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. Last Updated: 07/27/2016

Investors Give OK To Telecom Merger

Shareholders in three St. Petersburg telecoms have approved a giant merger of their companies, a move that will likely pave the way for a series of similar consolidations across the country, industry analysts said Wednesday.

Pending regulatory approval, the three firms, St. Petersburg Telephone, St. Petersburg National-International Telephone and St. Petersburg Telegraph will merge by the end of this year into a single entity with a capitalization of $480 million. The new company will probably then begin absorbing other telecommunications companies from neighboring regions, analysts said.

Svyazinvest, the nationally-owned regional telecom holding, owns controlling stakes in all three firms and initiated the merger as part of a long-term strategy to attract foreign investment to the sector, company officials said Wednesday.

"This must be done for us to move ahead," Svyazinvest head Valery Yashin said at a news conference, Reuters reported. He said Svyazinvest intended to merge the 89 regional telecom providers it controls into eight to 12 consolidated firms within the next several years.

Other mergers are expected to take place soon in Yekaterinburg, Rostov and Novosibirsk. The mergers could lead to more profitable companies capable of attracting investment, analysts said.

"The sector needs investment, but it doesn't attract investment because it is split up into too many companies, which are too small and offer too few services," said Nadezhda Golubeva, a telecoms analyst with the Aton brokerage in Moscow.

For example, Golubeva said, in 1998 Svyazinvest regional telecoms received a total of $309.5 million in foreign investment, mostly on the strength of blind optimism in Russia's financial future.

In 1999, however, after the government's default on domestic debts and devaluation of the ruble, when foreigners began paying closer attention to the sector's fundamentals, investment was only $34 million.

Analysts and industry insiders said the idea of consolidating Svyazinvest's holdings had been under discussion previously, but had become a priority only after Vladimir Putin's political star began to rise, first as prime minister and now as president-elect.

"The idea has been around for a while, but it needed a government capable of making a firm decision," said Vladimir Smolyaninov, executive director of LV Finance.

His firm advises the Quantum Fund, an investment vehicle for American financier George Soros, on the management of its 25 percent-plus-one stake in Svyazinvest, which it purchased for $1.7 billion at a controversial 1997 privatization auction.

"Soros has spoken about the need to consolidate Svyazinvest's holdings for a long time, but nothing was going to happen until the government understood the need to do this," Smolyaninov said.

Putin and his economic advisers have said repeatedly they want to see the state play a more active role in managing the national economy through companies the government holds stakes in. Indeed, it appears to be no coincidence that the first merger will likely take place in Putin's home city of St. Petersburg.

Leonid Reiman, formerly deputy general director of St. Petersburg Telephone, the lead company in the recently approved telecom merger, was named communications minister after Putin became acting-president last year. His boss at SPT, Yashin, was subsequently tapped by Putin to head Svyazinvest.

Smolyaninov said in all the planned mergers, persuasion and negotiation, rather than coercion, will be the primary motivator for the diverse companies within Svyazinvest to consolidate.

"In most cases, Svyazinvest has 38 percent of the votes, but decisions about restructuring the regional telecoms can only be made with 75 percent of the vote, which means private investors must also be brought on board," he said.

The mergers would likely use the same mechanism utilized in St. Petersburg, in which a lead company absorbs smaller operators through a complex series of stock-swaps, he added.