MTS Considers Offer For Stake in Yevroset

MTAn OMON officer entering a Yevroset shop Wednesday on Chistoprudny Bulvar. Its head office was raided on Tuesday.
Mobile TeleSystems confirmed on Friday that it was interested in buying a stake in mobile phone retailer Yevroset, which last week had its office raided and two of its employees detained over smuggling and kidnapping allegations.

The sale of a stake in the country's largest handset outlet to its biggest cell phone operator could signal the beginning of a trend toward the U.S. model of contract-based mobile phone service, although analysts cast doubt on whether that would happen soon, citing ingrained behavior patterns and a lack of infrastructure.

"Theoretically, we can admit that we are interested in buying a stake. Not a controlling stake," MTS spokeswoman Irina Osadchaya said. "We're just in a very early stage."

MTS has been looking at the deal "for a while," she added.

Her comments were an about-face from the day before, when Osadchaya said MTS was not interested in buying into Yevroset.

Yevgeny Chichvarkin, Yevroset's co-owner and chairman, said Friday that the company had "not yet received a letter of interest from MTS. But if and when we do, we will begin the negotiating process."

The announcement comes after the Prosecutor General's Office last week said it was investigating whether Yevroset had smuggled handsets into Russia and whether an executive had been involved in kidnapping and extortion.

Chichvarkin and Yevroset co-owner Timur Artemyev have denied wrongdoing by the company or its executives.

"With our evolving strategy, we are looking at different growth opportunities. Yevroset has been in the market for a while and is a market leader, which could have an influence on the sales of our contracts," Osadchaya said.

Yevgeny Golosnoi, telecoms analyst at Troika Dialog, said there was no reason MTS should not buy Yevroset, so long as the price is right.

"Given the current climate in the market, I'm not sure whether the $1.5 billion floated in the media is the right price. The market is changing. If the price is lowered to reflect changes, it would make sense."

If MTS were to acquire a stake in Yevroset, the move could have a major impact on the sector, with mobile-service providers becoming more vertically integrated and selling handsets along with their contracts.

The development would move the Russian mobile market toward that of the United States, where the biggest carriers generally sell discounted handsets together with fixed-length service packages.

"If MTS buys Yevroset or a stake in it, the market will be totally different in the near future," said Eldar Murtazin, an analyst at Mobile Research Group.

He said the sector would evolve along one of two paths — with mobile providers either buying handset retailers or the providers and retailers signing agreements on exclusive contract sales.

"There's no way one retailer would be bought and the other mobile-service providers would sit there," said Yekaterina Balykina, telecoms analyst at Alfa Bank. " It would be the end of independent retailers," she said.

VimpelCom, the country's second-largest provider, and No. 3 carrier MegaFon can be expected to make bids next, possibly for another big handset retailer like Svyaznoi, analysts said.

"VimpelCom and MegaFon will have to react to this. MegaFon will take the second way and create a contract, whereas VimpelCom could buy a chain," Murtazin said.

VimpelCom and MegaFon were not available for comment after repeated calls.

Analysts said the integration of mobile-service providers with handset and contract retailers could pose problems, however. The service providers have no experience selling phones, and Russians may not be willing to switch to legally binding usage contracts or fixed monthly bills.

"MTS and VimpelCom have said they're not in the business of selling phones. That's why their interest in a [retail] chain is such a surprise to me," said Troika's Golosnoi.

"I think it would be very hard to make people abide by their contracts. … Typically, people have searched for lower rates, and they could migrate freely. People even had multiple SIM cards," he said. "I am very doubtful that they will be successful in converting people."

Alfa's Balykina, who said she had experience with both the pay-as-you-go approach and the U.S. contract-based system, agreed.

"As a consumer … I was happy with having one bill. But I was very unhappy with being locked into a contract for two years," she said. "It's kind of early to say whether it would be a good or bad market."