in Moscow, said by phone.

USM’s idea previously was to build Scartel into an infrastructure company operating a network on which all Russia’s largest carriers would offer service. Scartel insisted that operators using its network should guarantee certain volumes of business, which would allow the company to fund costs of network development, which already exceeds $450 million, according to USM’s Streshinsky.

Still, MTS and VimpelCom failed to agree on the terms with Scartel. MTS decided to develop LTE on its own as cooperation terms offered by Scartel weren’t economically attractive, said Irina Agarkova, a company spokeswoman. VimpelCom hasn’t yet agreed with Scartel and doesn’t view LTE as a priority for 2013, said Anna Aybasheva, a spokeswoman for VimpelCom.

‘The Future’

“Other operators are not interested in developing LTE as there are not enough end-user devices supporting this technology, while they haven’t yet fully exhausted the potential of 3G for data services,” Streshinsky said. “On the contrary, we as MegaFon and Scartel shareholders made a bet on LTE and see it’s the future.”

To further increase its stakes in the Russian wireless market, USM may be willing to buy TeliaSonera’s stake in MegaFon, which is worth about $5 billion, Streshinsky said. USM has a good relationship with TeliaSonera and understands that the Scandinavian company may find it difficult to sell MegaFon’s shares in the market due to restrictions on London trading and the illiquidity of the Russian stock market, he said.

TeliaSonera Chairman Marie Ehrling said in an interview today that the carrier’s stake in MegaFon is a “long-term holding,” declining to elaborate.