Vodafone Group plc (NYSE: VOD) may be eyeing up the rapidly growing mobile market in Russia following its failed bid to take over AT&T Wireless Services Inc. (NYSE: AWE), according to a source close to the operator (see V'fone Withdraws AWE Bid).

The source, who requested anonymity, claims that Vodafone shifted its attentions to Russia once the AT&T plan turned sour, and that representatives of the operator visited Moscow for talks with unidentified parties to sound out options.

The attraction of Russia is obvious, and has already lured others (see Tele2 Touts 11th Russian Net). The economy is in an upswing, the telecom market is liberalizing (if somewhat slowly), and the Russians seem as keen on cellular communications as they are on vodka.

In March this year, Russia's mobile operators signed up 2.23 million new subscribers, taking the total to 42.4 million (29 percent of the market), up from 30 million just last September, according to analysts at Moscow-based J'son & Partners.

But Vodafone spokesman Bobby Leach denies the operator has any specific plan for Russia or that the company has sent anyone to Moscow to engage specifically in market entry talks. "All we've ever said is that Eastern Europe is potentially an area of interest," says Leach.

He says Vodafone is always looking at new markets, "some more than others," and that "we don't declare our interest" ahead of time as it has too great an impact on share prices.

He adds that Russia is not the only fast-growing market where Vodafone is absent, citing Brazil and China as other hot areas that Voodoo has yet to penetrate.

If Vodafone did decide to leap into the Russian market, it would find it difficult to buy a stake in any of the current market leaders, notes Eugene Popov, an analyst specializing in the Russian market at Pyramid Research.

The problem is that some of Voodoo's key rivals hold significant stakes in the three main players in the market, making it tougher to make an acquisition or build a partnership. T-Mobile International AG has a 25 percent stake in current market leader Mobile TeleSystems OJSC (MTS) (NYSE: MBT), which has 37 percent of all subscribers. Telenor ASA (Nasdaq: TELN), which is keen to build a growing presence in the region, holds a 29 percent stake in number two player JSC Vimpel-Communications (VimpelCom) (NYSE: VIP), which currently commands 31 percent of the market. And Scandinavian powerhouse TeliaSonera AB (Nasdaq: TLSN), which is also amassing mobile assets in Northern and Eastern Europe, owns 43.8 percent of the market's third player, MegaFon, which has 18 percent of the market at present.

"These are the only three players with the same caliber as Vodafone, and all three are expanding fast. Making an acquisition would be complex and expensive," reckons Popov.

But it's not as if Vodafone doesn't have the financial muscle, and analysts at Standard & Poor’s expect Vodafone will be involved in some European M&A action in the near future. The telecom team at S&P rates Vodafone as "one of the strongest operators in Europe" in financial terms, as it has high levels of cash flow and strong operating performance from its key assets.

At a presentation in the City of London last week, S&P director Leandro de Torres-Zabala said Vodafone has "good financial flexibility," and noted that it "is keen to extend its footprint." That footprint could be extended in a number of markets, though, with France the most likely location. Vodafone has tried and failed before to take majority control of French mobile operator SFRIn fact the S&P team believes there's room for a lot of consolidation in the European mobile market. De Torres-Zabala noted that there are currently 59 networks (2G and 3G) in operation in the 15 European Union member states (prior to the May 1 expansion of the EU), while the team at S&P believes the markets can only support 44.

Outside Europe, S&P still believes Vodafone's future in the U.S. does not lie as a minority stakeholder in Verizon Wireless. "The trend is to integrate fixed and wireless networks," noted Guy Deslondes, head of the S&P telecom team. "Verizon would love to have Vodafone out of the way so that it can fully integrate its operations."

— Ray Le Maistre, International Editor, Boardwatch