Itogi
18.01.2010
Elena Pokataeva
Svyazinvest’s time of rapid growth has finally come to an end. The director general of the holding Evgeny Yurchenko talks in an interview with Itogi about what the merged company will look like.
No sooner did the new century get under way than reports emerged concerning the transformation of Svyazinvest. The Russian telecommunications space was radically different back then: there was no MegaFon or SkyLink, while Comstar was a joint venture between MGTS and GPT. Mail.ru was in its inception, while the “beta” prefix had just been removed from Google’s website. Since that time, the telecom market has become virtually unrecognizable, but one issue has remained on top of the popularity rating throughout the years: which scenario for the transformation of Svyazinvest will be selected in practice? The answer to this question came only around the end of last year. The director general of Svyazinvest Evgeny Yurchenko talks with Itogi about how the market and its biggest player arrived at the definitive decision to proceed with the reorganization.
- Mr. Yurchenko, one has the impression that the intention to reorganize Svyzinvest arose along with the company itself.
- Svyazinvest holding was incorporated in 1995 by consolidating the equity stakes of 85 municipal and regional telecom entities which had taken on the form of joint stock companies, while the shares remained under federal ownership.
At a later time, the state’s stakes in Rostelecom and Central Telegraph went to Svyazinvest. A new structure was formed with a single goal, to help bring a stream of foreign and domestic investments into the telecommunications industry under new market conditions.
At that time, this meant selling an equity position in Svyazinvest (25% + 1 share) on tender tenders under investment terms.
- But this idea didn’t pan out.
- The tenders never took place as such. Russian telecom assets riveted the attention of foreign financiers only in 1997, at which time a cash auction was announced without investment terms. With a starting price of $1.18 bln, the above-mentioned equity position in Svyazinvest was sold for $1.875 bln to Cyprus-based consortium Mustcom Ltd., with members of the consortium including Onexim Bank, investment company Renaissance Capital, investment bank Deutsche Morgan Grenfell, Morgan Stanley Asset Management , and Quantum Fund, owned by George Soros. A second stake was supposed to be auctioned off in 1998, but this was prevented first by the financial meltdown and then by the low capitalization of telecom subsidiaries. Consequently, the year 2000 marked the beginning of the holding’s reorganization, which, according to the Federal Property Management Agency, was to result in a dramatic rise in the value of state stakes and subsequently, their successful sale.
- Since that time, the market has lived with rumors that a stake in Svyazinvest is to be sold to somebody…
- Yes, that’s right. The list of contenders includes AFK Sistema, Leonard Blavatnik, Alfa-Group, Telecom-invest, to mention but a few.
There is probably not a single adult in Russia that during this time did not hear about the battle for Svyazinvest between Gusinsky, Berezovsky, Potanin and Soros. Incidentally, the latter abandoned the fray after sustaining a loss. In 2004 Mustcom Ltd. was sold to Leonard Blavatnik for $625 mln. Subsequently, this 25% stake was acquired by Comstar United TeleSystems for $1.3 bln.
- So why was Svyazinvest eventually not privatized after such a fierce battle played itself out?
- Because there was no uniform vision mainly about how to deal with special consumers, i.e. the Ministry of Defense, FSB, and divisions of the Ministry of Foreign Affairs. What’s more, another issue was always on the table: if Svyazinvest’s telecom assets are placed in private hands, how will social tasks be accomplished in the regions? Who will provide service to low income consumers? In this case, a strategic state asset would end up in the hands of foreign companies, many of which could collaborate with Western intelligence agencies. For example, the Soros Fund has already been chased out of other countries because it was involved in projects linked with the US-based CIA. This is what occurred in Georgia. It also happened in Europe. So we can count our lucky stars that this never happened in Russia!
- And what happened to telecom enterprises during this period of time?
- In 2002 I was invited to join Svyazinvest in the position of financial director to work out a new model for the regional telecom operators (RTOs), which were being established at that time. The most complicated part of the holding’s history was in 2000 when Svyazinvest consisted of nearly 90 telecom companies that were spread out all across the country. Each telecom had its own technical policy and its own conception about how and what equipment should be used to build its own network.
Lets’ say that in the Kemerovo region one company operated Siemens and Lucent equipment, while another company in the neighboring Novosibirsk region ran on Iskratel and Huawei. There were incompatible telecom facilities operating in adjacent regions of the country. This meant that any calls and data could be transmitted within a region, but there could be problems outside. So, as you can see, the main challenge was to work out uniform plans for the installment of equipment, laying telecom lines, etc.
As a result, 74 regional operators were merged into seven large and financially powerful regional telecom operators. Once the legal merger of the companies was complete, a difficult period got underway of the integration of all business processes, the formation of new organizational structures, and the streamlining of procedures related to financial, operating and technical policy. I approved financial plans and acted as first chairman of the board of directors of a number of different companies: VolgaTelecom, Sibirtelecom and Far East Telecom … The existence of seven RTOs today implies a compact structure and in terms of numbers is less than twice as much as what we had before. Ten years ago there were some 370,000 employees in the Svyazinvest Group of companies, and there were only about 183,000 at the end of 2009. The same number of telecom employees as in the previous century is no longer needed today, since technology has made great strides forward in automating key telecom processes. Whereas before a building with thousands of square meters was needed at a telephone exchange in a city servicing a population of 300,000, today only a single room is needed to perform this function.
- So how can it be that a 10-year frenzied struggle to sell the state’s stake in Svyazinvest is over and done with and that the opposite result was achieved, i.e. the 25% privatized equity position is returned to the state?
- Yes, the oligarchs fought it out tooth and nail but one player remained – the most influential and richest of them all, the state itself. I think this situation had to be figured out, since the holding needs to achieve its development. The situation changed with the arrival of the new telecom minister Igor Schegolev and the top management shakeup at the Telecommunications Ministry. The economic downturn also had an impact, since the official guideline was abundantly clear – to support state-owned companies.
- Does Svyazinvest need state support?
- Our company, as was the case at a number of other large corporations, had piled up a huge amount of debts – over RUR 160 mln – by the time the financial downturn broke out. What’s more, the bank financing rate for them stood in the range of 20-23%. This took a serious toll on the company’s investment appeal. At present, the cost of financing our fixed income obligations is about 10%. And this means saving RUR 1 billion, which is no paltry sum! Basically, the point is not whether Svyazinvest needs state support or not, but what the top management of the industry decides: that a policy can be built in such a way as to develop the state’s assets successfully, thus creating added value for the state, so to say. At the beginning of 2009 we adopted a strategic decision: to raise the market capitalization of a state-owned asset. And indeed, over the year the capitalization of RTOs more than tripled. Overall, the state’s assets more than doubled their value over the last ten months alone.
- But capitalization figures are of a speculative nature …
- In this particular case I wouldn’t say so. There was no doubt a lot of speculation a year or so ago when nobody believed in the industry’s development. But the industry is very real. As a matter of fact, a cellular phone operator can be easily changed, but most people are hesitant to look for a new householder fixed-line and Internet provider. And we have 33 million of these subscribers – we’re talking about reality, not some speculative asset. These subscribers are constant in their preferences and consist of organizations, enterprises, and state agencies which are using and will continue to use telecommunications. Also, in 2008 our average dividend return on common shares was about 9%, and over 13% on preferred shares.
- As it turns out, the value of RTOs was artificially lowered before in order to “successfully” privatize these companies in the interests of the future owner. Are they still undervalued?
- I believe they are. It seems to me that this oversight will be rectified within the next six months. The year 2009 was a turning point, as the holding’s capitalization curve moved sharply higher and, hopefully, will remain on this upward trajectory moving forward. According to our expectations, the net profit of RTOs will amount to over RUR 22 billion in 2009, which is 36% more than in 2008. This is very good performance amid the difficult financial environment which the holding’s companies faced during the economic downturn.
A large contribution to this strong performance was attributable to profit derived from value-added services, mainly broadband Internet access. We expect 2009 results to show that the share of such services accounted for 20%, while growth from these services compared with 2008 stood at more than 24%.
- Mr. Yurchenko, much has been said about how Svyazinvest plans to develop its assets in the future. Let’s see if we can sum it up concisely.
- All RTOs are to be consolidated on the basis of Rostelecom. This will take about a year and a half. The new company will most likely retain the previous name, Rostelecom, since it sounds good and can be easily written in other languages, and it gives a clear idea of the new company’s activity.
During 2010 in line with the merger between RTOs and Rostelecom it will be necessary to make an appraisal of RTO shares, receive corporate approvals, restructure the debt obligations and execute some other procedures. The general shareholders meetings of the reorganized companies, at which a decision on the merger is adopted, are expected to take place in the summer of 2010. As a result of the merger between the Svyazinvest Group of companies on the basis of Rostelecom an integrated and competitive company will be established which is capable of providing the entire range of telecommunications services and datacom in Russia. Measures are planned to raise the share liquidity of the unified company, including a listing on Russian and foreign stock exchanges. A merger between the Svyazinvest Group of companies will have a positive synergetic effect in terms of cost-cutting and revenue growth.
- Do you expect to encounter many problems in dealings with minority shareholders during the merger process?
- This is an important part of our work. We have set up a special committee to work with minority shareholders. I myself decided to take an unorthodox step by becoming a shareholder in all of the companies slated for the merger, with no exceptions. This goes to show that I’ll always do my best to safeguard minority interests.
By this spring our consultants should estimate and make public the ratios for swapping RTO shares into those of the restructured Rostelecom. There is only one thing at issue here – to get minorities interested so that they will realize it’s in their best interests to participate in the merger between RTOs and Rostelecom. And it really will turn out well for them. It’s one thing to operate, for example, within Siberia, but a totally different matter to have a nationwide footprint. Nevertheless, we’re well aware of all the pitfalls. Incidentally, Svyazinvest recently won an award from the Investor Protection Association precisely for the quality of its work with minority shareholders.
- And what will happen to Svyazinvest’s cellular assets?
- Currently, we have 15 cellular operators located in various regions across the country and approximately 16 million subscribers. So far, these are disparate assets. Our challenge is to consolidate them. I’d also like to mention our transaction with AFK Sistema over the acquisition of Sky Link, which is to be merged with our cellular business, which will likely be wrapped up during the first quarter of 2010. Other takeovers are also in the offing.
- Svayzinvest is rumored to be discussing an alliance with MegaFon …
- What can I tell you? From the standpoint of the merged Rostelecom and the expansion of its mobile business the best thing would be to team up with one of the Big-3 operators, for example MegaFon. Admittedly, the shareholders of these companies could be of another opinion. As of the time this interview went to press no major negotiations have been held.
- What do you think about new mobile telecom technologies such as WiMAX?
- We’ve been studying all advanced technologies, such as WiMAX and LTE. According to our experts, each technology has its advantages. And each of them fits well in certain segments of the market. This is why we plan to study and develop all available wireless telecom technologies, based on the expediency of business needs.
- How does the holding intend to navigate this “bouquet” of technologies: GSM (3G, 4G), CDMA, and WiMAX?
- We intend to receive frequencies for all technologies throughout the entire country and turn them into marketable services. Incidentally, after all RTOs have been merged we’ll be able to think about providing converged solutions. Right now, at a time when we have a “patchwork quilt” of technologies and eight different companies, it is physically impossible to roll out converged services. However, Rostelecom, along with a single mobile operator, would be capable of doing this. By the way, a uniform national operator with mobile and fixed-line assets offers a good opportunity to provide portable telephone number services. This is a common feature in the United States. If you relocate from San Francisco to Chicago you can keep your telephone number. Moreover, this is both a mobile and home phone number. If you’re at home, the call goes through to the fixed line, where Internet, IP-TV and other telecom solutions are provided. As soon as you leave the house, calls and other services are redirected to your mobile phone.
- What effect will such a large national player have on competition? Won’t you squeeze out your competitors?
- I don’t think the appearance of a merged national telecom operator will have a negative effect on competition. Nowadays, our companies hold strong positions in the fixed-line segment, but in other segments, such as mobile com, Svyazinvest’s cellular operators do business only in four federal districts out of seven and control only 6 per cent of the market in terms of market revenue. In the value-added and broadband Internet segment the competition is very strong and both fixed-line and mobile operators are vying for market share. There is no monopoly here since any household has the right to select any other operator. It seems to me that the entry into the market of a new powerful player will help encourage higher service quality, more competitive tariffs and subscribers will only win out in this process.
- But the electronic government was assigned to only a single operator – Rostelecom. Won’t Svyazinvest, or more precisely the new Rostelecom, snap up all such national scale projects?
- Yes, and the responsibility is equally as great. Now it is clear who the president has entrusted to carry out the implementation of the electronic government. Now a specific manager will be in charge of the project – the director general of Rostelecom.
On the whole, I see no reason for debate here, since Rostelecom is a well-known entity in the telecom industry. In terms of form and content the operator is not unlike Deutsche Telekom, France Telecom, Telefonica, or Vodafone, which, by the way, implies a strong level of state participation. This kind of company enjoys no special privileges from the state; it’s just that it runs ahead of the rest of the pack and outpaces all the other contenders in its yellow leader’s shirt.
- The new Rostelecom, which intends to focus on rolling out its infrastructure, is a promising prospective client for manufacturers of telecommunications equipment. What is your position on supporting domestic producers?
- We’re in the process of executing the government’s decision to support domestic producers of telecommunications equipment, and for this reason, we intend to support vendors that are classifiable as domestic. As a matter of fact, any company can gain this status irrespective of the brand name under which it operates, if at least 60% of all its value is created within the territory of Russia.
- What are you feelings heading into 2010?
- I have the feeling that a heavy weight has been lifted from my shoulders, now that an efficient reorganization process is actually underway. We’re moving ahead into the New Year with confidence that the decade which took place under the sign of the reorganization of Svyazinvest has ended with the birth of a new, big and highly efficient telecommunications company.
