Russians may sell MTS Ukraine or find co-investors for the 3G

Somebody from national oligarchs could easily take "MTS Ukraine" under the umbrella of

Photo: Ivan Chernichkin

The MTS Group is seeking an investor for its daughter company MTS Ukraine, several highly respected experts on the telecommunications market informed Capital.

One of the sources said MTS has already engaged a bank to find potentially interested companies. “Such rumors are going around,” noted ex-president of Kyivstar Ihor Lytovchenko. He chose not to comment on this until MTS provides official information. “There is such a rumor, but I can refute it,” Managing Partner of the Finpoint investment company Serhiy Budkin stated. He also preferred not to provide any details, though in the opinion of Lytovchenko, it is highly unlikely that these rumors are totally groundless.

General Director of Datagroup Oleksandr Danchenko said the owners of MTS Ukraine had plans to sell the company a year ago. The owner was apparently not satisfied with the small Ukrainian market with a low ARPU (Average Revenues Per User). Noteworthy, based on quarterly results this figure in Russia was RUR 308 rubles (around UAH 80 – Capital), while in Ukraine it was only UAH 36.

At the time, Vodafone, which MTS signed a partnership agreement with back in 2008, was viewed as a potential buyer of MTS, according to Danchenko. “Talks on this matter were renewed at the start of this year, though I do not know what plans the company has today,” he said. The representative of the company who is familiar with the plans of MTS said that today the matter may not be about the sale of all the company’s assets, rather attracting co-investors for the financing of the 3G technology projects.

Too expensive

Vice President of MTS Russia for Marketing Vasil Latsanich said he does not have any information about the intentions of the group to sell its assets. He added that this would have been very sad news has the deal happened (Latsanich moved to Moscow after being promoted from MTS Ukraine). He said that even in theory, a buyer inside the country would not likely be found for such a valuable asset as MTS Ukraine. As to the interest of western investors, he is rather doubtful due to the difficult political situation in Ukraine and the consequences of its declining economy. “The sale of such an asset as MTS Ukraine in the current conditions will not draw a fair price, which judging from Russia’s experience should be the sum equal to the average OBITDA for three years multiplied by five,” noted a highly respected source of Capital. This converts to approximately UAH 24 bn.

Datagroup’s Oleksandr Danchenko shares their opinion saying that the company is not likely to find a buyer in Ukraine: “Nobody has such money”. Another source of Capital noted, “The only realistic buyer of MTS Ukraine is Kyivstar.” Yet another source said shareholders of Ukrtelecom – SCM (System Capital Management) may have plans for acquisition or co-investment. This operator is the only one with a 3G license in Ukraine, though it does not have a 2G network, which prevents it from expanding its business. By the way, Lytovchenko is skeptical as the Anti-monopoly Committee will not approve such a deal.

Crimea and Donbas let MTS down

Director of Public Relations of the Mobile TeleSysytems group of companies Olena Kokhanovska refuted information about the sale of the Ukrainian operator: “No, we are not selling MTS Ukraine”. She said the group is satisfied with the financial results of its Ukrainian daughter company made public based on the results of Q2 2014. The results of Q3 2014 have not been announced, but based on the assessments of Kokhanovska a slight decline in performance is quite possible. “The market is in decline and not only in the telecommunications sector. This is due to the overall economic situation in Ukraine and the events in the Donbas region and Crimea,” she explained.

Based on the results of this year, the position of MTS Ukraine may weaken much more than that of other market players. This is not associated with the operations of the company, rather on independent factors. Indeed, after the annexation of Crimea MTS Ukraine no longer was the main mobile communications operator on the peninsula (according to data of iKS Consulting, back in the spring MTS Ukraine controlled 57% of the market -- 1.7 mn SIM cards) and shut off its network. A part of the remaining subscribers were transferred to roaming provided by Trimob. Crimea accounted for approximately 10% of the company’s revenues.

MTS Ukraine is the key operator in the Donetsk and Luhansk oblasts, a part of the territories of which fell under the control of the non-recognized republics. In the past, these were highly profitable regions for the company. Earlier life:) filed a complaint with the Anti-monopoly Committee of Ukraine that the share of MTS in the Donetsk oblast exceeded 80%.

Unjustified risk

Aside from the economic risks, this year MTS Ukraine has been confronted with more serious political risks. Some high-ranking officials, politicians and businessmen decided to exploit the anti-Russian moods in the country and try to put spokes in the wheels of companies associated with Russia. The Cabinet of Ministers announced its intentions of not allowing such structures access to 3G (UMTS) and participation in tenders that in the best case scenario are expected to be held at the end of December 2014 – January 2015.

Responding to the question whether MTS is ready to continue investing in Ukraine, Kokhanovska said the company is waiting for the announcement of the terms of the tender for 3G technology. “We are interested in the development of new technologies and all our investments will be directed towards this,” she informed.

As Capital wrote earlier, MTS fully replaced equipment operating in the network of Ukraine in 35% of the country in 2013 and early 2014 as a part of its global modernization. The entire project cost UAH 2 bn. As General Director of MTS Ukraine Ivan Zolochevskiy informed in 2012 the initial plans called for modernization of 100% of the network, but in the spring the operator decided to take a moment to think about future plans and not hurry with making decisions.