The merged carrier is expected to be sold off to major operators in the future.

Three Russian wireline broadband operators have decided to merge to create a leading operator in West Siberia. Some analysts said the merged company might become a rival of major Russian telecommunications operators, but others noted that chances to compete with majors are weak and the merged company is likely to be later sold to one of the majors, which have recently been active on the merger and acquisition market. Other regional broadband operators, which are still numerous enough, may also seek to combine businesses with each other, but major operators are likely to acquire them anyway, analysts said.

Novosibirsk region-based Novotelekom, Kemerovo region-based E-Lait-Telekom, and Tomsk region-based Tomtel are expected to merge into a single company, Novotelekom said in a statement on November 2. The three companies are expected to become part of a holding, which is to be headed by Novotelekom’s current General Director Oleg Ignatenko, Novotelekom said, adding that the legal procedure for the merger is expected to be completed in early 2012.

The subscriber base of the merged company is expected to amount to more than 250 000 broadband and more than 80 000 cable TV users in 11 cities of the Novosibirsk, Kemerovo, and Tomsk regions, RIA Novosti reported. The combined revenue of the three merging companies is expected to be at 1.8 billion roubles in 2011.

Taking into account the expected revenue, the total value of the three companies can be estimated at up to $120 million minus debt, investment company Veles Capital’s Head of Equity Research Department Ilya Fedotov said, adding that the value may be lower because the companies are not public and their operations are geographically limited.

Shareholders of the three companies are expected to receive stakes in the merged company depending on the size of the operators, Novotelekom’s spokeswoman Maria Koresh said without elaborating. Novotelekom is currently 100%-owned by a little-known Cyprus-based company, Tomtel is 94%-controlled by Russian investment fund Elbrus Capital, while E-Lait-Telekom is owned by individual Russian investors, Russia’s RBC Daily reported.

Elbrus Capital’s Managing Partner Dmitry Kryukov told PRIME the merged company is expected to focus on the development of operations in cities already covered by the three companies and on expansion to other cities mainly in West Siberia. “West Siberia area is a promising area, and the three companies are already number ones in their regions; they will further develop there,” Kryukov said.

Kryukov also said there are so far no plans to switch the merging companies to a single brand. “All three companies have strong brands on their regional markets, so switching to a single brand is not urgent at the moment,” he said. Novotelekom currently operates under the Elektronniy Gorod and Zhiraf TV brands, E-Lait-Telekom is known by the Good Line brand, and Tomtel provides services under the Tomtel brand.

One of the key positive consequences of a merger for small and medium-sized broadband operators is a reduction in expenditures per subscriber, if the operators’ networks are built employing one technology, investment company TKB Capital’s telecommunications analyst Kirill Bakhtin said, adding that a merged company can also make savings on the content provided to subscribers. “Merged companies have better chances to compete with Rostelecom, MTS, VimpelCom, and ER-Telecom than separate small operators due to their ability and ease in cutting expenditures,” Bakhtin said.

The key rival of the merged company of Novotelekom, E-Lait-Telekom, and Tomtel is likely to be wireline giant Rostelecom, which had about 2 million broadband subscribers in Siberia and the Urals area as of late June, investment company Investcafe analyst Ilya Rachenkov said.

Fedotov from Veles Capital said that the merged company is unlikely to become a serious rival to major Russian broadband operators. The chances to compete with majors are only slightly better for the merged company than for each of the three operators separately, he said. “So far, only ER-Telecom could compete with majors without being acquired by them,” Fedotov said, adding that the three companies are more likely expected to be merged in order to subsequently sell the merged company to a large telecommunications operator, namely to Rostelecom, MTS, MegaFon, or VimpelCom, which are all actively developing their wireline broadband businesses. MegaFon, Russia’s second largest mobile operator, is however behind ER-Telecom and Moscow-based operator Akado by the number of broadband subscribers in Russia at present, but Rostelecom, MTS, and VimpelCom occupy the three highest positions in the list of largest broadband providers, according to data from Advanced Communications and Media (AC&M).

Rachenkov from Investcafe agreed that the merged company could be an attractive acquisition target for Rostelecom or other major telecommunications operators, but said that if shareholders of the merged company do not plan to sell it, the company may successfully compete with major operators, like ER-Telecom does. The merging companies provide services based on the Ethernet technology, which may be a competitive advantage over Rostelecom, which provides services mainly via the Digital Subscriber Line (xDSL) technology, Rachenkov added.

Bakhtin from TKB Capital also said he did not rule out that the merged company might be sold to a large broadband operator, taking into account majors’ statements that the market is expected to be further consolidated within a couple of years. “A larger (merged) company may be sold with a bigger premium than three companies separately,” Bakhtin added.

Other regional operators may also seek to merge into larger companies, but it is more likely that major operators will buy regional operators one by one, Fedotov from Veles Capital said, adding that so far the practice of mergers has not been widespread among regional operators. “Tough competition from four telecommunications majors is likely to make any attempts (by regional operators) to merge unreasonable, especially when the four majors start providing 4G (fourth generation wireless) services, which are comparable to wireline broadband services by connection speed,” Fedotov said.

Possible acquisition targets are still numerous for telecommunications majors, as an about 26% market share is still jointly held by smaller companies, Bakhtin from TKB Capital said, adding that “four major operators are quite interested in biting this quarter of the pie.”

Medium-sized operators with values of up to about $100 million, currently competing with majors, can be found in most Russian regions, Fedotov said, sharing Bakhtin’s opinion that there are still quite a few acquisition targets on the broad-band market.

Meanwhile several other operators have merged into a single company, which is also affiliated with Elbrus Capital. The fund said in mid-October it had created a broadband and cable TV company, called Strela Telecom, by integrating eight providers operating mainly in East Siberia and the Far East, but also having a presence in Tomsk. At present, Strela Telecom’s total user base amounts to more than 200 000 users in eight Russian cities, including Ulan-Ude and Khabarovsk, alongside Tomsk, Elbrus Capital said.

“We do not rule out than sometime in the future Strela Telecom will be merged with the company to be created around Tomtel, but there has been no discussion on this matter so far,” Kryukov from Elbrus Capital said, adding that despite both merged companies being expected to operate in Tomsk, one of the companies is to focus on operations in East Siberia and Far East, while the other one is to develop mainly within West Siberia.