M&A activity

Acquisition of NTK

On February 4, 2011, we, together with two IRCs, OJSC Uralsvyazinform and OJSC North-West Telecom, acquired 71.8% of the share capital of NTK for a combined cash consideration of RUB 27.9 billion. The shares were acquired from CJSC National Media Group, OJSC Surgutneftegaz and Raybrook Limited. In addition, we acquired NTK promissory notes previously issued by it to one of the sellers of NTK shares with the aggregate face value of RUB 3.9 billion for a cash consideration of RUB 3.7 billion. The interest rate under these notes varies from 6.0% to 9.5% per annum and the notes mature in June 2012 and 2013.

NTK is a major cable TV operator in Russia and also has a significant presence in the broadband Internet access market. NTK provides Pay-TV services, both social and extended packages, as well as broadband Internet access for corporate and residential customers. NTK also provides distribution services to 93 Pay-TV channels, operates 7 TV channels of its own production and provides telephony and line leasing services.

NTK owns and operates modern network infrastructure in seven Russian cities – Moscow, St. Petersburg, Ekaterinburg, Novosibirsk, Kurgan, Elektrostal and Sredneuralsk. In Moscow and Ekaterinburg, NTK utilizes FTTx technology, while in St. Petersburg, Novоsibirsk, Kurgan, Elektrostal and Sredneuralsk, NTK uses hybrid fibre coaxial (“HFC”) technology. As of December 31, 2011 in Moscow, St. Petersburg and Ekaterinburg NTK network covers 85%, 80% and 85% households, respectively.

On March 6, 2012, Rostelecom completed the acquisition of a 28.2% stake in NTK for a total cash consideration of RUB 13.8 billion. As a result, Rostelecom acquired 100% shares in NTK for RUB 41.7 billion, after taking into account a 71.8% stake purchased in February 2011. The transaction with NTK is expected to result in the realisation of approximately RUB 2 billion in synergies by 2015.

Acquisition of stake in Bashinformsvyaz

In June 2011, we acquired 39.9% of the ordinary shares in OJSC Bashinformsvyaz from Bashtelekominvest LLC for a combined cash consideration of RUB 3,640 million.

OJSC Bashinformsvyaz is a major telecoms operator in the Republic of Bashkortostan which provides fixed-line telephony, broadband Internet services and Pay-TV services to residential and corporate clients. It also leases channels to other telecoms operators. OJSC Bashinformsvyaz owns and operates modern network infrastructure in Ufa, Salavat, Oktyabrsky, Sterlitamak and other major cities of the Republic of Bashkortostan.

In 2010, OJSC Bashinformsvyaz generated RAS revenues of RUB 5,676 million and EBITDA of RUB 1,722 million.

The FASPM and the Ministry for Property Relations of the Republic of Bashkortostan currently own 29.3% and 18.5% of the voting shares in OJSC Bashinformsvyaz, respectively. The federally owned interest of 29.3% ordinary shares in OJSC Bashinformsvyaz is expected to be contributed into the charter capital of OJSC Svyazinvest in accordance with the edicts of the Russian President № 1005 “On the development of the open joint stock company Svyazinvest”, dated August 12, 2010, and № 1418 “On the further development of the OJSC Svyazinvest”, dated November 15, 2010.

Acquisition of stake in Volgograd-GSM

In August 2011, we acquired a 50% interest in CJSC Volgograd-GSM from SMARTS Group for a total cash consideration of RUB 2,322 million, increasing our aggregate shareholding in CJSC Volgograd-GSM to 100%.

CJSC Volgograd-GSM provides GSM mobile services in the Volgograd region covering 33 of the region’s districts, or 90% of the region’s 2.6 million inhabitants. CJSC Volgograd-GSM had 857,000 mobile subscribers as at the end of the second quarter of 2011, and a 20% share of the region’s GSM market as at the end of 2010. In 2010, CJSC Volgograd-GSM reported RAS revenues of RUB 1,748 million and EBITDA of RUB 708 million.

Acquisition of sta ke in Orenburg-GSM

In September 2011, we acquired a 49% interest in CJSC Orenburg-GSM from SMARTS Group for a total cash consideration of US$ 4 million, increasing our aggregate shareholding in CJSC Orenburg-GSM to 100%.

CJSC Orenburg-GSM provides GSM mobile services in the Orenburg region and its major cities Orenburg, Orsk, Novotroitsk, Mednogorsk, Buzuluk, Buguruslan, Kuvandyk, Sol-Iletsk and other towns. CJSC Orenburg-GSM had 185,000 subscribers at the end of the second quarter of 2011, and an 8% share of the region’s GSM market as at the end of 2010. In 2010, CJSC Orenburg-GSM reported RAS revenues of RUB 194 million and EBITDA of RUB 32.6 million.

EXPE CTED Acquisition of Sky Link

In November 2011, the FAS granted clearance to LLC MOBITEL (“MOBITEL”), our 99.9% owned subsidiary, to acquire 50% of voting shares in CJSC Sky Link (“Sky Link”), a leading Russian 3G operator and a wholly owned subsidiary of Svyazinvest.

Acquisition of GNC-ALFA

In February 2012, our wholly owned subsidiary Teleset Networks Ltd acquired a 75% minus one share stake in GNC-ALFA, one of the largest independent backbone operators in Armenia, for US$ 22.5 million.

GNC-ALFA operates a modern fiber-optic network spanning approximately 1,500 km, which covers approximately 70% of the territory of the Republic of Armenia. GNC-ALFA’s network is interconnected with the region’s major backbone networks and major MMR (“meet-me-room”) centres, as well as with certain international gateways. GNC-ALFA is a majort independent aggregator of national IP-traffic, and its subsequent transit, in Armenia. In 2011, GNC-ALFA reported revenues of approximately US$ 12 million.

Acquisition of Enter

In February 2012 Rostelecom completed the acquisition of a 100% stake in Enter LLC (“Enter”), a broadband Internet services provider to individual subscribers in Barnaul, Novokuznetsk and Tyumen, for a total cash consideration of RUB 305 million.

The acquisition of Enter reflects Rostelecom’s strategy to increase its subscriber base and modernise its network infrastructure. The deal also serves as an alternative to capital expenditure in Enter’s regions, as it provides Rostelecom with access to Enter’s modern network and it provides the Company with the technical ability to offer a broader range of services, including IPTV services to Enter’s existing subscribers and more modern and high-speed communications services to Rostelecom customers.

Enter’s network infrastructure was built in 2010 and it is among the most modern networks in the three cities it serves. The network is built using Metro Ethernet technology and has fibre-optic communications lines that exceed 480 km in length. The network’s technical scope covers around 2,600 multi-storey buildings passed, or around 80% of all multi-storey buildings in Barnaul and over 50% of the multi-storey buildings in Novokuznetsk.

Buyback of 3.86% shares

In February 2012 MOBITEL LLC has completed the acquisition of 3.86% of Rostelecom shares for a total cash consideration of RUB 19 billion with the help of debt financing. As a result, Motel’s ordinary share stake in Rostelecom increases to 6.55%.

To limit the dilution of the Company’s free float, as well as any stock price fluctuations caused by an open market share buyback, the 3.86% stake in Rostelecom’s ordinary shares has been accumulated by VTB Capital Plc and Renaissance Securities (Cypus) Limited on behalf of MOBITEL. The shares were acquired from minority shareholders through the over-the-counter (OTC) market.

This additional stake is expected to be used to facilitate strategic acquisitions, or it may be sold during the Company’s SPO, depending on the status of the securities market.

Agreement with Skartel (YOTA)

Rostelecom signed an agreement with Yota, the Russian mobile broadband provider, that gives Rostelecom access to Yota’s LTE network infrastructure. Rostelecom will utilise a feature-driven development (FDD) range of frequencies of between 2500–2530 MHz and 2620–2650 MHz to provide telecommunications services as a Mobile Virtual Network Operator (MVNO). Under the terms of the contract test services are expected to commence July 1, 2012. Rostelecom intends to start providing commercial services using an LTE network in the Moscow region from September 1, 2012 and the provision of these services across other Russian regions will be rolled out at a later stage. The Company also plans to offer subscribers its branded telecommunication equipment. MVNO-model will enable Rostelecom to optimise its costs and resources when starting to provide 4G network services in the near future. It will also help to expand Rostelecom’s range of services in Moscow.

The acquisitions we made in 2011 added 6 million subscribers to our subscriber base, made us a leader of the Russian Pay-TV market and strengthened our positions on mobile market.