Market Insight

Russian top cable players ER Telecom and Akado planning to merge

July 17, 2013


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Russia's third largest cable TV player and broadband provider, PFIG-owned ER-Telecom, has applied to the Russian Antimonopoly Agency (RAA) for the approval for its acquisition of the country's fourth largest cable TV player, Akado. RRA is expected to make a decision by the end of August 2013. According to local sources, ER Telecom will pay $1bn for Akado, including Akado's $390m debt, and the deal will be financed with support from Russian bank VTB.

Akado was put on sale already for a few times in recent years, attracting attention from companies such as telco Megafon, cable TV player National Media Group, and recently also from telecoms and pay TV operator MTS; nonetheless, no deal has been concluded.

ER Telecom provides its services in 56 cities, primarily in the South and Central regions of the European part of Russia. Akado is active in Moscow, St. Petersburg and Yerevan; the group is owned by Victor Vekselberg (through Renova Group, owing 67 per cent of Akado's shares), and Juryi Pripachkin (holding a 33 per cent stake in the company). Akado also has a stake in Belarusian cable TV and pay DTT provider, CosmosTV (50 per cent-owned by Renova Group).

In 2012, the Akado Group made Ru11.2bn (about $350m) revenues (9 per cent up y-o-y), with EBITDA short of Ru4.3bn (about $130m) - 25 per cent up y-o-y. ER Telecom generated in 2012 Ru13.9bn (about $430m), increasing 43 per cent y-o-y, EBITDA 956m (in 2011 published a negative EBITDA Ru513m).

According to IHS Electronics & Media, at the end of the first quarter 2013, ER-Telekom had about 2.4m cable TV customers, over 2.5m Internet subscribers, and short of 0.5m telephony subscribers. In the same quarter, Akado provided cable TV services to about 1.2m homes, and Internet to about 0.8m homes.

It remains uncertain whether ER Telecom is looking to buy the whole Akado Group, including its Belarusian assets, or just the Russian operations; however, the primary focus will almost certainly surround taking over Akado's networks in Moscow.

Until now, ER Telecom has been focusing on Russia's outlying regions, although recently it has launched its operations also in some major cities, including St. Petersburg and Yekaterinburg. The acquisition of Akado may mean a major change in the company's strategy, as so far ER Telecom has been growing primarily by rolling out its own networks, which has thus far been a successful approach to the market. The operator grew from just 0.35 million RGUs (revenue generating units) in 2006 to 5.4 million in the first quarter of 2013. Assuming the acquisition proceeds, ER Telecom will assume a 20 per cent share of the Russian pay TV sector; in Moscow the company will rank as the second largest cable TV player and the third largest Internet provider.

ER Telecom is already the third largest broadband provider across Russia as a whole, with 11 per cent of the market's broadband subscribers at the end of 2012, just ahead of Vimpelcom's Beeline. Acquisition of Akado will provide ER with a further 4 percentage points of market share, placing it neck and neck with the second largest ISP in Russia, Stream. Rostelecom remains the country's largest broadband service provider, with nearly 40 per cent of the market.

At the same time ER Telecom's digital TV services, provided under the brand DomTV.ru, have been growing very slowly. The service was launched already in 2006, however, at the end of 2012 it had just 30,000 digital TV subscribers. The digital offer has been continually improved - currently there are about 90 digital channels, including over 40 in HD - and the coverage has been extended - now ER Telecom provides digital TV in about 30 cities - nonetheless, the demand for digital TV has been relatively low. Generally, although the penetration of digital TV across other major cable TV players is much higher, just 11 per cent of total cable TV subscribers in Russia receive digital TV services. Akado, in contrast to ER Telecom, invested considerably in digital roll-out back in 2007 and 2008, and with attractive promotions has gained about 400,000 digital subscribers, but due to the recession in the following years, investment was put on hold, and only recently has the strategy been resurrected. In 2012 the company decided to make an investment of Ru2.4bn (about $80m) in network development.

With a relatively low multichannel penetration in Russia (according to IHS Electronic Media, about 75 per cent of Russian homes as of the end of March 2013), large cable TV players are still more interested in investing in growth in terms of subscribers, rather than in rolling out and promoting digital TV. Competition with cable is coming primarily from low-budget offers on satellite, provided by Tricolor and TeleKarta, and also from growing DTT platform reach. However, this competition is accelerating the uptake of multichannel services - by the end of 2014, according to IHS Electronics & Media, penetration of multichannel TV will reach short of 90 per cent of homes, making further growth in terms of subscribers more difficult. It is at this point that operators will have to focus more significantly on ARPU growth and further rollout of digital TV services. 

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