Russian Interest Likely as Kazakhtelecom Sells Majority Stake in Mobile Telecom-Service

Kazakh incumbent Kazakhtelecom has announced that it will sell off its 51% stake in GSM operator Mobile Telecom-Service. Kazakhtelecom has set 17 July 2009 as the closing date for the acceptance of letters of interest from potential bidders and 31 August 2009 as the closing date for final bids. Bids will be evaluated according to the criteria of financial capability, long-term investment intentions, relevant business experience of the bidder and the absence of a conflicting interest between the bidder and Mobile Telecom-Service. Kazakhtelecom has appointed RBS Corporate Finance as its financial adviser.

Mobile Telecom-Service operates under the "Neo" brand in Kazakhstan. The operator is the smallest GSM player in the country, with Kazakhtelecom reporting that it had around 920,000 subscribers at the end of May 2009, after launching in February 2007. By the end of 2008, it had expanded its operations nationally, covering 251 cities and towns. In March 2007, Kazakhtelecom sold a 49% stake in Mobile Telecom-Service, in order to share investment costs; this stake is currently held by AsiaNet Kazakhstan.

Kazakhtelecom also owns a 49% stake in another GSM operator, K-Cell, which is majority owned by Turkcell-TeliaSonera vehicle Fintur. At the end of 2008, there were around 16.6 million mobile subscribers in Kazakhstan, equating to penetration of around 107%. KaR-Tel, the mobile unit of Russia's VimpelCom, is the country's largest operator, reporting a market share of 48% at the end of the first quarter of 2009, while K-Cell had a 44% market share.

Outlook and Implications

• Kazakhtelecom to Retain Mobile Interest: Kazakhtelecom has indicated that its decision to divest its stake in Mobile Telecom-Service is due to its board-approved strategy of asset restructuring, which is aimed at consolidating its businesses and optimising its use of resources. The operator is currently undertaking a number of infrastructure roll-outs and technology developments in the fixed-line sphere, with recent projects including the launch of IP TV services in Astana and the provision of voice telephony and broadband services in rural areas through satellite network expansion (see Kazakhstan: 10 March 2009: Kazakhtelecom Launches Interactive IP TV in Astana and 23 January 2009: Kazakhtelecom Taps Gilat for Network Expansion Solution). IHS Global Insight considers the divestment of Mobile Telecom-Service to be a sound strategic move because, although the mobile sector is the most lucrative sphere within the Kazakh telecoms market, Kazakhtelecom will still retain a strong presence there through its 49% stake in K-Cell. The sale of Mobile Telecom-Service will allow it to shed a less-profitable unit and streamline its operations, thus increasing its focus on lucrative broadband-based applications in the fixed sphere.

• MTS a Likely Bidder: While no official indications of interest have yet been made, IHS Global Insight expects Russia's MTS to be a strong contender for the stake. MTS already has GSM operations in Armenia, Belarus, Turkmenistan and Uzbekistan, as well as being the largest operator by both subscriber numbers and revenues in its domestic Russian market. The operator has long hinted that it would be keen to expand its CIS footprint further and as recently as this month confirmed that in particular it is targeting Kazakhstan, as well as Azerbaijan, for opportunities (see Kazakhstan: 9 June 2009: MTS Eyes Expansion into Kazakhstan and Azerbaijan). MTS Chief Executive Officer (CEO) Mikhail Shamolin has indicated that his group intends to enter these markets through the acquisition of an existing operator rather than as a new player. This seems a sensible move given that the high penetration rate in Kazakhstan would make it difficult for a new operator to establish itself. However, this factor might also militate against the purchase of Mobile Telecom-Service, given that KaR-Tel and K-Cell between them command 92% of the subscriber market, offering little growth potential for the third-largest player. Nevertheless, should MTS decide to pursue Mobile Telecom-Service, few operators would have the strength to compete against it.