5. Business combinations

2011 transactions

Acquisitions of subsidiaries

OJSC National Telecommunications

In February 2011 the Group acquired 71.8% equity interest in OJSC National Telecommunications from CJSC National Media Group, OJSC Surgutneftegas and Raybrook Limited. The purchase price amounted to US$ 951 million. Further, the Group purchased promissory notes issued by OJSC National Telecommunications for US$ 126 million from Shepton Holdings Limited. The acquisition-related costs of 206 were included in other investing and financial gain in this consolidated statement of comprehensive income for the year ended December 31, 2011.

As of the acquisition date OJSC National Telecommunications was a holding structure consisting of 42 companies. The primary activity of the entity mainly focused on IP-television and data transmission services. The Group intends to take up a leading role on the IPTV market through this acquisition. The Group accounted for the acquisition of OJSC National Telecommunications by applying the acquisition method, in accordance with provisions of IFRS 3 Business combinations.

The results of operations and financial position of OJSC National Telecommunications were consolidated by the Group starting from February 1, 2011.

The goodwill is attributable mainly to the diversification of the activities of the Group and to the extension into new markets.

From the date of acquisition until December 31, 2011, OJSC National Telecommunications has contributed 0.2 to the increase of net profit of the Group and 9,170 to the increase of revenue for 2011. If the combination had taken place at the beginning of 2011, the profit of the Group would have been 46,127 and revenue would have been 296,774. In determining these amounts, management has assumed that the fair value adjustments that arose on the date of acquisition would have been the same if the acquisition had occurred on January 1, 2011.

CJCS Volgograd-GSM

In August 2011, the Group acquired an additional interest of 50% in CJCS Volgograd-GSM thus obtaining control of 100%. The shares were acquired from SMARTS Group for cash payment of 2,322. CJCS Volgograd-GSM primarily provides mobile communication services.

The Group accounted for the acquisition of Volgograd-GSM by applying the acquisition method, in accordance with the provisions of IFRS 3 Business combinations.

The goodwill is attributable mainly to the diversification of activities of the Group.

The remeasurement to fair value of the Group\x92s existing interest of 50% in CJCS Volgograd-GSM resulted in a gain of 1,505 which has been recognised in other investing and financial gains in this consolidated statement of comprehensive income for the year ended December 31, 2011.

From the date of acquisition until December 31, 2011, CJCS Volgograd-GSM has contributed 132 to the increase of net profit of the Group and 584 to the increase of revenue for 2011. If the combination had taken place at the beginning of 2011, the profit of the Group would have been 46,201 and revenue would have been 297,187. In determining these amounts, management has assumed that the fair value adjustments that arose on the date of acquisition would have been the same if the acquisition had occurred on January 1, 2011.

The following table summarizes the fair values of identifiable net assets of OJSC NTC and CJSC Volgograd - GSM as of the acquisition dates:


  OJSC NTC CJSC Volgograd-GSM Total
Consideration      
Paid in cash 27,907 2,322 30,229
Promissory notes 3,688 - 3,688
Total consideration transferred 31,595 2,322 33,917
NCI 8,465 - 8,465
Deferred consideration - 23 23
Investment to associate before the acquisition - 817 817
Fair value revaluation of previously acquired
share
  1,505 1,505
       
Fair value of identifiable assets and liabilities:      
Property, plant and equipment 7,959 2,817 10,776
Intangible assets 16,867 1,250 18,117
Deferred tax assets 451 7 458
Other non-current assets 99 - 99
Non-current financial assets 1 4 5
Trade and other accounts receivable 2,368 147 2,515
Allowance for doubtful receivables (279) (20) (299)
Cash and cash equivalents 1,628 8 1,636
Current investments 1,808 - 1,808
Inventories 208 43 251
Non-current loans and borrowings (2) (131) (133)
Current loans and borrowings (2,471) (90) (2,561)
Accounts payable, provisions and accrued expenses (1,899) (190) (2,089)
Deferred tax liabilities (3,912) (479) (4,391)
Total net assets 23,105 3,386 26,491
Goodwill 16,955 1,281 18,236
Costs directly attributable to acquisition 206 3 209

Acquisition of non-controlling interests

In September 2011 the Group acquired an additional 49% interest in CJCS Orenburg-GSM from SMARTS Group for US$ 4 million in cash, increasing its ownership from 51% to 100%. The Group recognised a decrease in noncontrolling interests of 32 and a decrease in retained earnings of 84.

In April 2011 the Group acquired an additional 49% interest in CJCS STS from MELVOND HOLDINGS LIMITED for cash payament of 250, increasing its ownership from 51% to 100%. The Group recognised a decrease in non-controlling interests of 180 and a decrease in retained earnings of 70.

2010 transactions

Acquisitions of subsidiaries

In June 2010, OJSC Volgatelecom acquired 98.19% of ordinary shares in Teleset Networks Public Company Limited for 4,283 and obtained control over this entity. Teleset Networks Public Company primarily provides local fixed line communication services in Tatarstan and Ulyanovsk region.

In December 2010, OJSC North-West Telecom acquired 100% of ordinary shares in CJSC Severen-Telecom's ordinary voting shares for 863 and obtained control over this entity. CJSC Severen-Telecom provides various telecom services in Saint-Petersburg.

The Group accounted for the acquisition of these entities by applying the acquisition method, in accordance with the provisions of IFRS 3 Business combinations.

The following table summarizes the fair values of identifiable net assets of Teleset Network Public Company Limited and CJSC Severen-Telecom as of the acquisition dates:


  Severen Telecom Teleset Networks Public
Company Limited
Total
Consideration      
Paid in cash 863 4,283 5,146
Total consideration transferred 863 4,283 5,146
NCI - 48 48
Fair value of identifiable assets and liabilities:      
Property, plant and equipment 259 2,228 2,487
Intangible assets 206 714 920
Other non-current assets 19 10 29
Non-current investments   1 1
Trade and other receivables 55 169 224
Cash and cash equivalents 1 597 598
Other current assets - 128 128
Non-current liabilities (48) (391) (439)
Current liabilities (61) (319) (380)
Deferred income tax liability - (322) (322)
Non-controlling interest - (164) (164)
Total net assets 431 2,651 3,082
Goodwill 432 1,680 2,112
Costs directly attributable to acquisition - - -

The goodwill is attributable mainly to the expected expansion of new and existing services in the potentially lucrative regions.

From the date of acquisition until December 31, 2010 Teleset Networks Public Company Limited has contributed 443 to the increase of net profit of the Group and 612 to the increase of revenue for 2010. Financial results of CJSC Severen-Telecom from the date of its acquisition, December 27, 2010, until the end of year were not included in the Group's financial results as immaterial.

If the combinations had taken place at the beginning of 2010, the profit of the Group would have been 31,765 and revenue would have been 276,803. In determining these amounts, management has assumed that the fair value adjustments that arose on the date of acquisition would have been the same if the acquisition had occurred on January 1, 2010.

2009 transactions

Acquisitions of subsidiaries

In July 2009, OJSC Volgatelecom acquired 100% of ordinary shares in LLC GTS for 350 and obtained control over this entity. LLC GTS primarily provided telecommunication services to corporate and residential customers.

In July 2009, OJSC Rostelecom acquired 100% of ordinary shares in CJSC Rosmedia for 0.01 and obtained control over this entity. CJSC Rosmedia was a start-up project for providing IPTV-services.

In December 2009, OJSC Uralsvyazinform acquired 100% of ordinary shares of LLC Uzhno-Uralskaya telefonnaya compania for 132 and obtained control over this entity. LLC Uzhno-Uralskaya telefonnaya compania mainly provide fixed-line telephone services, internet and data transmission services.

The Group accounted for the acquisition of these entities by applying the acquisition method, in accordance with the provisions of IFRS 3 Business combinations.

The following table summarizes the fair values of identifiable net assets of LLC GTS, LLC Uzhno-Uralskaya telefonnaya compania and CJSC Rosmedia as of the acquisition dates:


  LLC GTS Uzhno-Uralskaya
telefonnaya compania
CJSC Rosmedia Total
Consideration        
Paid in cash 350 132 - 482
Total consideration transferred 350 132 - 482
NCI        
Fair value of identifiable assets and
liabilities:
       
Property, plant and equipment 120 111 17 248
Intangible assets 6 4 3 13
Non-current financial assets - - 7 7
Trade and other receivables 14 13 12 39
Cash and cash equivalents 23 3 2 28
Other assets 3 8 7 18
Non-current liabilities - (1) - (1)
Current liabilities (16) (21) (100) (137)
Deferred tax liabilities (8) (8) - (16)
Total net assets 155 109 (52) 212
Goodwill 195 23 52 270
Costs directly attributable to acquisition - 8 - 8

The goodwill is attributable mainly to the diversification of the activities of the Group.

From the date of acquisition until December 31, 2009 LLC GTS, LLC Uzhno-Uralskaya telefonnaya compania and CJSC Rosmedia have contributed 1 to the increase of net profit of the Group and 49 to the increase of revenue for 2009.

If the combinations had taken place at the beginning of 2009, the profit of the Group would have been 26,206 and revenue would have been 264,855. In determining these amounts, management has assumed that the fair value adjustments that arose on the date of acquisition would have been the same if the acquisition had occurred on January 1, 2010.

Acquisition of non-controlling interest

In addition, in October 2009, OJSC Far East Telecom acquired 49% of ordinary shares in its subsidiary OJSC Sakhatelecom for 1,318 and increased its share to 100%. The carrying value of acquired share in net assets exceeded additional shares purchase consideration by 525 and was accounted for as an equity transaction.

History

Service