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Recent news
17.03.2010
"I know of no more honest investment than in your own company" – Svyazinvest CEO Evgeny Yurchenko on the restructuring of the holding and misuse of insider informationKommersant, interview by Inna Erokhina
The restructuring of main state telecommunications holding Svyazinvest got under way one year ago with its assets to be merged on the basis of Rostelecom. In an interview with Kommersant, the Director General of Svyazinvest Evgeny Yurchenko talks about progress in the reorganization, a possible alliance with Big-3 cellular operators and the decision to roll out LTE telecom services. He also addresses accusations concerning the misuse of insider information – all managers will be required to disclose information on their transactions involving Svyazinvest’s subsidiaries in real-time mode.
- When will the boards of directors of regional telecommunications companies (RTOs) review the ratios for swapping RTO shares into the merged company? And what are minority shareholders mostly concerned about?
- The process will commence at the board of directors meeting which is scheduled for April 26, but the date may still be changed.
The board, and after that the general shareholders meeting of each RTO will issue an agreement on the terms for merging one legal entity with another. It will also contain two coefficients which illustrate the number of common and preferred shares in units, which can be exchanged for one share in the merged Rostelecom. Ernst & Young, which is in charge of preparing them, has already forwarded indicative estimates to the consultant banks to receive their opinion, but the final swap ratios will be calculated based on 2009 RAS reporting data, which are now being consolidated. The methodology for calculating swap ratios is based on two valuation approaches – the discounted cash flow and market price method, at the basis of which lies the average cost of common shares over a certain time last year (six months under generally accepted practice – Kommersant). Minority shareholders frequently ask questions about the preferred shares of RTOs. Our consultants propose swapping all prefs, except for the preferred shares of Rostelecom for the common shares of the merged company with a discount which is in line with the market. The discount level will be the same for all RTOs. The range now under discussion is from 15-25%. Some minority shareholders are opposed to the idea of a discount, but we cannot agree with them, since it would not be fair to the holders of common shares, whose rights are much broader.
- You are the largest minority shareholder of CenterTelecom among individuals (over 7.4% of common shares). The question arises as to how the head of a state company raised the funds required for such large acquisitions (earlier the total market value of shares held by Mr. Yurchenko stood at over Rub 4 bln). Aren’t you worried about risking your reputation?
- I know of no more honest way to make money that by publicly investing in the shares of your one company. My main source of income has been investment and stock market operations. I was one of the first ten to receive certification from the Ministry of Finance to engage in securities transactions, when they were just starting to be issued. I have worked not only at Svyazinvest and Sberbank, but also at large commercial structures such as Menatep and Comstar-UTS operator. All the money I have earned has been declared. In order to confirm the level of income sufficient to purchase the RTO shares I own, all you have to do its look at the two tax returns I filed in 2006 and 2007. They are the most indicative in terms of my income. The taxable base in 2006 and 2007 stood at RUR 506.2 mln and RUR 263.4 mln, respectively, which means that I paid RUR 69.8 mln in taxes to the budget in 2006 and RUR 37.1 mln in 2007.
The total amount of personal investments since January 2009 in Svyazinvest’s subsiadiaries amounted to about $45 mln. I also used borrowed funds: from April to June 2009 Rosbank issued be five credit lines for a total of $15.4 mln, plus $22 mln with a term until December 24, 2010 which was provided by KIT Finance.
- When was the first time you purchased shares in Svyazinvest subsidiaries?
- In 2003, but I began to boost my stakes in these companies at the end of 2008 when I learned that I had been appointed to the position of director general. At that time, the capitalization of the holding’s assets were at an abysmally low level, less than $500 mln. I have never concealed my investment activity and told the media about it on numerous occasions, calling upon people to follow suit under the assumption that the telecommunications industry is undervalued. A year later, beginning in February 2009, the capitalization of seven RTOs had increased from 264.7% (Uralsvyazinform) to 650.0% (UTK). As a shareholder of Svyazinvest companies, I am interested in cost cutting and raising business efficiency. As the director general of Svyazinvest, I can make sure this is done in practice. It’s also important for me to be a shareholder in all public subsidiaries, in order to show that there will be no inequality between minority and majority shareholders during the reorganization of Svyazinvest.
- Could you tell me the exact size of your holding’s in RTOs and Rostelecom?
- As a result of repo transactions performed, information on the number of shares I own changes on a regular basis, so on a certain date they can either be pledged to a bank or on my personal account.
Right now I own over 2.5% of VolgaTelecom’s common shares, over 4.3% in UTK, more than 7.4% in CenterTelecom, while my shares in the other companies are pledged. After the chairman of the board of directors of Svyazinvest Leonid Reiman voiced concern about my possible misuse of insider information concerning the purchase and sale of shares, the Federal Financial Market Service (FFMS) launched a serious investigation into my affairs. But I never sold shares, I only raised my stakes, and for this reason, all allegations about insider dealings have no foundation. After completing its investigation, the Federal Financial Market Service confirmed that I had committed no violations on the securities market, but recommended Svyazinvest to approve insider regulations. The regulations will take effect as of April 1. The disclosure of information on the participation of board members in the capital of a company is mandatory on the date of an annual report. In line with the approved regulations managers are required to notify the corporate governance committee of any share holdings they have in the holding’s companies. This information will be made public in real-time mode.
- Do you have any private business or investments which are not related to the telecommunications business?
- No I don’t, but this summer I plan to launch a fund that will invest in Russian innovative projects. The fund’s charter capital will be up to RUR 1 bln and could be formed either using cash or some of the shares I own (for more details, see page 13 – Kommersant).
- The asset swap scheme to be used between the state and AFK Sistema provided for the corporation to turn over its 25% + 1 share stake in Svyazinvest (owned through Comstar-UTS) to VEB, while the shares of Sky Link cellular operator will go to the state holding. In exchange, Comstar will have its RUR 26 bln written off to Sberbank (these obligations would be assigned to VEB) and receive from Svyazinvest a 23.33% stake in MGTS’ common shares. Why has the swap been dragged out for so long and why was the decision made to exclude VEB out of the scheme?
- We’re a state-owned company and this is why we’re so wary of snags. But the deadline will still be met and it will be in April or May, hopefully. There is a strong likelihood that VEB will be removed from the scheme. However, we had considered this option at various stages when working out the transaction, and even right from the start. Under this option, Sistema would hand over its 25% + 1 share in the shares of Svyazinvest to Rostelecom, in return for which the operator would assume the obligation for Comstar’s RUR 26 bln to Sberbank. The size of Rostelecom’s debt as a merged company would not be critical. We expect to refinance it on more convenient terms that had been the case with Comstar, for example by issuing long-term bonds up to 10 years.
- Telecommunications Minister Igor Schegolev officially announced that Svyazinvest and AF-Telecom (owns a 31.1% stake in MegaFon) will be holding negotiations about forming an alliance. There are also reports that a draft memorandum exists, but has not yet been signed. Why not?
- The negotiations are still in progress, and the parties are laying out their positions. As far as we know, AF-Telecom will finalize its opinion after the restructuring of Svyazinvest is approved at the shareholders meetings of the companies slated to take part in the merger. It will be another two months before that time.
- Don’t you think it would have been convenient for AF-Telecom to declare its interest in this alliance before the Federal Anti-Monopoly Service and the Telecommunications Ministry spoke out against the transaction between Teliasonera and Altimo (shareholders of MegaFon) to combine their stakes in MageFon and Turkcell?
- We have never made it a secret that the best possible way to roll out the holding’s cellular assets would be through forming an alliance with one of the Big-3. But by the same token, we have no intention of twisting arms. Svyazinvest is open to dialog and continues to believe that this is a good proposal for both parties.
- Earlier, Kommersant’s sources at AF-Telecom claimed that even if the company were willing to swap its stake in MegaFon for an equity position in the merged company, the company would not be willing to relinquish control over it. A case in point is AFK Sistema, which, even though owing a blocking stake in Svyazinvest, was unable to impact the decision-making process at the holding.
- This is a very difficult question. The state’s official position, whether or not it is ready to relinquish control, can only be answered by the state itself. I have no desire to engage in conjecture or flights of fantasy. Looking to global industry practice, the state owns about 30% in France’s leading telecom operator France Telecom. AFK has a stake in the holding’s structure and one possible option we have already discussed is that of participating in the capital of an operating company which would be created during the reorganization process.
- What has already been done to create a fourth federal cellular operator, except for the fact that former top manager from MegaFon Alexei Nichiporenko has been placed in charge of rolling out the holding’s cellular assets?
- A decision has been reached for all cellular companies to sign an agreement with the managing company. I can already tell you that the legal entity will be called Mobiltel and will be 100% owned by Svyazinvest. Right now we’re in the process of re-electing the board of directors of our cellular subsidiaries, in which, aside from representatives from RTOs, managers from the holding will also be strongly represented.
Over the past year and a half a huge amount of work has been done to analyze the billing systems and capability to implement Enterprise Resource Planning Systems (ERP) at the holding’s companies, to assess the accounting policy, writing off customers on the part of companies, and monitoring the holding’s equipment inventory, i.e. assets used in networks. Right now there is a clear plan of action which aims to unify all processes. We think it is reasonable to use the Oracle licenses purchased back in 2003 to implement ERP. We have already agreed with the software developers that no new licenses would be purchased.
- When setting up a cellular operator will you take into account the fact that AFK Sistema has laid claim to a 32% stake in SMARTS, which Leonid Maevsky (the owner of Sigma Capital Partners) calls his own?
- We have performed a due diligence on the results of 9M09, as now we’re evaluating 2009 financial results, and would like to draw the right conclusions when we have all the facts and figures in hand, so we can see if SMARTS delivered on its financial targets. After AFK made this disclosure, Svyazinvest asked the corporation to provide documents which confirm its rights of claim. When we receive them we will make our conclusions and assess the risks.
If the information is confirmed, negotiations on the purchase should be conducted with Gennady Kiryushin (the main owner of SMARTS – Kommersant) and AFK Sistema. In my view, this is not very realistic, since in this case Leonid Maevsky (who owns a 20% stake in SMARTS – Kommersant), will likely file a lawsuit against Sistema. Given this state of affairs it would not be advisable to buy the company.
- Svyazinvest was in the final stage of negotiations with the Deposit Insurance Agency (DIA) over assigning a 29.9% stake in Rostelecom to the holding’s trust management. Why was the decision adopted to assign this stake to VEB (owns 9.8% of the operator)?
- I don’t know. VEB and DIA are ultimately accountable to the RF government, which is the one that adopted this decision. But we have not broken off the dialog. We’re discussing a range of agreements which may be provisionally termed a shareholders agreement. In any case, this is the only legal form known to Russian law, which satisfies the interests of each party.
- What does it entail and what tasks will it resolve?
- It would be silly for state structures representing Svyazinvest, namely VEB or DIA to have different positions on the reorganization of the holding. Moreover, we have different positions. The task of VEB and DIA is to regain money invested in Rostelecom, whereas ours is to ensure the success of the merger. The shareholder agreement sets out the provisions for our mutual actions under this process.
What I’m saying is that a number of issues put to vote at the general shareholders meetings will be consolidated. The main issues include adopting the company’s budgets and strategy, as well as putting forward candidates to be appointed as board members. VEB and DIA will receive options from Svyazinvest which make it possible to avoid financial risks, but their model will not necessarily be the same.
- What main results did Svyazinvest and its subsidiaries achieve over the last year?
- Speaking of the group of companies as a whole, the key profit and EBITDA metrics rose nearly 20% compared with the year-earlier period. The main thing is that free cash flow escalated dramatically, about seven times, or by 600%, exceeding RUR 38 bln. Amid the robust results achieved by regional telecom companies, Rostelecom’s performance looks extremely downbeat, as EBITDA plunged more than 25% and net profit crashed almost 30%. These figures are attributable to a somewhat faulty investment policy in recent years. One of the purposes of the reorganization is to turn this situation around, since in the face of a fiercely competitive telecommunications market, a LD operator saddled with social obligations such as Rostelecom is by definition not competitive.
- Svyazinvest’s companies were declared the unrivaled winners in tenders for mobile broadband Internet within the frequency band of 2.3-2.4 GHz (4G), seeing 39 licenses awarded out of 40 up for grabs. How fair would you say the allegations are according to which the terms of the tenders were scripted in favor of Svyazinvest?
- The terms of the tenders were drafted by a working group which was represented by virtually all operators, including cellular providers, and they were approved by the State Commission for Radio Frequencies (SCRF). After the results of any competition are announced there are always those who are displeased, but the position of the Big-3 operators is truly unique. After winning third-generation telecom licenses in 2007 and not even launching such a network across the whole country, they merely allowed themselves to comply with the bare minimum requirements, since they are also looking to receive 4G resources. The reason for this is quite simple: they are no longer satisfied with 3G technology. In this case, in our opinion, it would be fair to hand back their licenses to the state and fight on equal terms with the players that don’t have any 3G facilities.
- With which suppliers are you holding negotiations on the delivery of equipment for network construction?
- We’ve made the decision to go with LTE (telecom technology – Kommersant), since we believe it is more promising than WiMax. There are many more manufacturers of LTE equipment around the world, and this means that subscriber terminals which are compatible with this standard will be cheaper. Tender terms stipulate that a manufacturer should be domestic. And now the Telecommunications Ministry is drawing up the criteria to determine which manufacturers can be regarded as such.
- At the beginning of March, FAS filed a lawsuit against Far East Telecom, which, in its opinion, has been setting high monopoly prices for the provision of Internet services. Thus, the company’s tariffs in the Kamchatka krai are 350-1700% higher than tariffs in Moscow and St. Petersburg, and 1800-5100% higher on Sakhalin Island. What do you plan to do about this?
- FAS scheduled a hearing to take place on April 5, but on April 1 Far East Telecom will be offering its subscribers the so-called social tariff, which provides for reducing the cost of unlimited Internet in the Far East Region by several times. In continental Russia the price will be RUR 500, while it should be RUR 1,500 with a speed of 128 Kbps in remote areas and Sakhalin (within the license coverage area of Far East Telecom. Certain RTOs will be introducing a social tariff as of June 1, with a cost of RUR 250 in the European part of Russia, RUR 300-450 in Siberia, and RUR 250-500 in the Urals. In addition, our actions cannot be regarded as an answer to FAS, although the regulator likely expected that it would file a lawsuit, which would result in lower tariffs. It’s also noteworthy that last September the ministry publicly assigned us the task of introducing a social tariff. After this, the RTO tackled this issue, since they had to balance out their expenses on each tariff, operating not in categories of separate subsidiaries of the holding, but already as a merged company. FAS knew we were working on the problem, but it is not possible to work out such a large-scale problem overnight.
- Will such a sharp decline in tariffs have an impact on RTOs and why wasn’t this action taken several years ago?
- We don’t expect to see any negative repercussions, and it could be the other way around actually. By signing up for the social tariff, a subscriber traditionally wants more and goes over to a faster, which means a more expensive, tariff option. We view this move as a certain instrument designed to draw in a greater number of users and it will help us to deal better with the main issue – rapid growth in the number of Internet subscribers in Russia at a low cost. This year alone by phasing in the social tariff we expect to raise our subscriber base by at least 10%, thus increasing total connectivity from 5.1 mln to 7 mln. These high tariffs were due to the high cost of leasing backbone channels. Earlier, Rostelecom charged high prices for lines leased to Far East Telecom and other RTOs, in an attempt to improve its profit margins. Meanwhile, the operator kept losing its market share, since regional companies went over to alternative operators offering lower tariffs. Right now, we’re attempting to adhere to a more balanced policy.
- The holding has decided for the first time ever to implement an options program. Why is it necessary right now and don’t you find it to be excessive?
- No I wouldn’t. Legal and financial restructuring is extremely important, but when all is said and done people are working at the company and we needed to think up a simple idea that would bring together all our key top managers. We think the best way to achieve this is to offer them to become shareholders in the future company. We do not plan to dole out free shares as part of the options program and they will have to pay for them at a fixed price and in full. As a result, neither the state nor Svyazinvest will lose anything, while managers will make money only if the company’s capitalization goes up.
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