MTS, Vodafone Sign Network Agreement

Vodafone and Mobile TeleSystems clinched a "partner network" agreement Thursday that will allow the British carrier to expand its service in emerging markets and help Russia's biggest provider develop new technologies.

The partnership, seen as a possible prelude to an equity deal, comes at a difficult time for Vodafone, which has faced flagging sales in its core European markets after spending a staggering $6 billion to acquire a third-generation, or 3G, license in 2000.

"This groundbreaking agreement will give our customers the most innovative products and services from around the world," MTS president Mikhail Shamolin said. "Vodafone's commercial insights and technical expertise will translate into significant operational efficiencies for MTS ... as we transition our networks to 3G and beyond."

MTS will gain access to a range of products and services, particularly Vodafone's experience with 3G networks, which allow cell phone users to access broadband Internet. Vodafone, in turn, will get a foothold in the rapidly growing telecoms markets of Russia and its neighbors. MTS has 87 million subscribers, including more than 60 million in Russia.

"Our agreement with MTS is an opportunity for Vodafone to build its presence and work with the leading operator in these important markets," Vodafone president Vittorio Colao said.

"By combining the reach of the company's respective networks, we can give customers greater roaming capabilities and extended coverage."

Colao said Vodafone would open an office in Moscow to cooperate with MTS on future offerings. He added that the company's products and services would be marketed under a co-branded approach.

With its European 3G mobile offering slumping, Vodafone has turned to emerging markets, including India, Turkey and Ghana, to boost revenue.

Thursday's agreement was seen as a possible attempt to pave the way for an equity deal in which Vodafone could take a major stake in MTS.

"Vodafone must be hoping eventually to take control of a major cellular operator such as MTS," said Anna Bossong, telecoms analyst at UniCredit Group Europe. "Russia is a major missing piece in Vodafone's global empire."

Legislation limiting foreign investment in strategic sectors could pose a stumbling block for a deal, however.

"The political economy of today's Russia rules out the sale of such a major asset to a foreign -- let alone Western -- group," VTB telecoms analyst Alexei Yakovitsky wrote in a note Thursday.

Philip Townsend, head of research at brokerage Metropol, described Vodafone's push into Russia as "too little too late."

Vodafone had a rare opportunity in 2003 to buy more than 30 percent in MTS from Deutsche Telekom, but chose not to because of its involvement in 3G development, Townsend said.

"They came back to Russia because they are trying to pursue an emerging market strategy," Townsend said.

"Similar forays into India and Ghana were huge failures because the company overpaid for stakes in telecoms companies in both countries."