How far will the merger of Romania's 3rd and 5th-placed cellcos shake up the country's mobile market?

In mid-May, as part of a longer piece about M&A activity potentially changing the competitive landscape in Central and Eastern Europe, I noted that Greek telecoms group Cosmote had reportedly reached an agreement with Oger Telecom regarding the takeover of Romanian CDMA mobile operator Zapp.

According to James Middleton of telecoms.com writing today, this deal now seems to have been concluded, with Cosmote buying Zapp under a share purchase agreement worth EUR 61 million. The Greek firm will also assume Zapp’s debt and other liabilities worth in the region of EUR 146 million.

The country's mobile market, the penetration rate of which currently stands at 135.13% according to WCIS, will therefore be contested by four cellcos once Cosmote's Romanian operation is merged with its new acquisition.

Why was Zapp an attractive purchase for Cosmote? After all, the acquired company has just 242,000 of the country's 28.7 million mobile subs, according to WCIS figures. Further, the CDMA network operator has been experiencing a steady decline in its customer base since June 2007, when its number of subs peaked at around 546,000.

As I said in May, the answer lies in the fact that although Zapp had already got into third generation service provision via the deployment of a existing CDMA EV-DO network, the company decided last year to use UMTS/HSDPA technology for its 2100 Mhz network as opposed to CDMA2000. This solves a pressing problem for Cosmote Romania, which was the lone cellco with no 3G proposition.

"This opens up a new cycle of development and a widening of the customer base for Cosmote in Romania, given that the company is acquiring both a third generation license and infrastructure," Cosmote group CEO Michalis Tsamaz said in a statement issued last week.

Alkman Granitsas, writing for Dow Jones Newswires today, rounds up some analyst responses to to deal. Brokerage HSBC Pantelakis Securities, for example, stated that the company had paid "full price" for the acquisition, paying a multiple of 3.4 times 2008 enterprise value-to-sales.

"The main rationale behind the acquisition was (Zapp's) 3G licence with the network currently covering 23 Romanian cities," said HSBC. "Cosmote Romania was the only mobile operator in the country not owning a 3G licence; hence we believe that OTE had to pay a rather full price to effectively acquire such a licence so as to be able to compete more effectively in this highly competitive market."

Certainly, Cosmote must be hoping that the addition of 3G services to its portfolio will sharpen its competitive edge in a market where the Vodafone and Orange branded cellcos have been much more successful to date, with 33.95% and 35.34% market share respectively. Their Greek-owned rival lags some way behind with 22.90% of mobile subs. Zapp aside, only latecomer RCS&RDS has built a smaller share of the market - just 6.97% when the WCIS folks last crunched the numbers.

Perhaps more serious for Cosmote, and presumably partly attributable to its lack of a 3G offering, is the degree to which is under-performs in terms of ARPU. Monthly ARPU for Vodafone and Orange as of 2Q 2008 was EUR 10.30 and EUR 10.33 respectively, according to the most recent Central & Eastern Europe Mobile Market Analysis and Forecasts report from Informa Telecoms & Media. The same report indicates that Cosmote Romania's ARPU for the same period stood at just EUR 4.9. Cosmote was also doing much worse than its rivals in terms of ARPU decay, it's 2Q 2008 numbers being down a hefty 25.8% vs. the figure recorded a year earlier. While its two main competitors had also seen ARPU decline, this was at nothing like such a rapid rate.

It will be interesting to review the updated figures a year from now and see if the Zapp acquisition has represented good value for money for Cosmote.

How far will the merger of Romania's 3rd and 5th-placed cellcos shake up the country's mobile market?