History of Telecominvest



On October 12th 1998 CEO of Telecominvest and his young energetic CFO were in New York, continuing their meetings with international institutional investors. The CEO was scheduled to speak at the investor conference at the New York offices of CAIB Investmentbank AG, which hosted the conference. For both men this was the first time they appeared in front of an audience of portfolio investors, and they were looking forward to acquainting the world with Telecominvest and the post-crisis business environment in Russia in October 1998. The CFO was also eager to make sure that his new boss understood the importance of these meetings and saw how different they were from industry and hardware supplier-oriented events.

When introduced to an international equity analyst from one of the leading investment companies, the CEO of Telecominvest was disappointed to learn that the analyst had never heard of Telecominvest and its business before. Having spoken at international industry and supplier conferences almost on a monthly basis and having made extensive connections among Western European telcos, the CEO was bewildered with his discovery. A leading telecom player in the northwest Russia and St. Petersburg in particular and a relatively small private company, it was completely unknown in the universe of emerging markets financial investors. Clearly, whatever the CEO and the company board had in plans for Telecominvest, they had a long way ahead of them[1].

Introduction

Telecominvest is a holding company with investments in telecommunication businesses in North-west Russia. Backed by its influential shareholders, St. Petersburg telephone Network, St.Petersburg Long Distance and International Telephone Company and First National Holding S.A. – a Luxembourg affiliate of Commerzbank A.G. of Germany, the company developed rapidly, creating and occupying niches in most lucrative segments of telecommunications industry. At the end of 1998 the TCI group had a 65% share of the cellular market outside St. Petersburg, 88% of the cellular market of St. Petersburg, 9% of fixed line telephony, 22% of the internet services and operated 94% of St. Petersburg’s payphones.

With a number of important investments planned on the holding and subsidiary company levels for the not so distant future, the main challenge for Telecominvest management was to secure the sources of long-term financing. This task was especially difficult; given the after-crisis stock market conditions at the end of 1998, extremely negative sentiment of portfolio investors towards Russia and potential conflicts of interests between strategic partners of Telecominvest.

Russian Economic and Political Situation in 1998

Political and Economic Transformation

Before 1985 Russia was a centrally planned economy. In April of 1985, Gorbachev came into power with an understanding that something had to be done about the collapsing economy. In 1986 Gorbachev proclaimed perestroika and glasnost and in 1987 decentralized economic decision-making. In an address to the nation on December 25, 1991, President George Bush declared that "the United States recognizes and welcomes the emergence of a free, independent, and democratic Russia, led by its courageous president, Boris Yeltsin". By the end of December the Soviet Union had been dissolved, succeeded by 12 newly independent states. Boris Yeltsin was elected President of Russia, the largest of the new states. As president of the Russian Federation, he held much of the power over Gorbachev who had been elected President of the Soviet Union in 1990.

In January of 1992 prices were freed leading to a tripling overnight. Three and four figure inflation followed through to 1995, coupled with a constant decrease in output. In June 1992 Russia was admitted as an associate member to the group of major industrial powers, the G7, with the right to attend meetings as an observer. Unhappy with observer status only, Russia is seeking formal admission and a name change from the G7-plus-one, to the G8. In 1997 Russia joined the Paris Club of creditor nations, and undertook a deal in which it agreed to reduce its claims on third-world debtor nations from 100% to 75%, in exchange to win back some of the $140bn lent to Soviet allies during the cold war.

A multi-tier economy has developed in Russia. The old state sector, which is now largely privatized, has three tiers. The first tier is primarily oil and gas production. This sector showed small declines (5-10%) and is now growing at 3-5% a year. The second tier includes electric utilities, telecommunications, weapons and the chemical industry. These industries are growing slowly after a decline of 20-30%. The third tier is the rest of old state economy. It is comprised of textiles, apparel, agriculture and manufacturing. These sectors have declined by 80-90% and are still declining. The entrepreneurial sector, outside of the former state economy, is burgeoning and there is money to be made. The sector is spreading into telecommunications and parts of manufacturing.

Economic Crisis

The economic crisis had been building throughout 1998 starting with the crash of the Russian stock market in mid-1998, coming to a head on August 17th as a result of key decisions made by Prime Minister Sergei Kiriyenko’s reformist government. Significantly, the Central Bank widened the scope of currency fluctuation it was prepared to accept before intervening in the market. Currency speculators had spotted a weakness in the Russian economy, and the central government could no longer to artificially support the Ruble without dramatically affecting the foreign reserve position of the state. In mid-August the Ruble was trading at Rb7/$1 but plunged to a low of Rb20/$1, finally stabilizing at Rb16/$1 after an unexpected intervention by the Central Bank. Adding to the currency crisis, in August 1998 the government unilaterally extended the maturities of short-term government bonds (GKO’s and OFZ’s) from 3-three months to maturities ranging from 3 to 5 years yielding between 20-30%. In so doing, the government had effectively defaulted on Rb281,000m of government debt, (equivalent to $43bn). Investors wishing to convert bonds to cash received one fifth of the value. Some foreign investors were hurt, but more importantly, it hurt the Russian banks. The banks were heavily exposed to the GKO market causing many banks and inter-bank operations to freeze. A three-month moratorium was placed on Russian banks’ debt repayments to foreign lenders. Many small banks were lost, with larger banks being saved by the government with little regard to private depositors losses. Within two weeks the Ruble lost two thirds of its value.

Shortly after the crisis, international economists and investment banks operating in Russia were making rather gloomy predictions of the future economic situation. The obvious concerns were the exchange rate and the inflation rate. The consensus year-end exchange rate forecast in October-November 1998 was Rb32/1$ in 1999 and Rb70/1$ in 2000.

The Russian economy relies heavily on commodity exports for foreign revenue, and it was largely believed that fall in world commodity prices was in part to blame for the economic collapse. The fall in prices impacted on Russia’s foreign exchange reserves and placed the government in a debt repayment crisis. To many Russian companies, the crisis was a double-edged sword, companies held funds in the defaulted short-term government bonds and thus lost much of their investments. Moreover, the rapid depreciation of the Ruble led to a huge increase in the cost of purchasing equipment from foreign countries. The EIU forecasts that Russia’s economy would have shrunk 5% by the end of 1998. Within a single week in August, the reformist government ceased to exist and was replaced by the new government of Yevgeny Primakov. Since taking office, Primakov has brought a measure of stability to the economy and has appealed for the restructuring and refinancing of both Russian and Soviet debt.

Investment Risks and Concerns

After the crisis, Moody’s investment service cut Russia’s speculative-grade foreign currency rating from B2 to CAA1. It also downgraded its long-term foreign currency deposit ratings for 11 Russian banks, and lowered its financial strength ratings from D+ to E+ for 8 banks. The economic crisis has thus far not changed the fundamentals of the government’s privatization policy and the first deputy prime minister in charge of the economy, Yuri Maslyukov, stated that there would be no nationalization and no return to the planned economy. However, the Duma (Russian Parliament) set up a committee to review controversial sell-offs of state assets between 1995 and 1997, as well as considering a new “re-nationalization” bill that could reverse many of the post-soviet privatizations. The bill would have a range of criteria allowing it to renationalize companies. One criterion was a firm with “special significance to state interest”; another was a firm with a dominant position in the market. The government has launched a number of suites against winners of investment tenders that failed to keep their pledges to invest in privatized companies. Russia has cancelled the proposed sale of a stake in telecommunications giant Svyazivest in October 1998.

The implication of the financial crisis of 1998 on the financing opportunities for both new and established companies was devastating. Public equity markets, both domestic and international were closed for Russian companies; western commercial lenders hardened their requirements, making bank borrowing prohibitively expensive. Russian commercial banks were struggling to survive and keep at least some of their assets. Only two categories of investors remained remotely interested in investing in Russian companies, strategic investors and private equity investors to a lesser extent.

The strategic investors would only invest if they felt that they could participate actively in managing the investee companies and possibly gain control in the longer term. Private equity investors in emerging markets were known as high-risk takers, but even they were skeptical about the Russian economy. For potential investors, the critical question regarding investing became the investing strategy, and the use of offshore financial structures that would allow the investment to be governed by corporate laws of more stable jurisdictions (Cyprus, Luxembourg, Jersey, Guernsey, Isle of Man, etc.), the optimization of taxation and the repatriation of company profits.

Telecommunication Industry in Russian Federation

History

The current Russian telephony infrastructure is a carry-over from the highly centralized telephone network that was built around the defense and security needs of the former Soviet Union. By 1994 Russia ranked 33rd in the world, and 21st in Europe for telephone penetration at approximately 14 telephones per 100 persons. There were only 27.6m telephones in Russia at the end of 1996, of which 19.7m were private, compared to 36m in Spain, 44mm in Belgium and 69m in Switzerland.

Telephone links were prioritized towards the center of the network while inter-regional links were neglected. As a result of this, the ability to direct calls between regions, while avoiding the necessity of being connected via the center, remains extremely limited. This in turn dramatically hindered the economic growth in regional markets. A trunk backbone capable of providing network expansion on a nation-wide basis has not been developed in Russia, and as a result expansion into the rural regions is slow and expensive. Residential telephone service was traditionally regarded as a social service and not a commercial enterprise and was mostly free of charge; while long distance and international call facilities available to the general public were firmly restricted. Accordingly, telephone users in Russia were used to poor quality, inexpensive telephony service.

The low priority afforded by the Soviet state to improving the public telephony service during the cold war era has left the network in a technologically poor state. Many exchanges on the long distance network based on the electromechanical system and significant portions of long distance calls are manually switched

Telecommunication in Russian Federation after Privatization

After the breakup of the Soviet Union and subsequent liberalization of the former republics, the demand for telecommunications services in both private and public domains has grown significantly. The government telecommunications sector has experienced substantial difficulties in meeting this demand and has actively encouraged market liberalization, privatization and foreign investment in the telecommunication industry.

The transition to a market economy and the liberalization of the telecom sector has resulted in the appearance of a number of new operators in the Russian telecom space. Under the new regulations, foreign companies are prohibited from full ownership of the regional fixed line operations, however, companies such as Siemens, Acatel (France), Ericsson (Sweden) and US West (USA) are all active in the local market through joint ventures with local companies. Another way these foreign companies participate in the market is through the offering of credit and lease agreements for telecom equipment. Under this arrangement the central government has issued over 600 new licenses to these joint ventures. This investment has resulted in dramatic growth in the regional development of fixed-wire overlay systems, private networks, cellular and data services.

Regional telecommunication companies are investing heavily in their infrastructure, making use of government financing where possible, but resorting to foreign investment and partial ownership in most instances. By mid 1998 it was estimated that approximately $750m of foreign direct investment had been directed towards the telecommunications sector. This was however only a fraction of the estimated $100bn that was needed to bring Russia’s antiqued network up to world standards. There are currently no restrictions on cross-holdings between cellular and regional fixed-line companies, as a result, several regional fixed-line operators have established cellular subsidiaries or have invested in joint ventures with foreign cellular companies.

By 1991 approximately twenty new licenses had been issued allowing companies the right to operate in the lucrative international service market, effectively ending the monopoly previously held by state owned Rostelecom. The government does however own a controlling stake in 89 regional communications companies and in Rostelecom through the holding company Svyazinvest. In July 1997, the government sold 25% plus 1 share of Svyazinvest for $1.875bn to Mustcom Ltd, a Cyprus based company representing the interests of several investment funds.

The Russian government took an important step in securing foreign investment in the telecommunications industry by passing a new set of laws that would govern the industry moving forward. The law promulgated on February 23, 1995 effectively removed regulatory power from the government and placed it in the domain of established law practice. The new regulations placed control of the Russian telecommunications network in the hands of investors and local citizens. It also established a number of important principles in the sector including, but not limited to, the guarantee of equal access for all providers of services and safeguards for private business activity in the sector. More importantly, the Law extended these principles to foreign companies and individuals, further encouraging their participation in the market. In September 1997 the regulatory body was centralized and the new State Committee on Information and Telecommunications replaced the old Ministry of Telecommunications. This new body was responsible for the issuing licenses for both mobile and fixed line networks, and the allocation of frequencies for cellular and radio operations.

Telecommunications in St.Petersburg

Under Stalin, Moscow, and later St. Petersburg telecommunications were upgraded as part of the military strategic objective. This upgrading consisted primarily of the installation of new copper wire lines. The local St. Petersburg network did not received much attention after this until the arrival of foreign business in the early 1990’s. The local networks were incapable of supporting clean and uninterrupted data transmission, leading to an investment in digital overlay networks and fibre-optic links. As a result of the high installation costs, these digital and fibre links are aimed at the lucrative high-volume business market and wealthy individuals.

St. Petersburg Telephone Network (PTN) operates a portion of the telephone network serving St. Petersburg and the surrounding region. PTN has 1,8m lines in operation, amounting to a nominal penetration rate of 36%. The intra-city traffic is carried through a network of 34 transit exchanges distributed throughout the city, and connected to each other in a cobweb fashion. This network is outdated and overloaded resulting in heavy congestion, interference, and poor transmission quality. Currently only 17% of PTN’s exchanges are digital/electronic, and some of its equipment is over 40 years old.

PTN routes long distance traffic through a gateway exchange operated by St. Petersburg International and Long-distance Telephone Company (SPMMT). This traffic is then passed to the Rostelecom’s long distance network for delivery to the rest of the Russian Federation and international destinations. SPMMT operates as the gateway for international calls to and from St. Petersburg, and it has a number of options for the forwarding of these international calls. Calls can be directed to an international gateway controlled by St. Petersburg International, a joint venture between British Telecom and SPMMT, and then via direct satellite connection to UK. Alternatively, SPMMT has access via Rostelecom to the undersea cable between Russia and Denmark for international traffic. Finally it has the option to route international traffic through the international gateway in Moscow.

History of Telecominvest

After the fall of communism in the late 1980’s, it became apparent to senior officials in the state owned and controlled regional telecommunication companies, that things were about to change. As evidenced around the world, the burden on the state of trying to restructure faltering economies was just to high. This left the central government with little option but to rationalize traditional state owned operations wherever possible. The emergence of the Russian Federation into the western economic system had not been achieved without financial cost, both in absolute terms and through currency pressures. The central government was in desperate need of foreign reserves in order to support and reconstruct elements of the economy that were of national importance. This environment created the perfect opportunity for the major telecom companies in the North-West of Russia to combine forces in some way. Petersburg Telephone Network (PTN) and St. Petersburg International and Long Distance Telephone (SPMMT) established a number of joint ventures with western telecommunications companies and thus expand its mobile operations and to bring newer telecom technologies to St. Petersburg.

The geographic area in which both PTN and SPMMT operate plays an important role in the strategy of the JV and its partner selection. The close proximity to the Nordic countries of Finland and Norway has an important impact on the mobile capabilities and specifications required. It made sense for the expansion of mobile communications to follow the GSM 900/1800 spectrum. This was the dominant platform used in Europe and would allow telecom companies the ability offer a roaming service for business travelers going to and coming from the Nordic countries and the rest of Europe. St. Petersburg being the closest city to the Nordic region is the city of choice for investment of many Nordic companies. Mobile roaming and network coverage is thus an important factor to consider. In addition to the roaming factor, revenue for roaming is USD based and forms an important source of foreign revenue for any telecomm company. Based on these factors JV’s were formed with western companies that included, but not limited to; Media One (USA), Telecom Finland, Great Nordic (Denmark), PLD Telecom (USA)

It soon became apparent to the management of both PTN and SPMMT that in order to fully exploit the telecommunication possibilities of the region a corporate entity that would be able to attract foreign capital was a necessity. It was thus in the summer of 1994 that Telecominvest (TCI) was formed. TCI was formed as a closed joint stock holding company, owned by PTN and SPMMT. Shortly after the formation of TCI it was re-registered as an open joint-stock company and had a new investor in the form of First National Holdings S.A, a Luxembourg registered company owned 100% by Commerzbank AG of Germany. PTN and SPMMT contributed their interests in the various JV’s that they were a party to, as their portion of share capital in TCI. FNH made a cash contribution to share capital that would allow for expansion. At the end of 1998 the ownership structure of TCI was: 25% owned by PTN, 24% by SPMMT and 51% by FNH. This transaction injected much needed capital into TCI to further expand their operations and influence.

After the formation of TCI, it’s primary investments included ownership of significant interests in a number of fixed line and mobile operators in the surrounding city regions of Leningrad, Pskov, Arkhangelsk, Vologda, Novgorod and Murmamsk Oblasts and the Republic o Karelia. TCI held stakes in 25 companies in the region and was expanding into the areas of data transfer, paging, public payphones and Internet services. By the middle of 1998 TCI controlled more than 75% of the mobile market in the Northwest of Russia.

TCI is committed to western principles and accordingly follows GAAP accounting practice, and accordingly accounts for equity holdings in outside companies as either investment in associate, equity share of associate or consolidated group accounts. Currently the TCI group have a 65% share of the cellular market outside St. Petersburg, 88% of the cellular market of St. Petersburg, 9% of fixed line telephony, 22% of the internet services and operate 94% of St. Petersburg’s payphones.

Business of Telecomivest

TCI plays an active part in the management of operating companies. The main task is to determine the strategy and to co-ordinate the development of operating affiliates. It also regulates the working relationships with PTN, SPMMT, local and federal authorities. TCI generally provides its services to the operating companies on a commercial basis although it also provides assistance free of charge at the start-up stage. After the companies become operative, ongoing consulting services are usually provided on a commercial basis. These activities include advice from TCI’s experts on:

• General management, assessment of investment opportunities, negotiations with vendors and consultants, personnel selection and training, customer billing

• Financial management, preparation of budgets and business plans, tax optimization, cost analysis, feasibility studies for new projects and project financing, cash management

• Engineering, quality control, development of general circuits.

• Support in obtaining permissions and licenses from various authorities for new projects, political and regulatory lobbying.

Telecominvest’s Operating and Financing Strategy

Operating Strategy

The long-term goal of Telecominvest was to maintain and expand its position as a leading telecommunications provider in the Northwest and other regions of Russia. While preserving its holding structure Telecominvest planned to make efforts to obtain and keep at least a 51% share in all operating subsidiaries and subsequently consolidate the financial results of operating companies. The Telecominvest group planned to concentrate on fast growing communications services: cellular, fixed line communications for the business sector, data transfer, Internet access, paging, public payphone and other. In the near future the Company expected to increase its revenue in each of these sectors. EBITDA margin was expected to remain at levels of 40-50% of revenue reached by the TCI group in 1998 (in paging/payphones sectors to reach 30%), net profit to remain at 20-25% (10% in paging/payphones). TCI would normally only invest in telecommunications projects where the expected payback period did not exceed 3-4 years. The TCI group did not plan to invest in non-telecom operating businesses, unless such investment was necessary for the development of its telecom operating subsidiaries. The payback period could be longer in projects with strategic importance for the company, i.e. projects, which aimed to introduce new technology and to occupy new market niches.

The medium-term strategy of Telecominvest entailed maintaining the high growth rates of its key operating businesses, expanding into other regions through acquisitions of existing businesses or obtaining licenses for the GSM-900, DCS-1800 and NMT-450 standards. Telecominvest intended to occupy and develop new market niches in telephony and data communications. Main emphasis would be placed on attracting and retaining business customers. The ability to provide “cutting edge” services should enable Telecominvest to stay competitive in the future and to broaden its customer base.

Financing Strategy and Investment Plans

Telecominvest group used operational cash flow, loans and equipment leases to finance the development of the operating businesses. Current indebtedness of the majority of operating businesses was relatively low. Most of them managed to meet their investment needs through a combination of operating cash flow and local debt financing. The major investments on the holding level planned were:

• Increase of the shareholding in North-West GSM up to 45% by the acquisition of a 14% stake from North-West GSM’s current shareholders and later bringing the TCI stake in the operator to 50%, allowing full consolidation.

• Creation of a fibre-optic transport network in the North-West of Russia using the high-voltage transmission network in partnership with the regional telecom operators and the regional power companies.

• Construction of a transit network in St.Petersburg and building the infrastructure for providing WLL-services (wireless local loop) based on DECT technology.

Conclusion

With a number of important projects requiring financing, the main issue facing the management was: who could become an investor and partner to Telecominvest in the current market conditions and what is the value of the holding.

…………Five hundred miles from St.Petersburg, in the offices of CA IB Investmentbank AG in Moscow, a team of investment bankers was putting together a private placement presentation for the management of Telecominvest, hoping to secure a role for CA IB in the deal. The presentation was scheduled for 9:00 AM next morning, just forty minutes after a daily Transaero flight from Moscow was scheduled for arrival in the northern capital of Russia. Bankers were still working on the valuation of Telecominvest. It was clear that the total value of the holding consisted of four main parts: the value of the holding itself, which could be calculated using free cash flow forecasts and DCF methodology. CA IB made those forecasts, since Telecominvest published its U.S. GAAP accounts. The other three parts were the values of Telecominvetst’s holding in the three major subsidiaries: North West GSM, Delta Telecom and Peterstar. These private companies did not publish their full accounts, though limited financial data and comparable companies multiples were available. Bankers were still arguing over the Cost of Equity estimation method most appropriate for the post-crisis Russia. Another issue was the recommendation of target investors. Bankers knew that Telecominvest preferred to partner with the Western companies-telecom operators on the operating companies’ level, avoiding conflicts of interests among them and team up with financial investors (like FNH) on the holding level. However it was not clear whether financial investors that Telecominvest hoped to attract were interested in the deal at all. It was getting late………

Appendix

Macroeconomic Data

Investments of Telecominvest

Source: Telecominvest

Financial Forecasts

Free Cash Flow Forecasts

Unlevered Beta Calculations for Comparable Companies

Telecominvest WACC calculation assumptions

Relative Valuation Data for Three Largest Associates

Overview of St. Petersburg cellular communications market

At the end of 1998 three operators were present in the cellular mobile market of St. Petersburg:

• Delta Telecom

• North-West GSM

• St. Petersburg Telecom (operating under FORA Communications trademark).

St. Petersburg can be considered the leader in promotion of cellular communication systems in Russia

• Delta Telecom was the first in the country to start providing cellular services.

• North-West GSM and Delta Telecom are among the largest cellular operators in Russia.

• North-West GSM is the biggest GSM-900 cellular operator in Russia.

Delta Telecom was the first of the three companies to launch operations of a cellular network in St. Petersburg in September 1991. The network provides NMT-450i cellular communication services. North-West GSM has been rendering GSM-900 services since December 1994, and St. Petersburg Telecom has been offering AMPS-800 services since July 1994. The Russian government declared GSM-900 and NMT-450i “federal standards”. St. Petersburg has a dynamic cellular market. Each year the number of cellular subscribers doubles. According to a market research ordered by Telecominvest in July 1998, the potential of cellular services market is 700,000 subscribers with US$ 200 activation fee and US$ 70 average monthly bill, as of 1 August 1998.

According to the market analysis of Telecominvest, Delta Telecom and North-West GSM have over 91% of the total mobile traffic of cellular operators in the region. Currently, Delta Telecom and North-West GSM have more than 82% of the subscriber market. The following diagrams demonstrate the distribution of cellular operators’ market shares:

North-West GSM

Brief company profile

The company has provided GSM-900 cellular communication services since December 1994 and now is the largest cellular operator in northwestern Russia. The current shareholders of the company are Telecominvest (31%), Lensvyaz (14%), WestLink (3%), Contact-S (3%) on the Russian side; Soner (23.52%), Telenor Invest AS (12.74%), Telia International AB (12.74%) on the Western side. As of 1 August 1998, the company had 56.7% of the St. Petersburg market, over 90,000 subscribers.

Services

The company offers a complete set of GSM-900 cellular services: local, DLD and ILD communication, national and international roaming, data transfer, facsimile communication, etc. International roaming geography of North-West GSM is the most extensive among Russian cellular operators. Roaming agreements have been signed with 105 operators from 60 countries. The company provides national roaming service in the cities of Moscow, Tula, Pskov, Kaluga, Ryazan, Smolensk and Novgorod.

Coverage area

One of the basic strategic directions in the company’s development is strengthening its presence in northwestern Russia and expanding coverage of regional centers. As of the end of 1997, the network fully covered St. Petersburg and nearby territories, the highway to Vyborg and Vyborg itself, a few of the largest towns in the Leningrad region, as well as the regional centers Murmansk, Arkhangelsk, Severodvinsk and Petrozavodsk. In 1998, a segment of the network was launched into operation in the cities of Cherepovets and Vologda. During 1998 the network will expand to cover main highways, as well as business and leisure centers of the Leningrad region. Simultaneously, the network will continue to develop in the regions.

Core operating figures

Delta Telecom

Brief company profile

Delta Telecom was founded in October 1991 and was the first cellular operator in Russia. The current shareholders of the company are Telecominvest (25%), PTS (32.5%) on the Russian side and US West (42.5%) on the Western side. Delta Telecom is one of the authors of the NMT-450i SOTEL Russian Federal Cellular Network program (Russian Cellular Telephone). The Russian government has ruled to develop the state NMT-450i standard-based mobile network. By the year 2005, the SOTEL program will bring together all regional NMT-450i cellular operators of Russia providing services to over a million subscribers.

Services

The company offers a complete set of NMT-450i cellular communication services: local, DLD and ILD communication, national and international roaming, data transfer and facsimile service, etc. Automatic roaming services are rendered in more than 250 cities and regions of Russia and in 10 foreign countries.

Coverage area

Currently, Delta Telecom has the most extensive coverage among St. Petersburg cellular operators. Coverage area includes St. Petersburg, all of its suburbs and almost the entire region. In Karelia, Murmansk, Pskov and Novgorod regions, subscribers are served in cooperation with local operators, members of Telecominvest Group.

Core operating figures

Digital fixed line communication

Peterstar

Brief company profile

Closed Joint Stock Company Peterstar was founded in St. Petersburg in October 1992. Licensed by the State Committee on Communications of Russian Federation, the company provides users with services of local, DLD and ILD telephone communication, data transfer, telematics, videoconferencing and leasing of communication channels. The main goal of creating such a company in St. Petersburg was to meet the demand of Russian and foreign users for modern telecommunication services at the highest international level with the help of advanced technologies, as well as to actively participate and assist in upgrading the existing, mostly analogue, telephone network of the city. The current shareholders of the company are Telecominvest (29%) on the Russian side and PLD Telecom Inc. (USA) (60%) and PLD Holdings Limited (11%) on the Western side. The main direction of the company’s activity is to be part of city infrastructure by providing comprehensive telecom solutions using its own digital fiber-optic network, which is fully integrated and interconnected with the existing city telephone network.

Services

Within the framework of its core activity, Peterstar offers a wide range of services, including installation of analogue, digital and ISDN lines, which provide greater availability and high-quality communication and service; organization of switched and dedicated high-speed data transfer channels, the whole range of data transfer services, including ATM, ISDN and Frame Relay technology; providing wireless local loop access; construction of corporate and banking networks; access to Internet providers through its own digital network; sales through distribution contracts and installation of all kinds of telecom equipment made by Lucent Technologies and General Data-Comm; additional telephone services, including “Peterstar communication card”, 24 hour dispatching service, including call orders, simultaneous translation of international calls, etc.

Position on the market

Peterstar was the first to offer digital communication services on the market, and gained a strong competitive advantage from the beginning of the of the modern telecom market in Russia. As early as in 1992-1995, Peterstar attracted to its network most large and medium-size Russian joint ventures and Western companies operating in St. Petersburg. In the past six years Peterstar provided telecom services for numerous international events held in St. Petersburg, such as The Goodwill Games, visits of U.S President Clinton and U.S. Vice-President Gore, visit of the Queen of England, The Davis Cup, an international track and field competition, “Goodwill meeting”, The Catty Sark Yacht Regatta and others.

Business clients Peterstar has a 75% share of the St. Petersburg and Leningrad regional market of commercial clients with foreign capital. Among the clients of Peterstar are Grand Hotel Europe, Unilever, Coca-Cola, PepsiCo and Wrigley’s. The majority of business clients are Russian companies (about 85%).

Banks By volume of services, Peterstar has 50% of the St. Petersburg and Leningrad regional market. Peterstar brings numerous branches and affiliates of banks into a single network, for such leading banks as Sberbank of Russia, Central Bank branch of St. Petersburg and Leningrad region, Promstroibank, Baltic Bank and BNP-Drezdner Bank Russia.

Cellular operators Peterstar has over 85% of the cellular operators market. Its own digital fibre-optic network enables Peterstar to provide transit connection to three cellular mobile networks of St. Petersburg: Delta Telecom, North-West GSM and FORA Comm.

Residential users Under the St. Petersburg city communication infrastructure program, since 1995, Peterstar has been modernizing and renovating one of the central and oldest regions of the city - Vassilyevsky Island. By the end of 1998 about 30,000 subscribers of Vassilyevsky Island will have switched from analogues to digital lines.

Peterstar offers a number of higher quality services than its competitors. For example, Peterstar is the only company providing extensive access to ISDN (PRI). Some services are provided on the St. Petersburg market exclusively by Peterstar, such as subscriber connection by wireless access technology. The company intends to actively promote this service in the Leningrad region. Peterstar’s main competitor on this market is Sovintel, which owns a powerful telephone network in Moscow. On the St. Petersburg market Sovintel offers quality intercity and international communication and leases channels linking Moscow and St. Petersburg. Other companies (Combellga, Teleport, Metrocom) do not have as strong a presence on the telephone market. The main competitor on the data transfer market is Metrocom, a subsidiary of Andrew Corporation. Metrocom has its own fiber-optic network laid in the St. Petersburg subway. As a result, it has limited access to clients located far from metro stations.

Investment activity

Thanks to appropriate actions of Peterstar shareholders, timely and sufficient investments, and competent elaboration and implementation of the network construction strategy, one of the first integral digital communication networks in Russia has been created and is successfully operating in St. Petersburg. Peterstar’s integral digital network is based on a digital transmission system of ~750 km long fiber optic cables covering the entire territory of St. Petersburg (In 1998, the company launched over 10 km of lines monthly.) The company installed 7- 622 Mbit/sec (STM-4) SDH rings and 1- 2.4 Gbit/sec (STM-16) ring with double reservation. It has installed 3 powerful digital 5ESS switches from Lucent Technologies with the capacity of approximately 400,000 numbers. In addition, in various districts of the city there are more than 30 remote 5ESS switching modules. A network of high-speed data transfer channels with the total traffic capacity of over 800x64Kbit/sec has been built in St. Petersburg and its suburbs. All of this provides high-quality communication and reliable transmission of information. Thanks to complete integration with the city telephone network, Peterstar’s clients can get in touch with any subscriber in the city, using a standard seven-digit dialing system. Peterstar network is also connected to the SPb MMT network, allowing its clients to use high quality DLD and ILD services.

Core operating figures

References

a) The Economist Intelligence Unit

b) Presentation materials of Telecominvest for investor conference in October 1998

c) 1998 Annual Report of Telecominvest

d) CA IB Investmentbank AG research materials

e) Damodaran Online web-site

f) Internet Securities International

g)

h)

i)

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[1] Supervised by Campbell R. Harvey with Russell Burnett, Peter van Kerckhoven, Lilly Li, and Dmitri Sedov

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Market share distribution in services for

cellular operators

70%

30%

PeterStar

PTS

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