MTS has always looked as Russian as the fur cap and homemade vodka, and that identity became even stronger on Monday with the announced $734 million sale of its Ukrainian business, VF Ukraine, to Azerbaijani investors. Completion of the sale will offload the operator's biggest non-Russian business, with nearly 20 million customers, and leave Russia home to more than 90% of its remaining mobile subscribers.
The company had little to say about the transaction in its official statement, but it does not come out of the blue. In October, MTS declined to comment on mainstream press reports that it was eyeing a sale of VF Ukraine to Bakcell, an Azerbaijani operator. Several weeks later and that same operator has agreed to pay a cash fee that equals about 2.6 times what VF Ukraine made last year in operating income (before depreciation and amortization), and about 1.4 times what it generated in sales (using today's exchange rate).
That seems like a good deal for Bakcell. Despite the tough competitive and regulatory conditions in Ukraine, the MTS business reported near 30% growth in revenues and operating income for the recent third quarter, compared with the year-earlier period. And while customer numbers shrank 0.4% year-on-year, VF Ukraine added a net 200,000 customers in the three months to the end of September, taking its total customer base to 19.8 million.
What looks like a juicy business to Bakcell evidently holds less interest these days for MTS, though. VF Ukraine accounts for just 5.5% of recent quarterly revenues (based on today's dollar exchange rates), and MTS has repeatedly warned investors about the tough conditions in Ukraine when publishing its financial reports.
The operator's focus has also shifted dramatically in the past couple of years. Geographical expansion once seemed nearly as important to MTS as it did to Europe's empire-building service providers. Nowadays, under the leadership of CEO Alexey Kornya, MTS prioritizes Russian supremacy and digital transformation. It remains Russia's biggest mobile operator, with nearly 79 million customers, and has added almost 1 million in the past 12 months alone. Increasingly, it wants to be a platform for the sale of other services to Russian consumers, including banking and entertainment.
"This deal is in line with our revamped strategy to build innovative digital services on top of a strong telecom foundation," said Kornya in a prepared statement. "As our core market, Russia accounts for over 90% of group revenues. Given the small share of our Ukrainian operations in our overall business, we reaffirm our commitment to fulfilling our updated dividend policy and continuing to generate attractive returns for our shareholders."
The $734 million is also a tidy sum for an operator in its position. MTS is far less indebted than many of Western Europe's big operators, but its net debt is growing as a multiple of annual operating income before depreciation and amortization, hitting 1.6 in September from 1.2 a year earlier.
Spending needs are also high. Last year, MTS invested about 18% of its revenues in capital expenditure, a higher ratio than most European operators, and it expects the figure to have remained at that level in 2019, guiding for about 90 billion Russian rubles ($1.4 billion) in overall capex this year. Among other things, it is preparing for the rollout of 5G services in some areas. It also needs to invest in data storage systems to comply with increasingly stringent Russian regulations. In its most recent financial report, MTS estimated it would need to spend an additional RUB50 billion ($780 million) to be fully compliant with this "Yarovaya" law.
Investors seemed to applaud the Ukrainian sale, without getting overly excited. The operator's share price was trading up more than 2% at the time of publication, and at RUB311.80 ($4.88) in Moscow is worth about 26% more than it was this time last year. That's an increase that would delight most other service providers inside or outside Russia.
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— Iain Morris, International Editor, Light Reading