OREANDA-NEWS. Board of Directors of Rostelecom OJSC (Moscow Exchange: RTKM, RTKMP; OTCQX: ROSYY), Russia’s national telecommunications operator (“Rostelecom”), approve contribution of its mobile assets into a joint venture (“T2 RTK Holding”) with Tele2 Russia Holding AB (“Tele2 Russia”), equally owned by VTB Capital, the private equity arm of VTB, one of Russia’s largest banks (“VTB”), and a consortium of investors.

T2 RTK Holding will become a leading player in the Russian mobile market, with strong positions in the current regions of presence of Rostelecom and Tele2 Russia, and access to spectrum for next generation mobile services across all federal regions of Russia. T2 RTK Holding will have a pro forma subscriber base of approximately 38 million (Q3 2013), with pro forma 2012 revenues of approximately RUB 101 billion.

Rostelecom will contribute substantially all of its mobile assets and licenses to T2 RTK Holding, while Tele2 Russia will contribute all of Tele2 Russia’s mobile assets.

The contribution from Rostelecom will be effected in two stages. The first stage will see Rostelecom contributing its standalone mobile subsidiaries and assets, including SkyLink, into T2 RTK Holding. At the end of this first stage, Rostelecom will receive a 45% voting interest and a 26% economic interest in T2 RTK Holding.

During the second stage, Rostelecom will spin off its integrated mobile businesses into its new wholly owned subsidiary CJSC RT-Mobile which will be expected to have Rostelecom’s mobile licenses (including the LTE licenses) re-issued to it. Upon completion of the spin-off, Rostelecom will contribute its whole stake in CJSC RT-Mobile into T2 RTK Holding and increase its economic interest in T2 RTK Holding to 45%.

The combination will bring substantial benefits to both parties, as well as to consumers and the entire Russian telecom sector. T2 RTK Holding plans to undertake significant 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.

T2 RTK Holding will have immediate nation-wide reach and sufficient scale to effectively compete with existing mobile operators

The combination of mobile assets will allow 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 will command 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 will be able to offer converged fixed-mobile products across the country

Rostelecom will additionally benefit from substantial savings of mobile capital expenditures and elimination of debt related to mobile operations albeit facing relatively minor negative impact on top line

This transaction 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 transaction was approved by Rostelecom’s board of directors and is subject to regulatory approvals as well as other customary conditions precedent. It is anticipated that the first stage of the transaction will close in Q1 2014. The second stage of the transaction will be subject to the completion of Rostelecom reorganisation in the form of a spin-off, aimed at carving out the integrated mobile businesses. Such reorganisation requires Rostelecom shareholder approval, and a general meeting of Rostelecom shareholders to approve such a reorganisation has been scheduled for December 30, 2013. The second stage is expected to complete in the first half of 2014.

Sergey Kalugin, President of Rostelecom commented, “We are delighted to have reached an agreement with Tele2 Russia to create a new national mobile operator, with tremendous growth opportunities and exciting prospects. With support from both shareholders, T2 RTK Holding is set to be a story of great success.”

Credit Suisse and J.P. Morgan Limited acted as financial advisors to Rostelecom on the transaction. Barclays issued a fairness opinion. Linklaters served as counsel to Rostelecom.

VTB Capital and UBS acted as financial advisors to Tele2 Russia shareholders, while Skadden served as counsel to Tele2 Russia.