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MegaFon acquisition would lead to “three-tier” LTE market

The Fitch Ratings agency has expressed the opinion that MegaFon will be “at the top of a three-tier market in the provision of next-generation mobile services in Russia” if its proposed acquisition of Scartel goes ahead.

The statement indicates that Russia is unlikely to see any more mergers and acquisitions beyond the sale of Tele2 Russia.

Scartel originally aimed to build an LTE network that other operators would then use on a wholesale basis. This plan was unsuccessful, with MegaFon the only party interested in acquiring Scartel’s spectrum. Fitch has suggested that a full acquisition is “a likely option”.

The build-out of Scartel’s LTE network was already underway as it acquired spectrum before any of its rival operators. MegaFon currently holds more spectrum than its rivals, so an acquisition would make the resulting entity “the leading operator in Russian LTE telecoms”.

Fitch has observed that fellow operators MTS and VimpelCom “still have enough [spectrum] to successfully compete in Russia”, but also notes that Rostelecom “will face the biggest hurdles to launching a successful LTE network”. The fixed-line incumbent could acquire Tele2 Russia but would still need to raise its CAPEX if it aims to compete with the other three operators.

Indeed, Fitch believes that if VTB Bank were to sell Tele2 Russia this would put an end to consolidation in Russia for the near to medium term as the market is otherwise large enough for four operators to compete.

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