The process of consolidation that has gained momentum in telecom industries worldwide has finally reached Russia. It’s obviously about time to tailor what currently looks more like a patchwork into something that operates more effectively and is more attractive for investors.

Alfa Group is creating a telecom holding; AFK Sistema is uniting Moscow’s alternative wire-line operators; Mobile TeleSystems (MTS) is actively swallowing regional cellular operators; Telecominvest holding company, which originates from St. Petersburg, is trying to keep pace with MTS in its regional expansion; and, finally, Svyazinvest plans to consolidate its numerous subsidiaries into seven bigger companies. None of these projects has been completed yet, but there is enough information to make forecasts about their prospects.

Technically, the activities of MTS and Telecominvest appear to have been most clear and straightforward – both have targeted those regional telecoms that hold GSM licenses to provide services in their respective regions. Telecominvest, for example, is building up a nationwide cellular network operating under the brand name Megafon. In 2000, Telecominvest acquired control of MTT-Invest, a company licensed to provide mobile-communication services in the south of Russia, the Far East and Siberia, and later it acquired control of Uralsky GSM – holder of a license to provide cellular-telecom services throughout the Urals. Meanwhile, MTS has acquired Telecom XXI, which holds a GSM license to operate in Russia’s northwestern areas, and Telecom – 900, which owns stakes in the cellular operators of Novosibirsk, Yekaterinburg and Khabarovsk Krai.

Most of the swallowed regional companies, with the exception of Telecom 900, did not have their own full-fledged networks at the moment of takeover. Therefore, no compatibility problems have ever been tackled and the takeovers basically boiled down to license-acquisition moves on the part of MTS and Telecominvest. But in the near future MTS is going to face some technological problems related to consolidation: According to knowledgeable sources, MTS has reached an agreement on buying a major stake in Kuban GSM, a company servicing more than 350,000 clients in Krasnodar Krai. For the first time, MTS will have to integrate a large company and network into its structure, which is already rather entangled both technologically and administratively. Notwithstanding that the project appears feasible because both MTS and Kuban GSM are involved in one and the same business.

Equally clear are the prospects of Alfa Group’s project. In April 2001, this multi-directional holding bought a controlling stake in Golden Telecom, and then in May 2001, they acquired controlling stakes in Russia’s second-largest mobile-telecom operator, VimpelCom, and its subsidiary in charge of regional developments – VimpelCom-R. It has to be noted that Alfa Group’s acquisitions do not overlap – VimpelCom is a cellular operator, while Golden Telecom specializes in CLEC (competitive local-exchange carrier), as its core comprises Moscow’s alternative wire-line operator Sovintel and interregional overlay network Teleross. A first joint project has already been launched, in which VimpelCom and Sovintel are offering a new service called fixed mobile convergence, or FMC.

Nevertheless, Golden Telecom’s situation is not all cloudless. First, the company’s previous leadership had acquired a lot of Internet companies, not all of which are viable. Second, Golden Telecom owns 24 percent of MCT Corp., which owns 25 small mobile telecoms in various regions of Russia and the C.I.S. Theoretically, these companies may offer competition to VimpelCom-R. In all likelihood, Golden Telecom will seek to sell its stake in MCT. "We don’t plan to develop the mobile-telecom business," Golden Telecom president Alexander Vinogradov said.

But the problems facing Golden Telecom look quite minor compared to those facing AFK Sistema in connection with its telecom project in Moscow. In the first half of the 1990s, Moscow City Telephone Network (MGTS) set up a number of joint ventures with foreign companies in the segment of CLEC, including Comstar, Telmos and Golden Line, and kept on developing its own projects, like MTU-Inform, PTT-Teleport and others. Now, AFK Sistema, which owns a controlling stake in MGTS, is trying to consolidate "parallel businesses" in order to eliminate intra-holding competition. To achieve that, AFK Sistema will need to come to terms with all the founders, buy up their stakes or provide them with sufficient ones in a new, bigger company while not losing control of it. In all likelihood, AFK Sistema will try to purchase the shares of Golden Line from Alcatel and offer Rostelecom (shareholder of Telmos) and Metromedia (shareholder of Comstar) stakes in a new company. Metromedia, for its part, will probably join in with the shares of its other subsidiary, Peterstar, a St. Petersburg alternative wire-line operator.

"It will be interesting to see how Golden Line, Telmos and Comstar will share the market and what they will do to preserve their profits and clients as long as they are in the same business," Vinogradov commented.

Nevertheless, Sistema-Telecom first deputy CEO Vasily Sidorov is optimistic. He said, "We have already begun taking measures to coordinate prices and we are working on network compatibility. Our coordinating council is in touch with all the shareholders, offering them various options. I assess the chances of success of our project at 90 percent."

It is worth recalling here that the world’s history of mergers and acquisitions in the telecom sector has quite a few examples where the result was contrary to what had been desired and expected. During the "period of uncertainty" when a merger is being prepared, the companies may lose their positions to competitors, and this is precisely what is taking place now with Comstar and Golden Line. And it will be very difficult to regain their position afterward.

The most difficult consolidation project is Svyazinvest’s restructuring. Svyazinvest is an amorphous structure which owns stakes in 90 local operators – formerly state-run enterprises. Two years ago it was decided to convert Svyazinvest into a full-fledged managing holding. To achieve this, it is planning to merge the 90 companies into seven bigger ones and reorganize the long-distance carrier Rostelecom, which is also part of Svyazinvest. As a result of these mergers and re-organizations, the quality of management is expected to improve and credit and investment attractiveness to be boosted. The ultimate result will be a rigidly structured, transparent and well-managed holding with a market capitalization greatly exceeding the present figure of $1.6 billion.

In the first stage of Svyazinvest’s reorganization project, analysts have selected the basic seven companies and calculated share exchange coefficients. Meanwhile, general shareholders’ meetings were held in the merging companies and most of them have approved the merger plan. But the process is going along far from smoothly. In Siberia, there were problems with local governors; in the Far East, there was strong opposition from the shareholders of Amursvyaz and its CEO; in the Northwest, Lensvyaz could not participate because part of its shares were seized and Pskov City Telephone Network could not join because its controlling stake is owned by the management.

In the southern regions, the republics of Dagestan and Ingushetia could not join because of their tense political situations. The biggest operators of the Chelyabinsk Oblast and Sverdlovsk Oblast did not like the idea of merging them into the Perm Oblast operator because Perm is smaller and earns less. The Perm Oblast operator – Uralsvyazinform – was chosen as "basic" because of its technologic advantages and its market capitalization, in which it is the leader. So far, the process has been going smoothly in the Volga area, but the problem there is that the telecoms of Tatarstan and Bashkortostan do not belong to Svyazinvest. Therefore, the future holding will not cover the entire map of Russia. But the biggest "black hole" on the map will be Moscow, because the controlling stake of MGTS belongs not to Svyazinvest (which owns only 28 percent) but to AFK Sistema (55.62 percent).

For more than a year now, the leadership of Svyazinvest has been conducting difficult negotiations seeking to have MGTS included into CenterTelecom – a company that is being established through merging companies operating in Central Russia. In exchange for its stake in MGTS, AFK Sistema demanded control of CenterTelecom, but Svyazinvest would not agree to that. Judging by recent events, both sides will have come to terms.

( The author is a staff writer for Expert magazine.)