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TELECOMINVEST. Russell Burnett Peter van Kerckhoven Lilly Li Dmitri Sedov. 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. Overview. Russian Crisis

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russell burnett peter van kerckhoven lilly li dmitri sedov

TELECOMINVEST

Russell Burnett

Peter van Kerckhoven

Lilly Li

Dmitri Sedov

slide2
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
overview
Overview
  • Russian Crisis
  • Telecommunications in Russia
  • History of Telecominvest
  • Telecominvest strategy
  • Risks
  • Case Questions
  • Valuation
  • Case Outcome
slide4

Russian Crisis

  • Central Bank withdraws support of Rouble
  • Government defaults on short term bonds (GKO’s & OFZ’s)
  • Russian banks and companies heavily exposed to defaulted bonds
  • Collapse of banking sector
  • Russia foreign currency rating downgraded from B2 to CAA1
telecommunications in russia
Telecommunications in Russia
  • Highly centralized
  • Developed around a military/defense protocol
  • Overloaded transit and long-distance circuits
telecommunications in russia1
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.
history of telecominvest
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.
telecominvest operations
Telecominvest Operations

92%

85%

87%

Payphones

Fixed Line Communications

Business Segment

Cellular Communications

60%

36%

Cellular Markets outside St Petersburg

Internet Services

Production

Mass Media

DCS-1800

New Markets and Projects

telecominvest operations1

l

Murmansk

Helsinki

Republic

of Karelia

l

St Petersburg

Arkhangelsk

l

Nenets Autonomous

Area

l

l

l

Petrozavodsk

l

Pskov

Naryan-Mar

l

Novgorod

l

Vologda

Moscow

l

Saransk

l

Telecominvest Operations

Cellular Operations

Licensed Territories:

1 279 600 km.

10 federal regions.

Population: 13.7m

Penetration: 1.06%

Market share: 84%

telecominvest strategy
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.
financing
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
risks
Risks
  • Country Risks
    • Rouble devaluation
    • Nationalization
  • Company Risks
    • Profit repatriation
    • Loss of operational control
    • Competition
valuation
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%
valuation1
Valuation
  • Estimated value of TCI’s 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
case outcome
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.
case outcome1
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
case outcome2
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
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