Adding value

In 2014 and early 2015 we completed several vital transactions which pave the way to capitalizing on the development of promising market segments and ensuring maximum value growth of our assets.

The formation of the joint venture with Tele2 Russia, which was the largest deal in telecom sector in Russia, the creation of the JV with VGTRK as well as the acquisition of Safe Data are aimed at crystallizing value from those transactions by giving an additional impulse to enhance our competitive positions in the segments.

The Joint Venture with Tele2 Russia

The formation of the JV represents a key milestone in the implementation of Rostelecom’s mobile strategy and reinforces Rostelecom’s presence in the mobile segment. The mobile assets of Rostelecom and Tele2 Russia offer a great strategic fit, complementing each other in terms of footprint and allowing T2 RTK Holding to capitalise on Tele2 Russia’s know-how across the segments, proven track record of innovation and Rostelecom’s next-generation spectrum holdings. Rostelecom substantially enhances its exposure to Russia’s fast growing mobile data market through its strategic interest in a larger and faster growing operator, capable of effectively competing with the major players in the market.

The contribution from Rostelecom was effected in two stages. The first stage, finalized in late March 2014, saw Rostelecom contributing its standalone mobile subsidiaries and assets, including SkyLink, into T2 RTK Holding along with associated net debt of approximately $1 billion. At the end of this first stage, Rostelecom received a 45% voting interest and a 26% economic interest in T2 RTK Holding.

During the second stage, Rostelecom contributed into the JV its wholly-owned subsidiary CJSC RT-Mobile which is formed by demerging the Company`s integrated mobile businesses and having Rostelecom’s mobile licenses (including the LTE licenses) re-issued to it. The second phase was completed several months ahead of the schedule in August 2014. As a result, Rostelecom increased its economic interest in T2 RTK Holding to 45%.

The transaction enabled to create a truly nationwide player. This combination of the assets will bring substantial benefits to both parties, as well as to consumers and the entire Russian telecom sector. T2 RTK Holding plans to undertake investments in the development of 3G/LTE network as well as in innovative and high-quality mobile services for the benefit of Russian consumers and businesses.

Transaction structure

The following strategic considerations were behind the transaction:

• T2 RTK Holding gets immediate nation-wide reach and sufficient scale to effectively compete with existing mobile operators;
• The combination of mobile assets allows T2 RTK Holding to capture the imminent data growth opportunity in the Russian telecoms market by capitalising on Tele2 Russia’s know-how and impressive track record in developing mobile operations and on Rostelecom’s wide next-generation spectrum holdings;
• T2 RTK Holding commands superior cash flow generation potential, to the extent the combination is expected to generate significant synergies over the medium term, particularly in respect of network roll-out and operation, distribution and customer service;
• T2 RTK Holding is able to offer converged fixed-mobile products across the country;
• Rostelecom additionally benefits from substantial savings of mobile capital expenditures and elimination of debt related to mobile operations albeit facing relatively minor negative impact on top line.

The Joint Venture with VGTRK

In December 2014, Rostelecom announced a deal to create a media joint venture with the All-Russia State Television and Radio Broadcasting Company (“VGTRK”), Russia’s leading producer of pay-TV channels for cable and satellite broadcast. The JV was made up of VGTRK’s Digital Television and Rostelecom’s subsidiary NKS-Media.

The main aim of the JV is to accelerate the development of the combined media assets in the field of production and distribution of thematic pay-TV channels for cable and satellite broadcast. The participation in creation of Russia`s leading producer of thematic pay-TV channels, together with one of the country`s largest media holdings VGTRK, will provide Rostelecom with access to an expertize of high-quality original content creation. In addition, this will also enable the company to benefit from economies of scale.

The deal was structured as follows:

• Digital Television JSC carried out an additional share issue placed by private subscription;
• Rostelecom acquired additional share issue of Digital Television OJSC by contributing 100% of its equity interest in NKS-Media and RUB 250 million in cash and received 25.33% of Digital Television’s voting shares.

Rostelecom’s assets contribution to the JV amounts to more than RUB 1 billion.

Channels

Transaction rationale

We believe our media assets will generate greater value as part of a larger JV with VGTRK rather than attempting to develop our media business as a standalone entity. This will enable the combined company to obtain a much stronger position in the market, manage its costs more efficiently and enhance a leadership in quality of content.

Acquisition of SafeData

Early 2015 Rostelecom acquired a controlling stake in LLC Data Storage Centre (operating under the SafeData brand), Russia’s largest provider of commercial data centres, traffic exchange service and content delivery.

The acquisition will enable Rostelecom to accelerate its development of a national content storage and distribution network. This includes a federal geographically distributed network of data centres, which combines communication channels, traffic exchange points, content delivery systems, as well as systems to protect against network attacks and traffic monitoring. As a result of the deal, Rostelecom became a leading player in the Internet exchange points (IX) and content delivery (CDN) segments. It also strengthened the Company’s position in the data centre market, as Rostelecom became Russia’s second largest provider with a 15% consolidated market share following the completion of the acquisition.

The deal has been structured in two stages:

• During stage one, Rostelecom, acquired 5.4% of the share capital of LLC Data Storage Centre for RUB 104.2 million;
• During stage two, Rostelecom added RUB 1,728.9 million of cash to LLC Data Storage Centre’s share capital. As a result, Rostelecom’s stake in LLC Data Storage Centre’s share capital increased to 50.1%.

The volume of information being stored globally is increasing exponentially and is driving growth in the data storage and distribution market. Other factors include an increase in cloud service computing capacity, the complexity of telecoms operators’ interworking model, as well as increasing demands for reliable and timely delivery of digital content. A law requiring companies to hold data on Russian users within the Russian Federation also makes this segment attractive.

Transaction description

Transaction rationale

Data Centres Market Breakdown in 2014

Data Centres Market Volume (RUB billion)

^{Source: iKS-Consulting}

As a result of the deal, Rostelecom will quickly build up national-scale operations in the content storage and distribution market. The level of growth and promise offered by the marketplace makes its entry a logical step for Rostelecom. Furthermore, the business fits in with our overall strategy and SafeData is uniquely positioned, as the only player in the market to combine data processing centres, traffic exchange and content delivery into its business. This acquisition will allow us to present our clients with an integrated offering and make us the market leader in providing data services.