Russian Companies Continue to Expand Abroad

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May 17 – Russia’s third biggest mobile phone company VimpelCom has agreed to a US$420 million deal to buy New Telephone Company (NTC) from South Korea’s KT Corp and Summit Telecom Global Management, Sumitomo Corporation’s subsidiary.

VimpelCom said it planned to close the 90 percent acquisition within four weeks. After the acquisition, the company is planning on launching a mandatory buyout offer according to Russian law to purchase the remaining 10 percent of the NTC shares. The completion of the deal is expected in the third quarter of 2011.

VimpelCom’s Korean deal follows hot on the heels of an announcement that it would increase its ownership in a Vietnamese joint venture GTel Mobile to 49 percent from 40 percent and to invest a total of US$500 million towards the development of the joint venture by 2013 before further increasing its stake to 65 percent.

KT said the acquisition would help VimpelCom to secure a subscriber base in eastern Russia, where New Telephone is focused.

“Given that VimpelCom lacks a presence in Russia’s Far East, NTC is a good fit, in our view. The purchase price is quite high, but is reflective of a premium for control,” Ivan Kim, a telecoms analyst at Renaissance Capital in Moscow, said to Reuters.

NTC is a leading mobile operator in the Primorskiy region of Russia and one of the 10 biggest in the country. In 2010, NTC recorded approximately US$117.2 million in revenues and had a mobile subscriber base of approximately 950,000 as of 2010 year-end.

Mobile TeleSystem (MTS), VimpelCom’s biggest rival, also said in February it had bid for KT’s stake in NTC.

Similarly to VimpelCom, MTS has a successful subsidiary in India’s telecoms market, Sistema Shyam TeleServices, that currently services over 10 million customers and is expected to swing to a positive cash flow in 2013.

Russian companies are increasingly looking to invest overseas as insurance against political risk – foreign assets can’t be seized by the government if their owners clash with the Kremlin.

There have been too many cases of Russian entrepreneurs losing their companies to powerful officials or well-connected oligarchs.

The Russian Statistical Agency (Rosstat) informed on February 2011 that Russian accumulated investments abroad amounted to US$82 billion in 2010.

Analysts warn that if Russian companies continue to expand abroad rather than at home, it will be increasingly difficult to persuade foreign companies to invest in the modernization of Russia’s economy.

Last year US$35.3 billion left Russia. That was followed by another US$21.3 billion in the first quarter of this year, while the government was expecting from a maximum US$10 billion capital outflows over the whole year.

Although headline figures suggest foreign investors have been returning to Russia – FDI rose to US$41.2 billion in 2010 – only US$9 billion of this money was new foreign inbound investment. The rest was largely multinationals reinvesting profits and was equal to less than half of Russia’s US$19.4 billion outbound direct investment.

“The huge difference between the two figures suggests that Russia has to focus on improving its investment climate, as it will be hard to attract more foreign investment while Russian business is actively investing abroad despite the huge need for domestic investment,” Natalia Orlova and Dmitry Dolgin, members of Alfa Bank macroeconomic research team, said on the bank’s web site.