Russians may participate in 3G auction

Russia's largest telecommunication firm, MTS, may be considering a bid for one of three "third-generation" mobile licenses to be auctioned in Latvia this fall, but a spokesman said no final decisions had been made.

"All I can say is that MTS might be looking to expand into nearby markets in the CIS and elsewhere, but I cannot comment directly right now," said Irina Ostryakova from the MTS investor relations department.

Last week, Riga-based newspaper Bizness Baltija reported that Sistema Telekom, one of MTS' two principal shareholders, had expressed interest in the Latvian telecommunication market.

MTS is Russia's largest telecommunication company with licenses to operate in 49 of the country's regions. It reported revenues of $893.2 million in 2001 and some 2.6 million subscribers.

The Latvian government intends to auction a UMTS/GSM license at a starting price of 7.6 million lats ($12.9 million) in September. Two additional UMTS, or 3G, licenses will be offered to the two existing mobile operators, Latvijas Mobilais Telefons, or LMT, and Tele2, at 5.8 million lats.

The licenses will be valid from Jan. 1, 2003 to Dec. 31, 2017.

UMTS is the newest set of mobile technologies that uses high-tech infrastructure networks and handsets and offers high-speed Internet and wireless connections as well as data and video streaming.

Initially, the technology was expected to be launched by 2001, but most countries have postponed opening their 3G networks after the gloomy performance of telecoms on the world market.

The Latvian auction comes amid this global economic slump that has battered telecom companies worldwide.

Many of the world's biggest operators took on a significant debt burden in the bid for 3G licenses and are now in dire financial straits.

Finland's largest mobile operator, Sonera, which owns a 24.5 percent stake in LMT, invested more than 8 billion euros in European third-generation licenses but recently posted operating losses of 2.66 billion euros in the first half of 2002.

The company has abandoned its 3G license in Norway and put a similar project on hold in Spain.

Analysts say this could mean Russian companies will show the most interest in the Latvian license.

"Russian businesses are often better placed to run at lower costs then similar businesses in the West," said Andris Ogrins, regional manager for the Estonia-based Trigon Capital investment bank. "I don't think receiving bids (at this auction) will be a long shot, but I also don't think there will be more than three bidders."

The mobile market in Russia, much like that in the three Baltic states, is growing, with mobile penetration increasing substantially each year.

In Latvia, the mobile penetration rate had reached 27.8 percent but posted a year-on-year increase of some 69 percent. Mobile penetration in Estonia and Lithuania, each of which already have three mobile operators, was 45.5 percent and 25.3 percent respectively in 2001, according to official statistics.

Growth forecasts have Estonia approaching the level of Finland, with nearly 100 percent mobile penetration, by 2005. Latvia is expected to reach 50 percent, Lithuania 65 percent.

LMT, the larger of Latvia's current operators with about a 60 percent market share, posted 2001 profits of 29.8 million lats, outpacing fixed-line operator Lattele-kom's 23.3 million lats.

"The global telecom bubble may have burst, but in the Baltics, the mobile market is booming," said Pauls Platais, director of corporate finance for Hansabank, which is acting as adviser along with the U.K.-based NERA research company and the Grunte and Cers law firm.

A third operator will increase penetration by making for a more competitive market and lower prices, Platais said.

If one or more of the licenses are not sold, the government will take them off the market for 24 months, at which time they will be offered at lower prices, Platais said.

Neither LMT nor Tele2 would comment on the forthcoming auction, but Tele2 spokeswoman Agnese Ekmane said the market was ripe for tremendous growth in the coming years.

"Latvia is a very fast growing market, and I think it is possible to see 50 percent mobile penetration in the coming years," she said.

Both companies have said a third mobile operator would be beneficial in the long run for clients by making the sector more competitive.