Volume 6, Issue 2 January 24, 2009 Ability to raise funds brightens Svyazinvest prospects As the financial storm continues to batter the Russian economy, state-controlled telecommunications holding Svyazinvest is actively searching for ways to refinance the debt obligations of its regional telecom subsidiaries. The holding has already asked major state banks for 40 billion rubles in fresh loans and may use free cash from long-distance operator Rostelecom. The financial crisis is also likely to bring a new CEO and board of directors to the holding, but analysts believe a reshuffling of management is unlikely to have any substantial influence on Svyazinvest’s operations. In an attempt to ride out the economic crisis, Svyazinvest has unveiled a conservative financial plan for 2009. The holding’s regional subsidiaries will have to slash expenditures and postpone investments in some projects, such as the digitalization of telephone networks. The holding wants its subsidiaries to spend the funds saved from the cost-cutting measures on redeeming debts (40 billion rubles is to be redeemed in 2009), Russian media reported earlier. “The 50% cut in regional telecom operators’ capital expenditure plans for 2009 should improve their liquidity positions,” Stanislav Yudin, telecoms analyst from UBS, wrote in a recent research note. Continued on page 2 Contents DJ RusIndex Titans $mln. Ability to raise funds brightens Equipment 2500 900 Svyazinvest prospects . 20 800 2000 . 1 700 Retail Market 600 1500 Russia’s mobile user base up . 21 500 400 to 187.83 million as of 1000 Internet & Cable 300 December 31 200 . 23 500 Market research from AC&M 100 Fixed Income Market News . 4 0 0 07 Jan 08 Jan 09 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 19 Jan 20 Jan . 27 RTSVolume MICEX Volume DJ RusIndex Titans, left Industry Politics Stock Market Roundup . 8 Telecom stocks vs MT RusIndex . 29 Mergers and Acquisitions . 10 Consensus Estimates . 33 102 Mobile Operators . 12 Appointments 97 . 35 Fixed-line Operators 92 . 17 Calendar . 37 87 Satellite operators 82 . 19 7-Jan 8-Jan 9-Jan 12-Jan 13-Jan 14-Jan 15-Jan 16-Jan 19-Jan 20-Jan Telecoms MT RusIndex Volume 6, Issue 2 January 24, 2009 Ability to raise funds brightens Svyazinvest prospects At the same time, Svyazinvest is considering various ways to refinance the regional telecom operators’ debt obligations. In late December, the holding applied to four major state-controlled banks - Vnesheconombank (VEB), Sberbank, VTB, and Gazprombank - for 40 billion ruble worth of three- to five-year loans with an interest rate between 15% and 16%, the holding’s Finance Department Director Yelena Selvich said. “It’s no wonder that Svyazinvest has applied to state banks, as privately owned commercial banks will not provide loans without collateral and will not agree to the conditions put forward by Svyazinvest,” said Ivan Shuvalov, a senior telecoms The holding’s regional analyst at Alfa Bank. subsidiaries will have Svyazinvest, which was recently classified as one of the 295 “backbone” companies integral to the health of the Russian to slash expenditures and economy, is likely to receive the state support that it is postpone investments requesting, analysts believe. “Svyazinvest, a state-controlled holding, could rely on financial support from state-controlled banks, in our view. Moreover, the proportion of hard currency- denominated debt among total debt varies from 10% to 35% among regional telecom operators. This should not significantly complicate the debt repayment schedule and should not result in material forex losses,” Yudin from UBS wrote. Svyazinvest is also reportedly considering refinancing the debts of its regional units at the expense of its long-distance subsidiary Rostelecom. The total debt of Svyazinvest’s regional subsidiaries amounted to approximately 133 billion rubles as of late December, according to Credit Suisse and Finam estimates. “The chances for … use of Rostelecom’s funds are unclear at the moment, but theoretically they would help from a debt repayment perspective,” Yudin wrote. Regardless of the debt repayment issue, Svyazinvest’s regional telecom operators seem to be well positioned to weather the tough economic times, analysts said. “Regional telecom operators’ traditional fixed-line business is ruble-denominated, (most of) the debts of regional telecom operators are also ruble-denominated, and thus the continuing ruble depreciation will have no impact on the companies. Moreover, fixed-line services have become essential and if the Svyazinvest was recently crisis worsens, customers are likely to give up mobile services, classified as one not fixed-line,” said Shuvalov from Alfa Bank. of the 295 “backbone” The holding will likely rely on a new management team to guide Russian companies the company through the crisis. Svyazinvest has scheduled an extraordinary shareholder meeting for February 10 to elect a new chief executive and board of directors. The government has proposed Yevgeny Yurchenko, head of a Sberbank regional branch and a former deputy CEO of the holding, for the CEO position. Svyazinvest’s shareholders have also approved a list of candidates for a new board, which consists of nine seats. Russian multi-industry holding AFK Sistema, which holds 25% plus one share via its subsidiary Comstar UTS, nominated its candidates - Comstar UTS CEO Sergei Pridantsev and AFK Sistema’s First Vice President Vitaly Savelyev - back in November. www.prime-tass.com 2 Volume 6, Issue 2 January 24, 2009 Ability to raise funds brightens Svyazinvest prospects The government, which owns a 75% minus one share stake in Svyazinvest and has seven seats on the board, announced its nominees only last week. The list includes five independent nominees: Nikita Ryauzov, managing director of MDM Bank; Mikhail Butrin, managing director of VTB Bank; Ivan Rodionov, economics professor at the Higher School of Economics in Moscow; Konstantin Malofeyev, managing partner at Marshall Capital Partners; and Marlen Manasov, a member of UBS’ board of directors. The two remaining nominees are state officials: Leonid Reiman, a presidential advisor and former telecommunications minister, and Mikhail Leshchenko, an advisor to Igor Shchyogolev, the The holding will likely rely minister of communications and mass media. on a new management The move to make Svyazinvest’s board more independent to guide the company follows a government decision announced in June to replace officials on the boards of state-controlled companies with through the crisis independent directors. “We welcome the government’s decision to increase the number of independent directors on Svyazinvest’s board, which could lead to improved management efficiency at the holding,” analysts from UniCredit wrote in a recent research note. “We believe the planned changes as well as a new CEO represent signs that the government is continuing to work toward restructuring the holding.” In late December, Russia’s Ministry of Communications and Mass Media set up a working group to consider Svyazinvest’s reorganization. The working group, which will include representatives of the ministry, specialists from government financial agencies and other government bodies, and participants in the financial and telecommunications markets, will also take into account a strategy being developed by Svyazinvest to create a single operator using the assets of its subsidiaries. However, the creation of the working group and forthcoming management reshuffling are not expected to result in a quick resolution to Svyazinvest’s fate, analysts said. “The government might consider the holding’s restructuring as it has already lost the best time for Svyazinvest’s privatization. In the current Ministry set up situation, Svyazinvest’s privatization would bring in funds that a working group would be several times less than what a privatization could to consider Svyazinvest’s have drawn even a year ago,” said Anna Zaitseva, a telecoms analyst from Finam. reorganization Moreover, the possible restructuring is unlikely to be take place in 2009, some analysts believe. “A change in Svyazinvest’s CEO and board of directors could be a sign that Svyazinvest’s restructuring is underway. Merging Svyazinvest’s subsidiaries into one entity to cut capital expenditures, operational expenditures and to facilitate debt repayments, is among the potential restructuring scenarios,” Yudin from UBS wrote in a research note. However, “the government’s current focus is clearly on more important macro issues, rather than on the Svyazinvest reorganization, and it is too premature to say that the restructuring is on track for 2009,” Yudin wrote www.prime-tass.com 3 Volume 6, Issue 2 January 24, 2009 Market research from AC&M Russia’s mobile user base up to 187.83 million as of December 31 The number of mobile subscribers in Russia, as measured by the number of valid SIM cards, rose to 187.83 million as of December 31, 2008 from 184.33 million as of November 30, 2008, Advanced Communications and Media (AC&M) said in a report Monday. Below is a subscriber base breakdown of leading mobile operators, as provided by AC&M: Company Subscriber Subscriber base as of base as of Dec 31, mln Nov 30, mln MTS (Total) 95.657 93.912 Russia 64.628 63.273 within Moscow License Area 14.913 14.646 Ukraine (UMC) 18.115 18.103 Uzbekistan (Uzdunrobita) 5.647 5.492 Turkmenistan (Barash Communications) 0.927 0.866 Armenia (K-Telecom) 2.017 1.944 Belarus (unconsolidated) 4.323 4.233 VimpelCom (Total) 60.991 59.499 Russia 47.663 46.581 within Moscow