Business combinations

2012 transactions

Acquisitions of subsidiaries

CJSC Sky Link

In July 2012 the Group completed the acquisition of a 100% stake in the mobile phone operator CJSC Sky Link. As part of the deal, LLC Mobitel, a subsidiary of Rostelecom, has acquired a 50% stake in Sky Link from OJSC Svyazinvest in exchange for 1.91% of Rostelecom ordinary shares or 56,287,425 shares. As a result, the Group’s effective ownership in Sky Link amounted to 100%. CJSC MC-Direct, a wholly-owned subsidiary of Sky Link, owned the remaining 50% stake in Sky Link.

Sky Link currently owns licences in 76 Russian regions, covering over 90% of the total Russian population, which includes Moscow, St. Petersburg and several other major Russian cities. Sky Link’s licences enable the Company to provide services using CDMA-450 and UMTS-1900/2100 technologies in 65 regions, CDMA-450/2000 in 3 regions, GSM-1800 in 45 regions and GSM-900 in one region. The strategic acquisition of Sky Link enables the Group to strengthen its competitive position and increase the value of the Group. Sky Link is also the fourth operator which has obtained the remaining 3G frequencies available in Russia.

As indicated in Note 1, the Government of the Russian Federation controls both the Company and OJSC Svyazinvest. Thus the Group treated the acquisition of Sky Link as business combination under common control. It has been accounted for by the Group as if the acquisition had occurred on 1 October 2010, the date when OJSC Svyazinvest obtained control over Sky Link. The financial statements for the periods ended 31 December 2011 and 2010 were restated accordingly.

The following table represents the carring values of identifiable net assets of CJSC Sky Link as reported in the accounting of OJSC Svyazinvest as of the acquisition date (1 October 2010):


  RUB
Carring  value of identifiable assets and liabilities:  
Property, plant and equipment 8,473
Intangible assets 11,427
Goodwill 10,653
Investments in associates 31
Other non-current assets 163
Inventories 485
Trade and other accounts  receivable 423
Other current assets 354
Cash and cash equivalents 54
Deferred tax liabilities (1,998)
Non-current loans and borrowing (12,328)
Current loans and borrowing (5,417)
Accounts payable, provisions and accrued expenses (2,555)
Other current liabilities (465)
Total net assets 9,300

The difference between the cost of the acquisition (i.e., the fair value of the consideration paid by the Group), and the amounts at which the assets and liabilities of CJSC Sky Link have been recorded is recognised in equity. No additional goodwill arose in the business combination under common control.

CJSC GNC-Alfa

In February 2012 the Group acquired 74.98% equity interest in CJSC GNC-Alfa from a third party Filor Ventures LTD. According to the share purchase agreement the purchase price consists of cash consideration amounted to USD 22.5 million (690) and a contingent consideration, that is the sum of Earn-OUT-Payments for the financial years 2012 - 2015. Earn-OUT-Payments shall be calculated in respect of each of Key Performance Indicators (KPIs) listed in the agreement in accordance with the specified formula. Fair value of Earn-OUT-Payments was calculated based on the assumption that actual KPIs will be equal to target KPIs. To take account of the time value of money the expected future payments were discounted using the discount rate, which represents the risk-free Russian government eurobonds rate, of 5.41%. Fair value of the contingent consideration at the date of acquisition amounted to USD 4.3 million (139).

GNC- Alfa is the largest independent Internet and data provider in Armenia. It operates a modern fibre-optic network, which passes through 70% of the territory of the Republic of Armenia.

The acquisition of GNC- Alfa is part of the Group’s international expansion policy. The acquisition of a control stake in GNC- Alfa provides the Group with access to a well-developed infrastructure for broadband and pay-TV services in the Armenian telecommunications market, a market which has a significant growth potential.

The Group accounted for the acquisition of GNC-Alfa by applying the acquisition method, in accordance with provisions of IFRS 3 Business combinations. The results of operations and financial position of CJSC GNC-Alfa were consolidated by the Group starting from 1 February 2012.

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

The functional currency of GNC-Alfa is the Armenian Dram (AMD), national currency of the Republic of Armenia. For the purpose of consolidated financial statements of the Group the results and financial position of the company are translated in the presentation currency of the Group (RUB) applying the rules of IAS 21 The Effects of Changes in Foreign Exchange Rates.

From the date of acquisition until 31 December 2012, GNC-Alfa has contributed 37 to the increase of net profit of the Group and 204 to the increase of revenue for 2012. If the combination had taken place at the beginning of 2012, the profit of the Group would have been 35,257 and revenue would have been 321,275. 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 1 January 2012.

LLC Enter

In February 2012 the Group acquired 100% interest in LLC Enter, a broadband Internet services provider to individual subscribers in Barnaul, Novokuznetsk and Tyumen, for 305.

The acquisition of LLC Enter reflects the Group’s strategy to increase its subscriber base and modernise its network infrastructure. The deal also serves as an alternative to capital expenditure in LLC Enter’s regions.

LLC Enter’s network infrastructure was built in 2010 and it is among the most modern networks in the three cities it serves.

The Group accounted for the acquisition of LLC Enter by applying the acquisition method, in accordance with provisions of IFRS 3 Business combinations. The results of operations and financial position of LLC Enter were consolidated by the Group starting from 1 April 2012.

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 31 December 2012, LLC Enter has contributed 54 to the decrease of net profit of the Group and 9 to the increase of revenue for 2012. If the combination had taken place at the beginning of 2012, the profit of the Group would have been 35,222 and revenue would have been 321,272. 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 1 January 2012.

LLC КМ Media

In June 2012 the Group acquired 74.99% interest in LLC КМ Мedia, a software design company, for amount of USD 5.75 million. The acquisition of LLC КМ Мedia reflects the Group’s strategy to diversify its business. The Group accounted for the acquisition of LLC KM Media by applying the acquisition method, in accordance with provisions of IFRS 3 Business combinations. The results of operations and financial position of LLC KM Media were consolidated by the Group starting from 30 June 2012.

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

From the date of acquisition until 31 December 2012, LLC KM Media has contributed 30 to the increase of net profit of the Group and 142 to the increase of revenue for 2012. If the combination had taken place at the beginning of 2012, the profit of the Group would have been 35,223 and revenue would not change. 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 1 January 2012.

LLC Chita-on-Line

In August 2012 the Group acquired 100% interest in LLC Chita-on-Line from private investors.

Purchase price consists of a cash consideration amounted to 119 and contingent consideration (adjustment payment) amounted to 21. The adjustment payment was calculated on the settlement date of 6 February 2013 according with the formula specified in the agreement and was taken into account in the calculation of goodwill at the acquisition date.

LLC Chita-on-Line is one of the largest alternative operators in Chita. It provides FTTB and ETTH broadband access and pay TV services, along with other telecom services. The Group intends to take up a leading role on the IPTV market through this acquisition.

The Group accounted for the acquisition of LLC Chita-on-Line by applying the acquisition method, in accordance with the provisions of IFRS 3 Business combinations. The results of operations and financial position of Chita-on-Line were consolidated by the Group starting from 1 August 2012.

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 31 December 2012, Chita-on-Line has contributed 3 to the decrease of net profit of the Group and 33 to the increase of revenue for 2012. If the combination had taken place at the beginning of 2012, the profit of the Group would have been 35,239 and revenue would have been 321,287. 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 1 January 2012.

The following table summarizes the fair values of identifiable net assets of LLC Enter, LLC KM Media, LLC Chita-on-Line and CJSC GNC-Alfa as of the acquisition dates:


  LLC
Enter
LLC KM
Media
LLC Chita-
on- Line
CJSC GNC-Alfa 
Consideration
Paid in cash 305 189 119 684
Contingent consideration -   - 21 139
Total consideration transferred 305 189 140 823
NCI - (3) - 56
Fair value of identifiable assets and liabilities:        
Property, plant and equipment 152 7 28 314
Intangible assets 30 - 18 28
Deferred tax assets 9 - - -
Other non- current asset - - 3 -
Trade and other accounts  receivable 9 - 2 38
Cash and cash equivalents 1 - 4 2
Inventories 6 - 1 4
Other current assets 14 37 - -
Current loans and borrowing (51) (41) - (16)
Accounts payable, provisions and accrued expenses (34) (16) (10) (72)
Deferred tax liabilities (14) - - (53)
Other current liabilities - - - (20)
Total net assets 122 (13) 46 225
Goodwill 183 199 94 654
Costs directly attributable to acquisition 2 6 2 10

Acquisition of non-controlling interests

In March 2012 the Group acquired an additional 28.23% interest in OJSC National Telecommunications from OJSC Gazprombank for 13,826, increasing its ownership to 100%. The Group recognised a decrease in non-controlling interests of 4,206 and a decrease in retained earnings of 9,620.

In June 2012 the Group acquired an additional 26% interest in OJSC Mosteleset, a subsidiary of OJSC National Telecommunications, from the government of Moscow for 1,800 in cash, increasing its ownership from 74% to 100%. The Group recognised a decrease in non-controlling interests of 3,117 and an increase in retained earnings of 1,317.

The acquisition-related costs of 134 were included in other investing and financial gain in this consolidated statement of comprehensive income for the year ended 31 December 2012.

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 USD 951 million. Further, the Group purchased promissory notes issued by OJSC National Telecommunications for USD 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 31 December 2011.

As at 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 1 February 1, 2011.

The goodwill is attributable mainly to the diversification of the activities of the Group and to the extension into new markets.4

From the date of acquisition until 31 December 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 43,260 and revenue would have been 302,253. 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 1 January 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’s 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 31 December 2011.

From the date of acquisition until 31 December 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 43,334 and revenue would have been 302,666. 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 1 January

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 in 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
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 USD 4 million (116) in cash, increasing its ownership from 51% to 100%. The Group recognised a decrease in non-controlling 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 payment 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 accounts receivable 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 tax liabilities - (322) (322)
Non-controlling interests - (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 31 December 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, 21 December 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 30,856 and revenue would have been 278,569. 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 1 January 2010.

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