August 8, 2013 / 6:11 AM / 6 years ago

Russia's Megafon to buy 4G provider Scartel for $1.2 billion

MOSCOW (Reuters) - Megafon (MFON.MM) MFONq.L, Russia’s second-biggest mobile phone operator, is to buy next-generation service provider Scartel for $1.2 billion to extend its lead in the race to provide high-speed internet.

Customers and staff are seen through the partially cleaned window of a Megafon shop in Moscow November 28, 2012. REUTERS/Sergei Karpukhin

The deal unites assets belonging to Russia’s richest man Alisher Usmanov, and boosts Megafon’s position against rivals MTS (MBT.N) and Vimpelcom VIP.N in a fast-growing segment of the telecoms market.

Scartel, which operates under the name Yota, provides wireless services using the extra fast Long Term Evolution (LTE) technology expected by analysts to become the industry standard worldwide.

Megafon leapt ahead in the race to sell LTE, or so-called fourth-generation (4G), services last year by providing services in Moscow in May 2012 using Scartel’s infrastructure, two months before it and three rivals were awarded their own 4G licenses.

“We believe in the mass popularity of this product in the future and we are clearly betting on it, including with this deal,” said Megafon CEO Ivan Tavrin. “This is why we will do everything to be a leader in this sector.”

Megafon’s shares rose 4.9 percent in early London trade.

Megafon is buying Scartel from Garsdale, the telecoms holding company of Usmanov, who is also a controlling shareholder in Megafon with more than 50 percent.

Usmanov owns an 82 percent stake in Garsdale while the remainder is owned by Telconet Capital and state-backed Rostec.

Telconet is owned by businessmen Sergei Adonyev and Albert Avdolyan, who may sell out of Garsdale, according to a report in Russian newspaper Vedomosti this week.

The $1.2 billion purchase price will be paid on a deferred basis. Half will be paid on the first anniversary of the deal’s closing, with the remainder on the second anniversary.

Megafon is also assuming Scartel’s debt of $600 million.

Analysts at Bank of America Merrill Lynch said the price was in line with market expectations, which they said was positive.

“The price will not surprise anyone,” they said in a research note. “This was the main concern till now because of the cross ownership.”

Megafon, which obtained clearance from Russia’s competition watchdog to buy Scartel last month, said the deal was expected to close at the end of September.

The deal requires the approval of the majority of shareholders in Megafon, excluding Garsdale. Megafon’s largest minority shareholder TeliaSonera TLSN.ST, with a 25.17 percent stake, intends to vote for the deal.

Megafon also reported second-quarter earnings which beat forecasts. Net profit came in at 13.6 billion roubles ($412 million) compared with a Reuters poll forecast of 12.4 billion roubles and 1.7 billion roubles a year ago, which was hurt by a foreign exchange loss.

Revenue rose 8.4 percent to 72.2 billion roubles, above the average forecast of 71.7 billion, while operating income before depreciation and amortization (OIBDA) rose 21.8 percent to 34.3 billion roubles, with a 47.5 percent margin. Analysts expected OIBDA of 32.4 billion with a 45.2 percent margin.

Megafon reiterated its guidance for 42.5-44.0 percent OIBDA margin in its full financial year and kept its high single-digit revenue growth forecast.

($1 = 32.9965 Russian roubles)

Additional reporting and writing by Megan Davies; Editing by Elizabeth Piper and Mark Potter

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