Golden Telecom, Inc.

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Golden Telecom, Inc.

1 Kozhevnichesky Proezd
115114 Moscow
Russia
Telephone: +7-501-797-9300
Fax: +7-095-797-9306
Web site: http://www.goldentelecom.ru

Public Company
Incorporated: 1999
Employees: 1,700
Sales: $198.7 million (2002)
Stock Exchanges: NASDAQ
Ticker Symbol: GLDN
NAIC: 517212 Cellular and Other Wireless Telecommunications

Golden Telecom, Inc. is one of the first foreign companies to provide telecommunications and Internet services in Russia and the Commonwealth of Independent States (CIS). Its roots go back to the late 1980s, when an American company began setting up data and voice links in joint ventures with partners in the Soviet Union. The American company, which became known as Global TeleSystems, Inc., eventually became a leading telecommunications provider across all of Europe. Golden Telecom was formed in 1999 when Global TeleSystems spun off its business activities in Russia and the CIS into a separate company. Although Golden Telecom is incorporated in Delaware and trades on the NASDAQ, it is majority-owned by Russian companies and all of its business dealings are in Russia and the CIS.

Golden Telecom is a market leader among the independent telecommunications companies that were set up shortly after the breakup of the Soviet Union to provide a more convenient and reliable alternative to the regular public telephone service. It offers a wide array of telecommunications-related services. The company has built its own alternative local access overlay networks, fiber optic and satellite networks in Russia and the CIS countries. Through this network, it is able to offer telephone, Internet, and data transmission services to corporate customers in Moscow, Kiev, St. Petersburg, Nizhny Novgorod, and other population centers. It provides local, domestic long-distance, and international telephone services. Golden Telecom also offers dial-up Internet access to mass market consumers and operates several popular Russian-language web portals. In addition, the company is a leading cellular service provider in Kiev. Through acquisitions, it has furthered the consolidation of Russia's fragmented telecommunications sector.

Developing a Telecom Infrastructure in the 1990s

Golden Telecom's roots go back to 1983, when a nonprofit company known as San Francisco/Moscow Teleport, Inc. was set up to promote telecommunications connections with the U.S.S.R. In 1986 the company was incorporated as a for-profit corporation known as Global TeleSystems, Inc. That year it began offering data links between the U.S.S.R. and the United States. The company operated out of McLean, Virginia.

By the early 1990s Global TeleSystems was one of several Western companies that had set up telecommunications enterprises in Russia. Under state control, the country's existing network had failed to keep up with growing demand and technological advances. When the Soviet Union disintegrated in 1991, Russia was left with an inefficient and underdeveloped analog telephone system. The state Ministry of Communications transferred control of local access networks to 80 regional operators known as telcos, while a state-run enterprise known as Rostelecom took over the long-distance and international network. The small regional operators lacked the funds to update the country's overburdened infrastructure. Meanwhile, the gradually developing private business sector was demanding reliable local and long-distance telephone service as well as data connections. To spur investment, the Ministry of Communications issued licenses allowing domestic and foreign companies to construct their own overlay networks as an alternative to the traditional network. Private companies rushed in to provide upto-date telecommunications services to the business customers who could afford to pay for them. Most of Global TeleSystems' early enterprises were set up as joint ventures with the entities that held licenses for network development.

Global TeleSystems set up two of its major ventures in 1990. Sovam Teleport was established to provide data transmission and Internet connections in Russia and the CIS. The company began offering local subscriber access to its networks in 1994 and eventually became a leading provider of business-to-business data connections. Another subsidiary, Sovintel, was founded in 1990 as an international long-distance carrier in a 50–50 joint venture with the state long-distance monopoly Rostelecom. Sovintel began building an alternative fixed-line network in Moscow and started offering international long-distance services in 1992. For the Russian partners in the enterprise, Sovintel represented a whole new way of operating a telecommunications business. Under the old system, customers had to write a letter to the phone company and go on a long waiting list to get a telephone. Now it was the other way around: the telecommunications company was pursuing customers, primarily in the private business sector. Alexander Vinogradov, who would eventually head Golden Telecom, said of his early years at Sovintel, "We became students again. We were learning from our American partners, from our clients, from reading. We were finding ourselves in this world."

In the mid-1990s Global TeleSystems expanded its offerings across Russia and in Moscow. The company TeleRoss was established in 1994 to provide domestic long-distance services via a satellite network. TeleCommunications of Moscow, or TCM, was set up that year to provide CLEC, or "competitive local exchange carrier" services. A CLEC network was an overlay network separate from and superior to the public network. In 1995 Global TeleSystems began offering cellular service on a small scale, and amassed shares in regional cellular networks through the holding company GTS Mobile Services. It also branched out to Kazakhstan, founding SA Telcom LLP as a partnership between Sovam Teleport and the Kazakh holding company Sary-Arka. Global TeleSystems reached the city of Nizhny Novgorod in 1996 when it set up a joint venture with Svyazinform Nizhny Region. A Ukrainian branch also was founded that year. At first the Ukrainian subsidiary provided only cellular service, but it soon began building a fiber optic network in Kiev in order to provide Internet and voice services.

By the end of 1997, Global TeleSystems had 3,160 dial-up Internet subscribers and 50 points of presence across Russia that could be used to access the Russia On-Line service that had been developed by the Sovam Teleport subsidiary. The TeleRoss subsidiary had amassed 50 percent ownership in 14 regional providers of domestic long-distance service. Net revenues from the CIS businesses in 1997 more than doubled from the year before to $27.2 million, but net losses for the past several years were in the millions of dollars.

Nevertheless, expansion continued at Global TeleSystems. The company acquired the ownership interest of its former partner in Sovam Teleport and also began acquiring full ownership of the regional telcos and converting them into branches of TeleRoss. Meanwhile, Global TeleSystems was focusing more and more attention on Western Europe, where the telecommunications market had just been deregulated. To generate funds for European expansion, Global TeleSystems went public on NASDAQ in February 1998. Billionaire George Soros held about 27 percent of the company. The proceeds from the initial public offering (IPO) supported acquisitions of major telecommunications operators across Europe, including Espirit Telecom, NetSource, and Omnicom. As a result, Global TeleSystems' Russia and CIS division accounted for only about 20 percent of revenues in 1999, down from 80 percent in 1997.

IPO and Acquisitions: 1999–2001

The relatively unstable ventures in Russia were now a liability with the potential to depress Global TeleSystems' share price and make it harder to borrow money for its activities in Western Europe. So the company decided to set up a separate legal entity for the Russia and CIS division. In June 1999 Golden Telecom Inc. was incorporated in Delaware and in September the company went public on NASDAQ. Stewart Reich, an American who had led Global TeleSystems' Russia and CIS division since 1997, became president and CEO of the new company. Global TeleSystems retained a ⅔ interest in Golden Telecom.

Golden Telecom's IPO, the first by a Russian company since the financial crisis in August 1998, was not viewed as a success. At the last minute, the company's underwriters decreased the estimated share price from $16 to $12 in an effort to generate greater investor interest. Nevertheless, Russia's unpredictable regulatory regime, President Boris Yeltsin's poor health, and the uncertainty of the upcoming Duma elections did not inspire investor confidence. The share price dropped to $8.56 later on the day of the IPO. Still, Golden Telecom came away with nearly $150 million in cash, including about $64 million from the share offering, a $50 million contribution from its parent company Global TeleSystems, and $30 from strategic investors including ING Barings and the Soros Fund.

Company Perspectives:

Golden Telecom anticipates strong growth in the next three to five years as the company expands with the expected strong growth of the Russian economy over the same period. Expanding demand from business customers for modern telecommunications services will drive the growth. Our main strategies are to: Pursue consolidation opportunities through acquisitions that will allow us to improve and expand our service offerings and maintain operational control. Increase market share by offering bundled data and voice services over an integrated network. Extend our leading position in high growth data and internet markets. Control operating costs and satisfy needs via network planning and optimization. Our network strategy includes building and owning our local exchange and customer access networks. Focus operating activities and capital investments opportunities in Moscow, Kiev, St. Petersburg, Nizhny Novgorod and other population centers in the CIS, where demand for our services is most heavily concentrated.

By the end of 1999, confidence in Golden Telecom improved and the share price was more than $30. A minor scandal surfaced at the end of the year: The New York Times reported in December that sometime in the mid-1990s Global TeleSystems paid directors of the Moscow City Telephone Network $65 million for preferential treatment that would allow them to set up a premium telecommunications provider. Golden Telecom denied the allegations and the incident failed to have any lasting effect. In 1999 both annual revenue and net loss attained new heights, reaching $97.9 million and $46.5 million, respectively.

Golden Telecom moved ahead with more acquisitions and consolidation. The data and Internet subsidiary Sovam Teleport had acquired Glasnet, a leading Russian Internet service provider, a few months before the IPO. In November 1999 Golden Telecom merged three of its subsidiaries in order to take advantage of operational and tax-related benefits: Sovam Teleport, the data and Internet division, and TCM, the CLEC services provider in Moscow, were combined into TeleRoss, the satellite communications operator.

A series of Internet-related acquisitions followed in 2000. Golden Telecom's web presence grew with the acquisition of the web sites Absolute Games and Referat.ru, Russia's number one educational site. This was followed by the $8.28 million purchase of IT INFOART STARS, an Internet portal that offered a wide variety of news and publication content, as well as the popular rating index 1000stars.ru. In August 2000 Golden Telecom completed one of the biggest deals yet in Russia's telecommunications sector when it bought the Agama family of web properties for $25 million. The purchase included the top bilingual search engine Aport and a popular entertainment portal known as Omen. With these acquisitions under its belt, Golden Telecom was able to roll out an enhanced version of its Russia-On-Line web portal in October 2000. No longer just a basic dial-up service, Golden Telecom now offered news, chat, games, shopping and search facilities. The company's goal was to become the dominant web portal in Russia.

Other acquisitions in 2000 extended Golden Telecom's reach as an Internet service provider. The company's Ukrainian subsidiary acquired its partner's interest in the data connections provider Sovam Teleport Kiev, so the company was able to offer both voice and data services in Kiev through one fully owned subsidiary. In April Golden Telecom bought a 51 percent share in KIS (Commercial Information Systems), an ISP that had been active in Nizhny Novgorod since 1992. CEO Stewart Reich told the Moscow Times in 2000 that, with only about 300,000 to 400,000 Internet subscribers in Russia, the country was far from hitting the Internet ceiling: "I don't even believe we're at the start. The only barrier facing us is an overall domestic economic recovery. Once that happens, our products are available to everyone."

Reich hoped to enhance business-to-business services such as web hosting and design as well as mass market consumer services. One move in the "B2B" direction came in April 2000 when Golden Telecom acquired Fintek, a Moscow-based web design studio with expertise in advanced animation techniques and 3D imaging that could help shoppers preview goods on an e-commerce site.

By the end of 2000, Golden Telecom's data and Internet division had grown to rival the CLEC services division in terms of revenue generated. The company had 85,833 Internet subscribers and 132 points of presence across Russia. The following year Golden Telecom became the leading ISP in Russia with the acquisition of the Moscow-based ISP Cityline, with 62,000 subscribers, and the 51 percent acquisition of Uralrelcom, an ISP with 8,000 subscribers in the Ekaterinburg area.

Consolidating the Market As a Russian-Owned Company: 2001–03

In 2001 Golden Telecom became a truly Russian company when control moved into the hands of several large Russian investors. Since the fall of 2000, Golden Telecom's future had been uncertain, as its U.S.-based majority shareholder Global TeleSystems had indicated that it wished to get rid of its Russian assets and focus on Western Europe. The situation was resolved in May when the influential Russian conglomerate Alfa Group bought a 44 percent stake in Golden Telecom for $110 million. Although Alfa had no experience in the telecommunications industry, it had connections with bureaucrats in provincial areas that could help Golden Telecom extend its reach into the regions. Two other minority shareholders, Capital International and Barings Vostok, also purchased additional shares from Global TeleSystems at this time, leaving Global TeleSystems with an 11 percent stake in Golden Telecom. By the end of 2001, the company had sold its remaining stake to Golden Telecom and Barings Vostok. Observers agreed that it was advantageous for Golden Telecom to be a Russian company, since the Russian government had recently indicated that it was wary of foreign investment in telecommunications because of national security concerns. Now, with solid Russian credentials, Golden Telecom was free to pursue the full acquisition of the international long-distance carrier Sovintel, which it still operated as a joint partnership with the government concern Rostelecom.

Key Dates:

1983:: San Francisco/Moscow Teleport, Inc. is set up as a nonprofit company.
1986:: The company is incorporated as Global TeleSystems, Inc., a for-profit corporation.
1990:: Sovam Teleport and Sovintel are established to provide voice and data communication services in Russia.
1999:: Global TeleSystems' Russia and CIS division becomes a separate company, Golden Telecom, and goes public on NASDAQ.
2000:: Golden Telecom makes numerous acquisitions of Internet service providers and web properties.
2001:: Alfa Group leads a consortium of Russian investors that purchases majority control in Golden Telecom.

Although the latest developments at Golden Telecom were promising, the company was still operating at a loss. In 2001 it lost $39 million on revenues of $140 million. Performance that year was hurt by lower-than-expected demand for advertising on the Russia-On-Line portal and by complications at the Ukrainian subsidiary that summer. The Ukrainian state phone monopoly Ukrtelekom had accused Golden Telecom (Ukraine) of using a deceptive call routing scheme to mask long-distance calls as local calls, thereby cheating the state company out of the fees that would normally have to be paid when Golden Telecom used state lines to route international calls to customers. Golden Telecom, in turn, had increased criticisms of the state organization in previous months for using unfair means to squeeze out smaller competitors. The dispute culminated in March 2002 when state prosecutors raided the Ukrainian subsidiary's offices. The General Director of Golden Telecom (Ukraine), Yury Bezborodov, subsequently stepped down and was replaced by Mladen Pejnovic, who pursued a compromise with the state entity.

In August 2001 Stewart Reich resigned and Alexander Vinogradov took over as president and CEO of Golden Telecom. Vinogradov had been working in the telecommunications industry since 1980. He joined Golden Telecom's Sovintel in 1991 and had served as general director of the subsidiary since 1995. As CEO, Vinogradov led Golden Telecom through another series of consolidations. In the summer of 2002 the company merged its operations in Nizhny Novgorod into a single entity that could provide both voice and data services, primarily to corporate customers. Golden Telecom had a 58 percent stake in the new entity, formed when TeleRoss Nizhny Novgorod and the Internet company KIS were merged into Agentstvo Delovoi Svyazi (ADS). Golden Telecom had acquired ADS, which operated a network infrastructure in Nizhny Novgorod, in September 2001.

In the fall of 2002 Golden Telecom completed the long-sought acquisition of international long-distance carrier and fixed-line operator Sovintel from its 50–50 state partner Rostelecom. Rostelecom received $52 million and a 15 percent share in Golden Telecom in the transaction. Sovintel was a profitable company that was expected to help Golden Telecom's balance sheet. In 2003, Golden Telecom's other main subsidiary, TeleRoss, was merged into Sovintel. With data and voice activities combined in a single entity, Golden Telecom would now be able to offer more integrated services to both businesses and consumers. Business services, at 54 percent, were by far the largest segment of Golden Telecom's operations, followed by services to other telecommunications operators at 33 percent, consumer services at 9 percent, and cellular services at 4 percent.

Golden Telecom reported its first profit in 2002. Net income was $29.8 million on revenues of $198.7 million. The trend continued into the first half of 2003, when the company reported a second quarter net profit of $11.9 million. The company continued an aggressive acquisition strategy. It purchased Sibchallenge Telecom, an ISP and alternative telephone provider in Krasnoyarsk, for $15 million. Golden Telecom also announced that it was in discussions with Norway's Telenor for one of its largest acquisitions yet. In exchange for a 19.5 percent stake in Golden Telecom, Telenor would give the company full ownership of its fixed-line operator Comincom, including the subsidiary Combellga. Telenor had acquired the companies from the Russian government in 2000 and was now willing to sell them in order to advance the consolidation of the market. Golden Telecom, meanwhile, stayed on the lookout for further acquisitions in its drive to become the dominant player in Russia's independent telecommunications market.

Principal Subsidiaries

TeleRoss LLC; ADS (58%); Golden Telecom LLC (Ukraine); GTS Mobile Services, Inc.; Cityline ZAO; Uralrelcom (51%).

Principal Divisions

CLEC Services; Data and Internet Services; Long Distance Services; Mobile Services.

Principal Competitors

Sistema Telecom; Moscow City Telephone Network; Metromedia International Group, Inc.; Ukrtelecom; Petersburg Telephone Network; Rostelecom; Equant; Ukrainian Mobile Communications.