Russell Burnett

1
TELECOMINVEST

• Russell Burnett
• Peter van Kerckhoven
• Lilly Li
• Dmitri Sedov

2
Case

• Set in 1998
• Russian telecommunications company
• Seeking capital to expand locally and regionally
• Intended IPO but Russian Crisis struck
• Require alternative form of financing

3
Overview

• Russian Crisis
• Telecommunications in Russia
• History of Telecominvest
• Telecominvest strategy
• Risks
• Case Questions
• Valuation
• Case Outcome

4
Russian Crisis

• Central Bank withdraws support of Rouble
• Government defaults on short term bonds (GKOs
  OFZs)
• Russian banks and companies heavily exposed to
  defaulted bonds
• Collapse of banking sector
• Russia foreign currency rating downgraded from B2
  to CAA1

5
Telecommunications in Russia

• Highly centralized
• Developed around a military/defense protocol
• Overloaded transit and long-distance circuits

6
Telecommunications in Russia

• After break-up of Soviet Union
• fixed-line operations by foreign companies
  prohibited.
• Investments through JV popular.
• Svyazinvest formed in 1995 by the government
  contains controlling stakes in 89 regional
  communications companies.
• Gvt. sold 25 of Svyazinvest for 1.875bn.

7
History of Telecominvest

• St.Petersburg Telephone Network (PTN) and
  St.Petersburg International and Long Distance
  Telephone (SPMMT) form a JV
• PTN and SPMMT convert from a JV to closed joint
  stock holding company called TCI, (1994).
• TCI sells 51 to First National Holdings a
  Luxembourg registered 100 owned subsidiary of
  German Commerzbank AG.

8
Telecominvest Operations
92
85
87
Payphones
Fixed Line Communications Business Segment
Cellular Communications
36
60
Cellular Markets outside St Petersburg
Internet Services
Production
Mass Media
DCS-1800
New Markets and Projects
9
Telecominvest Operations

• Cellular Operations
• Licensed Territories
• 1 279 600 km.
• 10 federal regions.
• Population 13.7m
• Penetration 1.06
• Market share 84

10
Telecominvest Strategy

• Goals
• Expand position as leading telecom provider in NW
  region of Russia.
• Increase investments in all associates to at
  least 51 i.e. consolidate financials
• Invest in fiber-optic and high-voltage
  transmission networks.

11
Financing

• IPO no longer viable option
• Require large financial backer
• A non operational partner in order to maintain
  operational independence.
• Foreign partner providing credibility and access
  to foreign markets

12
Risks

• Country Risks
• Rouble devaluation
• Nationalization
• Company Risks
• Profit repatriation
• Loss of operational control
• Competition

13
Valuation

• Cost of Equity
• Investigate number of models
• Each has unique problems
• Use ICCRC methodology
• Ratings slow to react to crisis
• Yielded cost of equity 38.8
• Final WACC 36.6

14
Estimating Beta
15
Valuation

• Estimated value of TCIs own and fully
  consolidated business 18,1 million
• Estimated value of holdings in 3 largest
  unconsolidated subsidiaries 77.8 million
• Total value of TCI 96 million

16
Case Outcome

• (1999) TCI issues new shares to raise capital.
• (1999) FNH pays 12m to TCI for shares increasing
  holding to 75.
• Effective value of TCI is 36m.
• (2000) Commerzbank sells 29.5 equity stake in
  FNH to Telia of Sweden for 80.4m.
• Effective value of TCI is 363m.

17
Case Outcome

• 22 stake sold for 80.4 million
• Why premium?
• Embedded in TCI value is a real option of
  equipment supply and penetration of Russian
  telecoms industry.
• Incomplete disclosure
• Inter-company loans

18
Case Outcome

• (2000) FNH increases stake in TCI to 85 for
  45m.
• Effective value of TCI is 450m.
• TCI increases stake in NW-GSM to 45 for 12m.
• Effective value of NW-GSM is 86m

19

• Discussion