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Leap Wireless Russian Venture to Invest up to $8 Bln (Update1)
Leap Wireless Russian Venture to Invest up to $8 Bln (Update1) (Adds detail about Russian partner, comment.)
Moscow, Feb. 25 (Bloomberg) -- Leap Wireless International Inc., a U.S.-based telephone network operator, said its Russian joint venture will spend up to $8 billion over ten years to install phone networks in Russia's regions, stretching across 11 time zones.
The project to install wireless phone networks in more than 50 of Russia's 89 regions already shipped $100 million worth of equipment and will double that figure by year end. While most investors are shunning Russia after the ruble's collapse in August, Leap sees profits. ''If you are at all entrepreneurial in your view of the world, this is a good time to invest in Russia,'' said Tom Bernard, executive vice president of San Diego, California-based Leap Wireless International in an interview. ''Russia has a huge pent-up demand for telephone service, and cash is the problem.''
The joint venture, Metrosvyaz, is 50 percent owned by Leap and Tiller International and 50 percent owned by Russia's Tass Telecom, a subsidiary of the Itar-Tass news agency. Its chairman is Anthony Georgiou of Tiller International, who set up another Russian phone company, the PeterStar joint venture in St. Petersburg. PeterStar is 71 percent owned by PLD Telekom Inc., which is based in New York and has several partnerships with phone companies in the former Soviet Union.
Metrosvyaz is installing wireless CDMA phone systems in four regional phone companies and is set to install at least six more in the next half year. In all, Metrosvyaz is in talks with 15 regional phone companies. ''We are providing 100 percent of the capital required to not only design, build and support'' the stations regionally ''but to run the businesses,'' said Georgiou in an interview.
Far-Flung
Russia's regions, stretching from Kaliningrad in the west to Magadan in the far east, are plagued by low-quality, unreliable phone services. Just 19 households out of every 100 in Russia has a phone, compared with 60 per 100 in the U.S., and wireless phone systems could be the way to hook up individuals waiting for phone services. The system uses a wireless local loop application instead of a copper wire to connect people's phones with the local switching office.
Bernard of Leap said the technology, called CDMA, or code division multiple access, is a cost-effective way of giving residents in the farthest reaches of Russia better quality phone service while increasing the number of people with phones. ''If you are a phone company and want to expand, it's quicker to do it with a wireless system, particularly when you get out into regions, wireless is much more cost effective,'' he said.
Metrosvyaz has pledged $500 million to kick off the project, which aims to install 30 million wireless lines in ten years. For now, the venture is thinking small, with the first stations being built to accommodate 10,000 users, as opposed to the original intention of 30,000 user stations.
Total Cost
Total cost of the venture is estimated at as much as $8 billion, the majority of which will be raised ''by way of debt and equity,'' Georgiou said.
Metrosvyaz keeps 50 percent stakes in the joint ventures it forms with regional telephone companies, he said. It is now working to install stations in the Saratov, Krasnodar, Chelyabinsk, and Leningrad regions.
Despite the government's August default on its Treasury bonds and the subsequent 70 percent plunge of the ruble, Metrosvyaz is pushing ahead with plans to install networks. Georgiou said the company shipped $30 million worth of equipment the week after Aug. 17, the day of the government's debt default. ''The reality is that nothing that's happened to the economy has affected what we have been doing,'' he said. ''We are comfortable that our plan was conservative enough to start. We have been able to ride with the current situation quite comfortably.''
Spun Off
Qualcomm Inc., a U.S. wireless phone equipment producer which spun off its operating business to Leap in September 1998, will supply much of the equipment. So far, the Russian government has not granted a cellular license for the CDMA technology, but that could come this year, said Sergei Svirida, technical assistance director in Metrosvyaz's Moscow office.
The project seeks to cash in on the demand for phone service in Russia, where phone lines are notoriously low-quality. Metrosvyaz is confident it will make money, while providing a much-needed service. ''It's a good opportunity because in the long run it will provide profitability and you are doing something that's needed. We're not selling hula-hoops,'' Bernard said.
Leap shares fell 2.2 percent to 5 9/16 yesterday. Qualcomm shares fell 1.2 percent to 72 3/4.
Brian H. |
