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Russell Burnett Peter van Kerckhoven Lilly Li Dmitri Sedov

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

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  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 (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

  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 60% 36% Cellular Markets outside St Petersburg Internet Services Production Mass Media DCS-1800 New Markets and Projects

  9. 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%

  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 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

  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

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