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Articles & publications
14.05.2010
Rostelecom gains an ally: operator set to take over Orion ExpressKommersant, Inna Erokhina
Russia’s largest LD operator Rostelecom has taken an interest in the paid-TV market. As Kommersant learned, the company is conducting negotiations aimed at taking over satellite operator, which provides services under the Eastern Express and Continent brands. By 2015, Rostelecom expects to control 15-20% of the paid TV market, which has an estimated value of $1 bln.
Kommersant learned from several sources close to the transaction that Rostelecom is conducting negotiations aimed at purchasing Orion Express. The plan is initially during the course of an additional share issue to acquire only a 10% stake in the company for $4 mln (these funds will be invested into the operator), while the parties will conclude a 3-year option to buy out the remaining 90%. This is a startup for Rostelecom, so it makes sense to enter the asset gradually. If the project proves successful, when the 3-year option expires equity stakes could be bought up from the other shareholders at their market value at that time. Vice versa, the company could return its 10% stake for the acquisition price.
A separate condition of the deal is that Rostelecom should help Orion Express secure a $30 mln loan or guarantee the return of these funds to the bank, which means that in this case a 90% stake would be pledged to Rostelecom. Kommersant’s source at Svyazinvest (controls 51% of Rostelecom) went on to say that the parties have signed a protocol of intentions and Svyazinvest is currently performing a due diligence. People at Rostelecom’s press service declined to comment until the end of the transaction. The general director of Orion Express Alina Kurakina confirmed that the negotiations are taking place.
Since 2005 Orion Express has been providing cable network services to operators and the company entered the mass market in July 2007. At the end of last year Orion Express had a subscriber base numbering 130,000 with a market share of about 2%. The company’s 2009 revenue stood at approximately $16.5 mln with total debts amounting to over $20 mln. The main shareholders include Finprombank and private investors.
At present, Svyazinvest has about 590,000 cable television subscribers and 160 IPTV customers (4% of the market with 2009 revenue including subscriber equipment amounting to about $51 mln). The acquisition of Orion Express represents entry into a promising market for Rostelecom. We expect to see synergy created between the satellite platform in remote regions and IPTV which is popular in resort cities”, says Igor Pshenichnikov, head of Svyazinvest’s information department.
Based on estimates made by the holding’s consultants, the satellite TV market is growing by an average 14% per year, and there should be 12 mln satellite TV households. Svyazinvest had been looking to tap foreign experience, Mr. Pshenichnikov went on to say. Rom Telecom (Czech Republic) launched its satellite TV platform in 2006 (currently 850,000 subscribers), Portugal Telecom with 47,000 subscribers in 2008 raised its subscriber base to 530,000. A source close to Svyazinvest points out that Rostelecom aims to command 15-20% of the paid TV market by 2015.
“The satellite television market is growing by leaps and bounds, but this segment of the paid TV market is a highly specific business and enjoys demand mainly in remote and hard-to-access areas”, according to the Vice President of Comstar Viktor Koresh. He believes that it will be not be easy for the holding to conquer 20% of the paid TV market: “In order to achieve this goal it will be necessary to raise the number of channels available, which would require Rostelecom to completely rebuild its transport and distribution network. Right now Svyazinvest’s subsidiaries run on ADSL technology, whereas a broader transmission bandwidth would be required for TV channels”, Koresh emphasized.
According to McKinsey’s estimate, paid television (cable and satellite TV and IPTV) covers 40% of households with an aggregate turnover of $1 bln. According to 2009 data, the total coverage of satellite coverage amounted to 5.4 mln households, with a market value of $350 mln. Elena Krylova, an analyst with iKS-Consulting, believes that 100% of Orion Express could be worth $75-80 mln, with the satellite operator’s average subscriber acquisition cost (SAC) equal to $600. In February, Swedish media holding Modern Times Group (MTG) acquired 50% of Russian satellite operator Dalgeocom (Raduga TV brand with 70,000 subscribers as of year-end 2009). 100% of Raduga TV has an estimated value of $45 mln.
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