Tele2 Russia’s $5 Billion Deepens Phone Stock Rout

Mobile carriers are proving the biggest laggards among Russian stocks traded in New York amid concern that a smaller rival’s push into the largest European country will cut into the industry’s profit margins.

OAO Mobile TeleSystems, Russia’s top mobile provider, has tumbled 8.4 percent in 2014 while VimpelCom Ltd., controlled by billionaire Mikhail Fridman, has tumbled 34 percent, the biggest retreat in the Bloomberg Russia-US Equity Index. OAO Rostelecom is down 25 percent and OAO MegaFon, the second-largest operator, slumped 5.2 percent in London.

Tele2 Russia, acquired from Sweden’s Tele2 AB last year, obtained a one-year loan facility of as much as $5 billion from VTB Group. It may use the funds to expand its network as it strives to control a quarter of the Russian mobile-phone market by 2019 after a merger with state-run Rostelecom’s cellphone assets this year.

“VTB’s loan facility signals that Tele2 will become a major player in the market sooner rather than later,” Sergey Libin, a Moscow-based analyst at Raiffeisenbank, said by phone yesterday. “This may result into lower subscription prices and higher capital spending for other mobile companies. The size of the loan signals a pretty aggressive expansion by Tele2.”

The Bloomberg index of the most-traded Russian stocks in the U.S. slipped 0.9 percent to 93.65, trimming its gain this quarter to 9.8 percent. The 22 percent average plunge in the three telecommunications companies this year is almost three times the Bloomberg gauge’s 8.6 percent slide.

Market Share

VTB Capital, a unit of Russia’s second-biggest lender, acquired Tele2 Russia for about $3.6 billion from Stockholm-based Tele2 AB in April 2013. It then sold 50 percent of the operator to OAO Bank Rossiya and its partners, including billionaire Alexey Mordashov, last year. Tele2 and Rostelecom have completed the first phase of the joint venture, Rostelecom said in a March 28 statement.

The marriage of Rostelecom and Tele2 would create a company with 38.5 million Russian mobile subscribers, according to first-quarter data from Advanced Communications & Media. That compares with 76.1 million for Moscow-based Mobile TeleSystems, 55 million for VimpelCom and 67.6 million for MegaFon.

While Russia’s biggest mobile companies spend about $2 billion a year to expand, Tele2 had been lagging behind, spending about $200 million a year, Libin said, citing Raiffeisenbank’s estimates.

ETF Slips

Konstantin Prokshin, a Tele2 Russia spokesman in Moscow, didn’t respond to a phone call and an e-mailed request for comment on the company’s spending plans when contacted outside of regular business hours yesterday. Tatyana Novikova, a VTB spokeswoman in Moscow, declined to comment. Rostelecom’s press service wasn’t available to comment when contacted by phone and e-mail.

Mobile TeleSystems, also known as MTS, slumped 4.2 percent to 302.71 rubles, or $8.97, in Moscow yesterday. Its American depositary receipts added 0.7 percent to $19.82 in New York. VimpelCom gained 0.4 percent to $8.51.

ADRs of Rostelecom slipped 1.1 percent to $15.31 in New York after dropping 2.1 percent in Moscow. MTS’s adjusted earnings will fall 19 percent this year while VimpelCom’s revenue is set to decline 7 percent, according to analyst estimates compiled by Bloomberg.

Even with fresh funds, the new carrier may not have an easy time upending the mobile market, according to Anvar Gilyazitdinov, a fund manager at Rye, Man & Gor Securities in Moscow.

Slow Rollout

“There is a competition risk, but it’s not as serious as it may look,” Gilyazitdinov, who manages a $30 million portfolio of Russian stocks at Rye, Man & Gor, said by phone yesterday. “It will take time for Tele2’s joint venture with Rostelecom to challenge the major players in the market. Even with all the support from the government, it won’t be easy for them to catch up.”

Gilyazitdinov said his fund owns MTS and MegaFon and doesn’t plan to sell anytime soon.

Bobby Leach, VimpelCom’s spokesman in Amsterdam, declined to comment. Olesya Yaremenko, a media representative at MegaFon in Moscow, and Nikolai Minashin, a spokesman for MTS, weren’t available to comment when contacted by Bloomberg News by mobile phone and e-mail outside of normal business hours yesterday.

“Tele2 is known for its very aggressive business model that allowed its very quick expansion throughout the country,” Sergey Vasin, an analyst at OAO Gazprombank, said by phone from Moscow yesterday. “It’s not so much about the money, it’s rather about the time it will take for Tele2 to provide competitive quality.”

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