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Euroset - Russia?s costliest mobile phone retailer


Several Russian mobile phone retailers have announced regional expansion plans over the past two weeks. Euroset, Russia?s leading mobile phone retailer, said it was expanding its business to Kyrgyzstan.

The company said it wanted to have branches in all countries of the Commonwealth of Independent States. Euroset also said it had signed several franchise agreements with regional retailers. Retailers? activity is a sign of their rising sales and increasing market value. RBC Daily has made an approximate calculation of the market value of Russia?s key mobile phone retailers.

Russia?s mobile retail market is one of the fastest developing industries in Russia. By Euroset?s estimates, $4 billion worth of mobile phones were sold in Russia in the first nine months of the year, including second-hand phones. Replacement (procurement to replace sold products) was put at 59 percent of total retail sales. The number of real new subscribers who purchased mobile phones increased by 12.3 million from January through September 2005. What?s more, analysts say Russia?s mobile phone retail market is set to grow.

Consolidation on the country?s mobile retail market began long before the August 1998 crisis, after which some retailers faced problems and were acquired by larger players. One example is the Tekhmarket company which was purchased by Euroset. As a result, retailers were divided into rich and poor, and they have adopted different styles of work. Large companies, like Euroset and Svyaznoy, are building up their shops and buying already existing chains. Smaller retailers, among them Tsifrograd and Divizion, prefer franchise agreements. It is more appropriate for such companies to operate using franchising schemes in view of their smaller resources, although Tsifrograd acquired Anarion.

Most mobile retailers are not public companies (as a rule, they are either closed corporations or limited liability companies), and they do not disclose their market value. But this does not mean that it cannot be calculated.

"When calculating the market value of a company, we should understand what factors our assessment is based on: number of shops, property, sales, etc.," Eldar Murtazin, chief analyst at Mobile Research Group, told RBC Daily. Market experts offer different methods of determining the market price of a mobile retailer. One of the simplest methods is based on multiplying the average value of a mobile phone shop - between $10,000 and $25,000 - by their number.

"We can assess the capitalization of a mobile retailer based on the number of its shops, franchising not taken into account, putting the value of each shop at $11,000. This is the lowest price for shops rented by a retailer," Murtazin said. "For large companies with a high recognition rate, such as Euroset and Svyaznoy, we should also add their brand value. For second-tier companies, brand does not have any significant impact on their value."

Thus, by different estimates, the value of the Euroset retail chain, numbering about 2,300 shops, is put at between $110 million and $140 million. Euroset?s closest rival Svyaznoy, with about 720 shops, was valued in the range of $30 million to $40 million.

"In terms of sales, Euroset is the leader, followed by Svyaznoy and smaller companies. It is difficult to estimate the sales of franchise chains. Our company assesses them based on procurement," Murtazin told RBC Daily.

Sergei Kolyada, chief editor of Sotovik, Russia?s leading online agency specializing in mobile market news, pointed to another several factors affecting the value of mobile phone retailers. "We have to take into account shops? own sales areas, their inventory stocks and the amount of managerial work, adding together inventories and multiplying the number of rented shops by costs spent on searching available sales areas and redecorating them in accordance with a company?s style," he told RBC Daily.

However, most merger and acquisition analysts polled by RBC Daily say the value of retail shops is calculated in the following way: EBITDA is multiplied by a payment coefficient called a "multiplicator", and a company?s debts are subtracted from the result. The amount of a multiplicator depends on the size and effectiveness of a company, not least on its financial transparency. For Euroset, the coefficient can be 6, for Svyaznoy - somewhat lower, and for second-tier companies it will be not higher than 3.

Russian mobile retailers borrow a lot from banks and on securities markets, observers say. Euroset, Svyaznoy and other retailers have already issued promissory notes and bonds. "On average, each company?s debt is about $10 million," Kolyada estimates. Other analysts give higher estimates, between $30 million and $40 million. "Many second-tier companies borrow a lot, which can lead to cash shortages," an analyst at a large Russian bank told RBC Daily. "Their value can be very low, and such companies are shunned by serious investors," he added.


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