Russell BurnettRussell BurnettPeter van KerckhovenPeter van Kerckhoven

Lilly LiLilly LiDmitri SedovDmitri Sedov

TELECOMINVESTTELECOMINVEST

Case Case Set in 1998Set in 1998

Russian telecommunications companyRussian telecommunications company

Seeking capital to expand locally and regionallySeeking capital to expand locally and regionally

Intended IPO but Russian Crisis struckIntended IPO but Russian Crisis struck

Require alternative form of financingRequire alternative form of financing

OverviewOverview Russian CrisisRussian Crisis Telecommunications in RussiaTelecommunications in Russia History of TelecominvestHistory of Telecominvest Telecominvest strategyTelecominvest strategy RisksRisks Case QuestionsCase Questions ValuationValuation Case OutcomeCase Outcome

Russian CrisisRussian Crisis Central Bank withdraws support of RoubleCentral Bank withdraws support of Rouble

Government defaults on short term bonds (GKO’s Government defaults on short term bonds (GKO’s

& OFZ’s)& OFZ’s)

Russian banks and companies heavily exposed to Russian banks and companies heavily exposed to

defaulted bondsdefaulted bonds

Collapse of banking sectorCollapse of banking sector

Russia foreign currency rating downgraded from Russia foreign currency rating downgraded from

B2 to CAA1B2 to CAA1

Telecommunications in RussiaTelecommunications in Russia

Highly centralizedHighly centralized

Developed around a military/defense protocolDeveloped around a military/defense protocol

Overloaded transit and long-distance circuitsOverloaded transit and long-distance circuits

Telecommunications in RussiaTelecommunications in Russia After break-up of Soviet Union:After break-up of Soviet Union:

– fixed-line operations by foreign companies fixed-line operations by foreign companies

prohibited.prohibited.

– Investments through JV popular.Investments through JV popular.

– Svyazinvest formed in 1995 by the government Svyazinvest formed in 1995 by the government

contains controlling stakes in 89 regional contains controlling stakes in 89 regional

communications companies.communications companies.

– Gvt. sold 25% of Svyazinvest for $1.875bn.Gvt. sold 25% of Svyazinvest for $1.875bn.

History of TelecominvestHistory of Telecominvest St.Petersburg Telephone Network (PTN) and St.Petersburg Telephone Network (PTN) and

St.Petersburg International and Long Distance St.Petersburg International and Long Distance

Telephone (SPMMT) form a JVTelephone (SPMMT) form a JV

PTN and SPMMT convert from a JV to “closed PTN and SPMMT convert from a JV to “closed

joint stock holding” company called TCI, (1994).joint stock holding” company called TCI, (1994).

TCI sells 51% to First National Holdings – a TCI sells 51% to First National Holdings – a

Luxembourg registered 100% owned subsidiary Luxembourg registered 100% owned subsidiary

of German Commerzbank AG.of German Commerzbank AG.

Telecominvest OperationsTelecominvest Operations

85%

Internet Internet ServicesServices

36

%

92%87%

Fixed Line Fixed Line CommunicationsCommunications

Business SegmentBusiness Segment

Cellular Cellular CommunicationsCommunications

PayphonesPayphones

DCS-1800 DCS-1800 Production Production Mass MediaMass Media

Cellular Markets Cellular Markets outside St outside St

PetersburgPetersburg

New Markets and ProjectsNew Markets and Projects

60%

Telecominvest OperationsTelecominvest Operations

Cellular Operations

Licensed Territories: 1 279 600 km.10 federal regions.

Population: 13.7m

Penetration: 1.06%

Market share: 84%

Murmansk

Petrozavodsk

Moscow

Helsinki

St Petersburg

Pskov

Novgorod

Vologda

Arkhangelsk

Naryan-Mar

Saransk

Republic of Karelia

Nenets Autonomous Area

Telecominvest StrategyTelecominvest Strategy GoalsGoals

– Expand position as leading telecom provider Expand position as leading telecom provider

in NW region of Russia.in NW region of Russia.

– Increase investments in all associates to at Increase investments in all associates to at

least 51% i.e. consolidate financialsleast 51% i.e. consolidate financials

– Invest in fiber-optic and high-voltage Invest in fiber-optic and high-voltage

transmission networks.transmission networks.

Financing Financing IPO no longer viable optionIPO no longer viable option

Require large financial backerRequire large financial backer

»A non operational partner in order to A non operational partner in order to

maintain operational independence.maintain operational independence.

»Foreign partner providing credibility and Foreign partner providing credibility and

access to foreign marketsaccess to foreign markets

RisksRisks Country RisksCountry Risks

– Rouble devaluationRouble devaluation

– NationalizationNationalization

Company RisksCompany Risks– Profit repatriationProfit repatriation

– Loss of operational controlLoss of operational control

– CompetitionCompetition

ValuationValuation Cost of EquityCost of Equity

– Investigate number of modelsInvestigate number of models

– Each has unique problemsEach has unique problems

Use ICCRC methodologyUse ICCRC methodology

– Ratings slow to react to crisisRatings slow to react to crisis

Yielded cost of equity = 38.8%Yielded cost of equity = 38.8%

Final WACC = 36.6%Final WACC = 36.6%

Estimating BetaEstimating Beta

Country BusinessTax Rate D/E

Unlevered

OTE Greece full service 35 67% 0.66 0.46SPT Telecom Czech Republic full service 35 61% 0.66 0.47MATAV Hungary full service 18 101% 0.63 0.34Vimpelcom Russia pure mobile 35 31% 3.90 3.25Portugal Telecom Portugal full service 37 110% 0.62 0.37Telecominvest Russia full service 35 8% 1.03 0.98

ValuationValuation

Estimated value of TCI’s own and fully Estimated value of TCI’s own and fully

consolidated business = $18,1 millionconsolidated business = $18,1 million

Estimated value of holdings in 3 largest Estimated value of holdings in 3 largest

unconsolidated subsidiaries = $77.8 millionunconsolidated subsidiaries = $77.8 million

Total value of TCI = $96 millionTotal value of TCI = $96 million

Case OutcomeCase Outcome (1999) TCI issues new shares to raise capital. (1999) TCI issues new shares to raise capital.

(1999) FNH pays $12m to TCI for shares (1999) FNH pays $12m to TCI for shares

increasing holding to 75%.increasing holding to 75%.

– Effective value of TCI is $36m. Effective value of TCI is $36m.

(2000) Commerzbank sells 29.5% equity stake (2000) Commerzbank sells 29.5% equity stake

in FNH to Telia of Sweden for $80.4m.in FNH to Telia of Sweden for $80.4m.

– Effective value of TCI is $363m. Effective value of TCI is $363m.

Case OutcomeCase Outcome

22% stake sold for $80.4 million22% stake sold for $80.4 million

Why premium?Why premium?

– Embedded in TCI value is a real option of Embedded in TCI value is a real option of

equipment supply and penetration of Russian equipment supply and penetration of Russian

telecoms industry.telecoms industry.

– Incomplete disclosure Incomplete disclosure

– Inter-company loansInter-company loans

Case OutcomeCase Outcome (2000) FNH increases stake in TCI to 85% (2000) FNH increases stake in TCI to 85%

for $45m. for $45m.

– Effective value of TCI is $450m. Effective value of TCI is $450m.

TCI increases stake in NW-GSM to 45% TCI increases stake in NW-GSM to 45%

for $12m.for $12m.

– Effective value of NW-GSM is $86mEffective value of NW-GSM is $86m

DiscussionDiscussion