ROSTELECOM PJSC (RKMD)
ROSTELECOM PJSC: Rostelecom to Consolidate 100% of Tele2 Russia
13-Nov-2019 / 12:51 MSK
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Rostelecom to Consolidate 100% of Tele2 Russia
The landmark deal creates the largest integrated digital service provider in
Russia
Moscow, Russia - November 13, 2019 - Rostelecom PJSC (MOEX: RTKM, RTKMP;
OTCQX: ROSYY), announces that its Board of Directors has approved a
transaction to consolidate a 55% stake in T2 RTK holding LLC (hereinafter -
Tele2 Russia). The transformational deal strengthens Rostelecom's position
in the fast-growing mobile segment and creates the leading integrated
digital provider of fixed-line and wireless solutions in Russia.
Transaction highlights:
? Rostelecom gains 100% control over the strategically vital asset at an
attractive price;
? Potential to realise operational synergies on the back of the
implementation of a unified strategic approach;
? Support of fixed-line business as wireless remains a key strategic trend
in the industry;
? Benefits include joint involvement in the development of a 5G
infrastructure;
? Attractive deal financing as an approximately 70% non-cash component to
the deal;
? Attractive challenger[1] multiple of 6.0 EV/EBITDA 2019F (5.2 EV/EBITDA
2020F).
Mikhail Oseevskiy, President of Rostelecom, commented:
"The acquisition of the remaining 55% stake in Tele2 Russia provides us with
full control of the most successful and rapidly growing mobile player in
Russia. The deal transforms Rostelecom into the largest integrated digital
service provider in the country. We are consolidating 100% of Tele2 Russia,
predominately on a non-cash basis, at a fair fundamental price and
attractive multiple for this type of asset.
"Strategically, this is a landmark deal for Rostelecom and represents a key
part of the Company's digital transformation. The transaction strengthens
Rostelecom's service ecosystem through the addition of renewed convergent
solutions that increases the competitiveness of our market proposition. This
will drive sales opportunities through joint cross-selling and it increases
the margins of our overall business."
"The deal also facilitates joint development of projects as part of Digital
Russia program, including informational infrastructure projects, smart city
solutions, unmanned vehicle transportation, big data analysis."
"Moreover, the deal provides Rostelecom with a significant competitive edge,
which has potential to enhance our financial profile, and strengthen our
leading position in telecom, IT and other hi-tech solutions sectors in the
mid- and long-term. The unique mix of the largest fibre infrastructure,
mobile network, spectrum resources will create and control a new foundation
to develop 5G. The successful combination of Rostelecom and Tele2 assets
forms an unrivalled integrated platform for rendering telecom, IT and other
top-notch digital solutions."
Strategic Considerations
Acquisition of a rapidly growing high-margin mobile business
Tele2 Russia is the fastest growing mobile player in Russia and the only
provider in the country that managed to substantially increase its market
share in the last three years to 17% (+ 2 p.p.)[2]. Tele2's subscriber base
stands at 44 million[3], while its Net Promoter Score ranks as the best in
the sector. Tele2 posted 16% revenue CAGR for 2016-2018, against the 4%
average in the industry. The company is proud of its increasingly developed
mobile data network, and its six-fold increase in LTE base stations in the
last three years[4], which has enabled Tele2 to become the second mobile
player in Russia by the number of Base Transceiver Stations. The company is
the leader in telecom market in terms of the pace at which its network
infrastructure is being rolled out. Tele2 Russia ranks third in the industry
by the number of 2/3/4G BTS.
The enlarged company expects top-line and OIBDA growth to accelerate, and
for margins and cash flow generation to increase.
Considerable upside potential for fixed and mobile assets
The deal will complement Rostelecom's digital ecosystem of services with new
convergent offerings, which may stimulate consumption and increase sales as
a result of higher cross-selling potential between its segments.
Convergence remains a key strategic trend in the telecommunications sector.
International trends indicate that the promotion of convergent offerings
decreases churn and generates higher ARPU. Following the conclusion of the
deal, the enlarged company will become the only player in the market to
offer a unified and fully-converged offering nationwide, based on
Rostelecom's superior fixed-line network and Tele2's enhanced mobile
infrastructure.
The deal will enable Rostelecom to realise substantial opportunity by
offering the best convergent proposition, which strengthens the Company's
competitive position and increases market shares both in the mobile and
fixed-line segments.
5G prospects in Russia
In the run up to the upcoming rollout of the 5G network, the deal will
enable Rostelecom, as potential infrastructure operator of 5G networks, to
merge Rostelecom's technologically complimentary network (backbone and last
mile) with Tele2's mobile infrastructure and bring together the required
experience and expertise of both parties to build an economically viable
next generation network.
Moreover, the usage of Tele2 technological infrastructure will enable
Rostelecom to optimise its network maintenance costs. For specific client
groups and territories, the possibility exists to shift from fixed-line to
wireless solutions.
Synergies potential
As a result of the deal, Rostelecom group will be able to extract synergies
to deliver incremental value for the company.
The deal will enable the company to create new services, strengthen
cross-selling potential and deliver new packaged and convergent solutions to
accelerate revenue growth.
There is also tangible potential to reduce operating costs by increasing the
scale of the business and by optimising external costs and business
processes.
Deal Structure
The acquisition of the 55% stake in Tele2 Russia is expected to be completed
in three parts:
? The acquisition of a 10% stake in Tele2 Russia through an exchange of
10% of ordinary Rostelecom shares held by MOBITEL (Rostelecom subsidiary).
The valuation of this non-cash transaction is based on the report of an
independent appraiser. The transaction has a value of RUB 24 bln;
? The acquisition of a 27.5% stake in Tele2 Russia using cash proceeds
received from an additional share issue of Rostelecom ordinary shares
awarded to VTB bank at a price of RUB 93.21 per share. The transaction
will carry a value of RUB 66 bln.
? The acquisition of a 17.5% stake in Tele2 Russia for cash at a valuation
determined by the independent appraiser. This cash component will be equal
to RUB 42 bln.
Approach to Financing
Upon the completion of the deal, the enlarged company will maintain a
comfortable level of debt which will enable Rostelecom to comply with the
requirements of its current dividend policy.
Integration and management
Once the deal is complete, the company intends to:
? keep Tele2 Russia as a separate legal entity and maintain its existing
brand;
? establish a joint integration committee with the aim of finding and
extracting synergies while maintaining the ambitious pace of Tele2
Russia's development;
? preserve the status of Tele2's existing management team and approve a
new motivation plan;
? renew and unveil the Rostelecom group strategy within the first half of
2020.
* * *
PJSC Rostelecom [1] is the largest digital service provider, operating in
all segments of the telecommunications market in Russia, it serves millions
of households, the state and private enterprises across the country.
Rostelecom is Russia's undisputed market leader, providing high-speed
Internet access to over 13.1 million users and pay-TV services to more than
10.3 million clients, over 5.5 million of which are subscribed to
Rostelecom's IPTV services on a national level.
In the nine months of 2019, the Group generated RUB 242.6 billion of
revenues, RUB 81.4 billion of OIBDA (33.6% of revenue) and RUB 16.4 billion
of net income.
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