April 4th, 2013

A very suspicious deal in the Russian telecom market

Swedish Tele2 sells its Russian arm to VTB, a state-controlled bank, for $3.55 billion while consortium of Vimpelcom and MTS, two leading mobile networks in Russia, offers up to $4.25 billion for the asset.

In a free market economy, sellers maximize price by organizing transparent auctions between potential buyers. Through the auction procedure, buyers improve their offers and a seller gets the highest possible price for his asset while shareholders control the process and push company to shop for the best proposal.

Andrei Kostin is famous on serving Kremlin's special interests

Things are different in Russia. Transparent, competitive procedures are rarely observed in the Russian market. In many cases sellers have no other choice but to sell their assets, and do it urgently. The only possible acquirer is usually known beforehand. The sum of the deal often depends on the goodwill of a buyer and “merits” of a seller. Those, who risk stepping in with a counter offer, are ignored or severely punished.

The acquisition of Tele2 Russia, the fourth largest cellular network in Russia, fits well into a pattern of a typical Russian deal. Two largest Russian telecom companies complain that they have not been allowed to participate in negotiations with Tele2. According to VTB, the parties already signed a legally binding agreement and the deal can’t be reversed. Head of VTB Andrei Kostin makes no secret of the bank’s intentions to sell Tele2 Russia in the nearest future. Most likely, the assets will be used to form a larger company with state-controlled Rostelecom or/and Megafon, the third largest mobile network provider.

Tele2 sells its Russian assets because the company’s further development has been effectively blocked by the Russian government. In the telecommunications industry regulator can easily kill a company as happened many times in the Russian wireless market. The Swedish company was allowed neither to build 4G network nor to use its 2G network for LTE.

The economic impact of the deal will be mainly negative. The effective government control over the economy will increase as well as the capital outflow from Russia. The real beneficiaries of the acquisition will be revealed pretty soon. Non-transparent, non-competitive deal procedure demonstrates Russia’s unfavorable investment climate. Investors don’t receive fair price for their assets while the growth of non-government controlled companies depends on the relationships of their owners with the Putin’s team.

FT

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