Following the successful entry of Vimpelcom’s Beeline brand onto the Ukrainian market in April, the Russian mobile communications giant is now mulling plans to merge with Astelit, Ukraine’s third largest mobile services company, or Kyivstar, Ukraine’s number one mobile provider in terms of subscribers.

Speaking in an interview with the Russian newspaper Vedemosti, published June 26, Vimpelcom CEO Aleksandr Izosimov said that with an investment of about $500 million into Ukrainian Radiosystems (URS) – another, much smaller, Ukrainian mobile operator that was bought by Vimpelcom in 2005 and through which it introduced its Beeline brand into Ukraine – his company believes it can attract between 5 and 6 million subscribers by the end of 2008. That means cornering 10-12 percent of the Ukrainian mobile communications market.

“After that, it will be possible to integrate our business with other market players, whether it’s Kyivstar, Astelit, or someone else,” Izosimov said.

Since the launch of its Beeline brand in Ukraine, Vimpelcom has more than doubled the number of URS subscribers to 450,000. However, with total Ukrainian mobile phone subscribers at around 34 million, and still growing, this represents little more than a 1 percent share of the Ukrainian mobile services market.

By comparison, Kyivstar reported more than 16 million subscribers as of the end of June. Together with Ukrainian Mobile Communications, which boasts around 15 million subscribers, the two companies control nearly 90 percent of the Ukrainian mobile communications market.

Astelit, which operates under the Life:) brand in Ukraine, claims 3.25 million subscribers and nearly a 10 percent share of the Ukrainian mobile services market.

Industry experts expect the number of mobile phone subscribers in Ukraine to increase from the current 34 million to 43 million, for penetration of 90 percent, by the end of this year. Mobile penetration is currently about 73 percent.

Izosimov’s comments regarding Vimpelcom’s plans to consider merging URS with Astelit or Kyivstar were published the same day that the Moscow Arbitration Court dismissed a lawsuit by Norwegian telecom giant Telenor, which sought to invalidate Vimpelcom’s decision to buy tiny URS in the first place, alleging that the purchase was illegal.

The court decision marked the latest step in a long-running battle between Vimpelcom’s two primary shareholders, Telenor and Russia’s Alfa Group, over business strategy in Ukraine.

Telenor and Alfa Group own 26.6 and 32.9 percent of the shares in Vimpelcom, respectively.

In Ukraine, Telenor owns a 56.5 percent stake in Kyivstar, while Alfa Group owns the remaining 43.5 percent.

Telenor has filed three separate lawsuits with the Moscow court against Vimpelcom’s purchase of URS, with the Moscow court’s June 26 decision being the second in Vimpelcom’s favor. The court is due to examine the third claim by Telenor on Aug. 1.

“It is my hope that this second court decision in favor of Vimpelcom sends an even clearer message to Telenor that it is time to act in the best interests of all Vimpelcom shareholders and withdraw its remaining lawsuit against the company,” Vimpelcom Chief Executive Alexander Izosimov said in a statement.

“We’re considering our options,” Kjell-Morten Johnsen, head of Telenor’s operations in Russia, was quoted as saying by Dow Jones Newswires, without giving any further details.

Telenor and Alfa Group have also fought bitterly over Vimpelcom’s offer to buy Kyivstar for $5 billion, made back in February. Negotiations over that deal have since stalled, with Telenor insisting on a market-based mechanism to separate its and Alfa Group’s interests in Vimpelcom as a condition to the Kyivstar sale. The sale of Kyivstar to Vimpelcom would also separate Telenor’s and Alfa Group’s interests in Ukraine.

At the start of June, Vimpelcom said that it had withdrawn its bid for Kyivstar, because it saw little prospect that a market separation agreement between Telenor and Russia’s Alfa Group could be reached “in the foreseeable future.”

Merger barriers

If Vimpelcom does consider its options to merge URS with Astelit, Telenor may again stand in its way as a Vimpelcom shareholder, according to some industry experts.

Astelit is a joint venture between Turkish telecom giant Turkcell (54.4 percent) and System Capital Management, a portfolio of multi-billion-dollar business interests controlled by Donetsk billionaire Rinat Akhmetov.

Meanwhile, Alfa Group owns 13.2 percent of the shares in Turkcell, giving it an advantage to push for a merger with Astelit down the road.

Oksana Rudiuk, the head of external and corporate relations for Astelit, said that no decision had been reached regarding any kind of corporate merger, either on the part of Astelit, or its major shareholder, Turkcell.

Artem Minaev, the CIS and regional development manager for Beeline-Ukraine, said that no negotiations had been held with Astelit over the merger issue. He added that if the two operators decided to merge, they could run into obstacles, from disagreement among the companies’ shareholders to difficulties with integrating their systems.

“What is essential is the decision of the shareholders. Only with this is integration possible. So far, the merger is just an idea,” Minaev said.

“[The merger] is a strategic option,” Vimpelcom CEO Izosimov said. “It’s understood that if Alfa controls a stake in Turkcell, then that creates a bridge for possible partnership.”

He said that even if the shareholders of URS and Astelit don’t agree to a corporate merger, it would still be possible to integrate their mobile communications networks, adding that Vimpelcom has already made such an offer to Astelit.

“That would provide for a significant decrease in operating expenses, and instead of four networks – Kyivstar, UMC, Astelit and URS – the country [Ukraine] would only have three, comparable in quality as well as size. Since we are a new player [on the Ukrainian market], no one is holding talks with us about a possible merger. However, when we create a communications network platform, I think discussions could then take place.”

“Right now, the question is not the [corporate] merger of the companies [URS and Astelit], but the building of a common network, that is, one network, two operators,” said Valeriy Goldin, Vimpelcom’s vice president of international affairs.

“Creating a common network with Astelit could help us to quickly strengthen our platform on the Ukrainian market, definitely compensating for the consequences of entering the market late”, Goldin said. He added that “this deal should be beneficial for both operators, since it will cut their costs and allow them to quickly achieve the necessary level in the quality of services.”

Oleksandr Parashiy, a senior analyst with Concorde Capital, a Kyiv-based investment firm, said that as a shareholder in Vimpelcom, which operates the Beeline brand, Telenor could object to the merger of URS and Astelit.

“If Telenor considers the conditions of the merger unprofitable for Beeline’s shareholders, it will block the deal, as was the case with Ukrainian Radiosystems,” he said.

Parashiy said that the integration of the networks belonging to URS and Astelit “would save money on network development, allowing the two players to build a common network.” He added that mobile phone service subscribers would benefit from the increased competition introduced onto the market from a merged URS-Astelit network.

Vimpelcom’s Goldin agrees. He said that based on the experience of the Russian mobile communications market, having three national operators with comparable networks competing on the same market has led to a continuing improvement in the quality of their networks while substantially lowering the price of services. However, he said that two operators dominating mobile communications services on a market can create a stagnant situation.