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. Last Updated: 07/27/2016

MTS Buys No. 2 Ukrainian Operator

Top cellular operator Mobile TeleSystems said Tuesday it will pay $194.2 million for a controlling stake in No. 2 Ukrainian operator Ukraine Mobile Communications.

MTS said it will pay $55 million for each of the two 16.3 percent stakes belonging to Deutsche Telekom and KPN, a Dutch operator, and $84.2 million for Ukrainian operator Ukrtelecom's 25 percent stake.

"MTS's expansion into Ukraine is in line with the company's strategy to exploit growth opportunities beyond Russia's borders," MTS's president Mikhail Smirnov said. "We believe that the acquisition of UMC would provide MTS with the best opportunity to enter the developing Ukrainian mobile market, which has a penetration rate of only 6.7 percent."

In addition to acquiring 57.7 percent of UMC, MTS signed an option agreement with Dutch operator TDC to purchase its 16.3 percent for at least $55 million. MTS also has an option agreement with Ukrtelecom to buy its remaining 26 percent stake in the next two years for $87.6 million.

By 2005, MTS plans to own 100 percent of UMC.

UMC is the second largest of Ukraine's six mobile operators. It has 1.5 million subscribers out of a population of 49.3 million. According to UMC's financial results prepared under international standards, the company's revenues in 2001 totaled $215.8 million, earnings before interest, taxes, depreciation and amortization reached $100.7 million, and net income was $44.3 million.

Analysts saw the acquisition as good news for MTS, but said it could imply revisions for MTS capital expenditures in Russia's regions.

"Ukraine is a very big market where MTS needs to be present since it's unclear whether Vimpelcom will enter this market or not," said Andrei Bogdanov, an analyst at Alfa Bank. "In its potential, Ukraine is similar to Russia's regional market, and MTS received access to it for a lower price than it did for Russian regions."

Bogdanov added, however, that the deal may force MTS to reconsider its capital expenditure plan for expanding into Russia's regions.

"Considering UMC's financial results, it is a good deal for MTS -- just over $250 per subscriber is a much more attractive price than the $340 per subscriber they paid for Kuban-GSM, or $670 per subscriber for BM Telecom, or $705 per subscriber it paid when buying its latest acquisition, Dontelecom," said Vyacheslav Nikolayev, an analyst at Renaissance Capital.

"This is a continuation of MTS's expansion into the CIS countries -- which in general could be questioned by the investment community, as there are still a lot of uncovered places in Russia, generally a more profitable market."

UMC will become MTS's second venture outside Russia. In June this year, MTS launched a joint venture with Belarus' long-distance operator Mezhdugorodnaya Svyaz, MTS Belarus, in which the former owns 49 percent and the latter 51 percent. MTS became Belarus' second GSM operator after its only rival Velcom and plans to invest $50 million in its Belarus venture by the end of this year, $138 million by 2005 and $198 million by 2011.