"Location, location, location," recite the realtors. "Smaller, faster, cheaper," reply tech leaders like Intel and Apple. But what do the worker bees at Verizon (NYSE: VZ ) and AT&T (NYSE: T ) chant as off to work they go? Judging from history, I'm betting their mantra is something like: "Grow, scale, monopolize."
That does seem to be the strategy du jour of the telecom industry -- and not just here at home, but in the rest of the world as well. In the former Soviet Union, we learned earlier this week that Russia's leading mobile phone operator Mobile TeleSystems (NYSE: MBT ) has just entered the Armenian telecom market.
Following the lead of Russian archrival VimpelCom (NYSE: VIP ) , which spent $474 million to acquire fixed-line and mobile telephone operator Armentel last year, MTS has agreed to purchase an 80% stake in K-Telecom, which owns Armenia's VivaCell mobile service. Paying $361 million up front, with as much as $69 million more over the next three years (if VivaCell meets certain unspecified financial targets), and extending a $194 million loan to pay off K-Telecom's debts, MTS is valuing VivaCell's current customer base at $791 per head, according to analysts at the Aton brokerage house.
That's a hefty sum when you consider that the average customer in the markets MTS serves generates just less than $120 a year in revenue, let alone profit. All the more so when compared to what it costs MTS to acquire a customer organically -- just less than $30 in the most recent quarter. But really, what choice does the company have? Judging by the standards of Russian telecom math, there's no place left to grow in the home market. This market's not just saturated, it's supersaturated, with 110% mobile penetration back home in Russia.
But Armenia's market is relatively untapped, with mobile penetration at just 39%, and VivaCell owns two-thirds of that pool. By buying control of K-Telecom, MTS not only gains entry into a largely untapped new market, but also takes the pole position in said market.
Whether that's enough to justify the purchase price, time will tell. But with the market back home in Russia tapped out, MTS doesn't have any place left to "grow, scale, and monopolize" -- except abroad.
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