You're reading: MTS seeking partner for Ukrainian business

Moscow - Mobile TeleSystems (MTS), Russia's leading mobile provider, is considering bringing a foreign partner into its MTS Ukrainian business in order to share the cost of building a 3G network, a source on the telecommunications market told.

He said MTS has been looking for a co-investor since this past summer. Considering the unstable economic and political situation and low elasticity of the market, the case for developing 3G in Ukraine is currently unprofitable for implementation by one company, the source said. Therefore, MTS is looking for a foreign partner who would co-invest in 3G in exchange for an equity stake in MTS Ukraine and a share of dividends, he said.

Ukraine plans to auction off three 3G licenses. The National Commission for Communications Regulation plans to set the starting price for the 3G licenses at Hr 2.4 billion. In addition, each winner of a license will be required to pay Hr 0.53 billion for conversion of frequencies and to invest about Hr 1 billion in network construction. Therefore, the overall costs for one operator will total at least Hr 4 billion (about 12.6 billion rubles).

In order for the construction of 3G networks to be profitable, the starting price per license needs to be slashed to Hr 1 billion, the source said. Right now the amount of investment is seen as too high for all Ukrainian providers, he added.

MTS has already hired a bank belonging to ‘a major international group’ to value the Ukrainian asset, business daily Vedomosti reported on Oct. 21.

Vedomosti’s sources said the difficult political environment was behind the possible sale of part of MTS’ Ukrainian business. The Ukrainian authorities may, for example, be unhappy with the fact that the Ukrainian subsidiary pays dividends to its Russian parent company, the paper’s sources believe. MTS Ukraine paid its parent company Hr 2.23 billion for both 2012 and 2013.

The Ukrainian government also proposed to bar companies with more than 50 percent Russian ownership from bidding at the 3G auction. The National Commission for Communications Regulation has approved a draft government resolution on holding the auction without this restriction. However, it is not clear whether this means that the restriction has been completely abandoned.

A spokesman for the regulator said the commission did not approve the restrictions because they require clarification. It is not clear whether the restriction would only apply to MTS Ukraine or also Kyivstar, a subsidiary of Vimpelcom Ltd, in which Russia’s Alfa Group owns 48 percent of equity and 48 percent of votes, the spokesman said. The final version of the resolution has not been signed yet.

It will be difficult for MTS to get a good price for the Ukrainian asset given the political and economic situation in Ukraine, as well as the fact that the sale might be partially due to the risk of the operator being sidelined from the 3G auction because of its current shareholder structure, Sberbank CIB analysts said in a report.

President Petro Poroshenko issued an order in late July to hold the 3G frequency auction by Oct. 30, but the auction has not been announced yet.

The only operator in Ukraine with a 3G license at present is 3Mob, which is owned by Rinat Akhmetov’s Ukrtelecom. MTS previously held negotiations to buy 3Mob, but a deal never took place.

MTS Ukraine has a 38 percent share of the Ukrainian mobile communications market. Ukraine accounts for 7.8 percent of the MTS Group’s revenue. MTS Ukraine increased revenue 2.2 percent in Q2 2014 to Hr 2.56 billion, however in Russian rubles, revenue plummeted nearly 23 percent due to the Ukrainian currency’s devaluation. OIBDA fell 3.1 percent to Hr 1.3 billion.

MTS Ukraine halted operations in Crimea on Aug. 7. The company began to gradually shut down its network on the peninsula after Russia’s LLC K-Telecom launched a mobile network there using frequencies previously belonging to MTS Ukraine. MTS Ukraine currently serves its subscribers in Crimea via 3Mob roaming services.

MTS Ukraine put its telecom equipment in Crimea up for sale in early October for a total of Hr 288 million. The bidding deadline was Oct. 14, but was later extended.