VTB to sell Tele2 Russia stake, fuelling consolidation talk

Reuters

* VTB to sell 50 pct of Tele2 Russia to Russian investors

* Buyers affiliated with businessmen Kovalchuk, Mordashov

* Deal expected to be worth around $2 bln including debt

* Tele2 Russia seen merging with Rostelecom's mobile unit

By Oksana Kobzeva and Maria Kiselyova

MOSCOW, Oct 11 (Reuters) - Russian bank VTB is tosell 50 percent of its mobile phone operator Tele2 Russia to agroup of investors in a deal expected to be worth about $2billion and which stoked talk of an eventual tie up betweenTele2 and rival Rostelecom.

Russia's mobile market is dominated by three companies - MTS, Megafon and Vimpelcom. Smallerplayers have little room to grow client numbers as many Russiansalready own more than one SIM card, fuelling speculation theywill consolidate to step up the challenge to the "Big Three".

"I think this is just the first part of a deal, and the nextstep is likely to see Rostelecom join its (mobile) assets withTele2 and get a stake in the united company," said AnnaLepetukhina at Sberbank Investment Research.

Yuri Soloviev, first deputy president of VTB's managementboard, said on Friday that VTB would sell 50 percent of Tele2Russia to a group of investors, including affiliates of BankRossiya and Alexei Mordashov's steelmaker Severstal.

The deal represents a quick turnaround for VTB, which boughtindustry No. 4 Tele2 Russia in April for $3.6 billion fromSweden's Tele2. VTB had said it was not looking tohold the asset for the long term.

The deal could be worth about $2 billion including debt,according to the valuation VTB gave for Tele2 Russia in its lastfinancial report. That valuation - as of the end of June -showed the asset rose around 20 percent in value in the firstthree months of ownership. VTB declined to comment on the price.

A tie-up between Tele2 Russia and the mobile arm ofstate-controlled Rostelecom - the country's fifthlargest mobile operator - has long been speculated.

The Vedomosti newspaper reported last month that Rostelecomhad hired JPMorgan, Credit Suisse andaccountancy firm PricewaterhouseCoopers to advise on a possiblejoint venture with Tele2 Russia.

Rostelecom's chief executive Sergei Kalugin was quoted assaying last week that the company could put its mobile assetsunder the management of an unspecified partner to focus on cableTV in a strategy shift.

Analysts speculated Tele2's new shareholders might look toset up a joint venture with Rostelecom. The new investorsdeclined to comment on Friday.

Tele2 only has 2G, voice-focused licences, while Rostelecomhas both 3G and 4G permits which allow it to provide fast mobileinternet services.

"If Tele2 gets 3G licences it will be able to compete withthe Big Three in offering mobile internet ... but it will ofcourse take time," said Lepetukhina, adding that launching inMoscow would be crucial for its success.

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Bank Rossiya, which is part-owned and chaired by YuriKovalchuk, an old acquaintance of President Vladimir Putin, saidlast week it was considering taking part in a deal for a stakein Tele2 Russia.

A spokesman for the St Petersburg-based bank confirmed itplanned to participate in the deal with VTB, saying the statecompetition regulator had given it permission. But it declinedto provide any details or to discuss its plans for Tele2 Russia.

Severstal declined all comment. However, a source familiarwith the situation said that Mordashov's connections rather thanthose of Severstal were participating in the deal.

According to media reports, the group of investors includeda third buyer, but neither VTB or Bank Rossiya identified them.Vedomosti reported last week that Bank Rossiya could partnerwith lender Gazprombank and oil firm Surgutneftegas.

In its first-half earnings report, VTB said Tele2 Russia wasworth 126.4 billion roubles ($3.9 billion), suggesting a 50percent stake would be valued at around $2 billion beforestripping out debt which stood at $1.1 billion as of June 30.

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