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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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