Comstar-United Telesystems

Activities of the company

• cable TV
• providing Internet access
• fixed connection

Board of Directors

On December 4, 2009 extraordinary general shareholder meeting JSC COMSTAR-OTC made the decision on election of new structure of Board of Directors of the company. Were a new part of Board of Directors:

• 1. Ulf Bakkmayer, the associate director of a business unit "MTS – Russia" on finance of JSC MTS;
• 2. Thomas Vinkler, vice president of a business unit "Telecommunication assets" of AFK "Sistema";
• 3. Mikhail Gerchuk, vice president for commerce of JSC MTS,
• 4. Konstantin Markov, director of the macro-region Moscow of JSC MTS;
• 5. Sergey Pridantsev, president of JSC COMSTAR-OTC;
• 6. Ingwe Redling, chairman Swedish Russian / CIS of chamber of commerce;
• 7. Michael Hekker, vice president for strategy and corporate development of JSC MTS;
• 8. Thomas Holtrop, board member of Gruner and Jahr company;
• 9. Mikhail Shamolin, president of JSC MTS.

Finance

• The consolidated revenue of Group for the first half of the year 2010 made US$818.1 million, OIBDA indicator margin – 42%.

Infrastructure

For July, 2010 the international Internet network of Comstar is connected with a global network the Internet in several large nodal points in London, Stockholm, Amsterdam, Frankfurt, Paris, Los Angeles and New York.

Subscriber base

In the II quarter 2010 the number of subscribers of paid TV of Comstar in Moscow decreased up to 121 thousand users against 133 thousand a year ago, the number of corporate users of services broadband access for the same period decreased from 48 thousand to 45 thousand. In an alternative segment of communication services of the Moscow region which is provided by Comstar and its "daughter" Comstar-Direkt (Stream trademark), a cumulative number of subscribers of all types of service of communication (the fixed telephone communication, broadband access, an intercity and international telecommunication) for last 12 months decreased as among individuals ― from 632 thousand to 568 thousand, and among corporate clients ― from 29 thousand to 28 thousand.

In not capital regions picture completely opposite. In 12 months since June, 2009 the number of individual subscribers of broadband access of Comstar grew more than by one and a half times, to 495 thousand people, the number of users of paid TV increased too, though for only 5%, to 2.06 million. There were more in regions and corporate users of broadband access: their number grew by 10%, up to 30 thousand.

The subscriber base COMSTAR-OTC in Moscow as of the end of the 2nd quarter 2010 makes 3.6 million room subscribers of telephone services, including 867 thousand room subscribers of broadband access in the capital and also 2.7 million room subscribers in regions of Russia and the CIS, including 495 thousand room subscribers of broadband access and 2.1 million subscribers of a pay TV.

Development strategy

The president of Comstar Sergey Pridantsev is sure that the main potential of growth of a subscriber base is in regions now. Therefore the company intends to take special measures of promotion of services there. Regional networks by implementation of "optical fiber to the building" technology (FTTB) in them will be upgraded first of all that will allow to increase the capacity and capacity of networks for providing to users of higher data transfer rates. Until the end of 2010 it is going to provide with this technology 80% from 4.34 million households which have a connectivity to network of Comstar in regions.

Also there will be soft junction of regional networks for work under a brand of MTS for use of marketing potential of this famous brand.

In regions Comstar intends to get into apartments of potential users using paid TV which uses there, according to Pridantsev, great demand. Then to the subscribers connected to this service, Comstar will offer also others — broadband access and telephone communication. However, on a propagation path of broadband access outside the capital there is a serious obstacle: low prevalence of personal computers. Comstar intends to solve this problem, offering users special prefixes which allow to go on-line via the normal TV. Such prefix can be connected to any cable on which the TV signal is delivered to the apartment, and then to join the TV. On the same cable accession to an access network in the Internet is performed. It is possible to work with a prefix, having connected to it the normal wire or wireless computer keyboard, as the monitor at the same time serves the TV screen.

Such prefixes are going to be provided in lease to the subscribers connected to services broadband access at the symbolical price of 20 rub a month. Such measure as consider in Comstar, should involve in services broadband access in regions of those who already use paid TV. Comstar intends to begin sales of Internet prefixes to TVs at the end of the 2010th — the first half of 2011.

History

2010: Accession to MTS

• In June, 2010 Boards of Directors of companies "Mobile TeleSystems" (MTS) and Comstar-United Telesystems recommended to shareholders to perform their reorganization by accession Comstar to MTS. The transaction will be submitted for consideration of extraordinary meetings of shareholders of both companies which will take place on December 23, 2010.

Merge is going to be performed by conversion of stocks of Comstar into stocks of MTS, at the same time for one stock of Comstar it will be possible to receive 0.825 shares of MTS. Such coefficient assumes an award in the amount of 7.7% to weighted average on the trading volume for the last three months to coefficient of converting of ordinary shares of MTS in the global depositary receipts (GDR) of Comstar. One GDR of Comstar corresponds to one its ordinary share.

Minority shareholders of Comstar have two options how to arrive with the actions. MTS, in case of receiving approval from Federal service on the stock markets, is going to announce the voluntary offer on the redemption of 37.6 million stocks of Comstar (9% of its authorized capital) at the price of $7.16 (220 rub) for one GDR. This price for 13.1% exceeds weighted average on the trading volume for the last three months the market price of the GDR of Comstar. If the offer takes place, it will cost MTS of $270 million However, the analyst of IC Finam Eldar Vagabov does not recommend to shareholders of Comstar to accept the offer. "Taking into account positive effect of a company merger the offered award does not look adequate compensation for an exit from the capital therefore it is better to select converting from the stock of MTS", - the analyst says.

The offer is necessary for MTS to avoid appearance of minority shareholders of Comstar, discordant with reorganization, for implementation of the transaction it is necessary to receive the consent of not less than 75% of shareholders of both companies. MTS owns 62% of stocks of Comstar now, and 52.9% of stocks of MTS belong to AFK "Sistema". The size of the voluntary offer in 9% was calculated with a condition that AFK "Sistema" remained the controlling shareholder of MTS after reorganization implementation.

Shareholders both Comstar, and MTS which will vote against accession or will not take part in vote at all if reorganization after all will take place, will be able to show the securities to the obligatory redemption. The Board of Directors of MTS set the redemption price in the amount of 245.19 rub for one stock of the company, Board of Directors of Comstar - in 212.85 rub respectively. The price at which will purchase securities of discordant shareholders of Comstar 3.3% lower costs which MTS offers shareholders of Comstar within the voluntary offer. Costs for the redemption of shares of minority shareholders will make $1.03 billion.

The offered scheme of the transaction was issued by special committee of independent directors at Board of Directors of Comstar which drew the conclusions on the basis of estimates Ernst&Young concerning the price of redemption of stocks of both companies. As the legal adviser of MTS Latham & Watkins, MTS - Linkleters acts. A financial advisor of MTS is Goldman Sachs, and the conclusion about justice of the transaction to committee of independent directors of Comstar was submitted by J. P. Morgan.

MTS became the controlling shareholder of Comstar still a year ago, having acquired for $1.32 billion 51% of stocks of the operator at the "genitive" structure – AFK "Sistema". In May, 2010 it was announced transfer of most services of Comstar under a brand of MTS. However, about merger of Comstar still the speech did not go, moreover, MTS did not even begin to do the offer on redemption of stocks at minority shareholders of Comstar (it was possible to refuse the offer in connection with affiliation of the parties participating in the transaction). Now in MTS decided that merge to Comstar will provide big synergy, than initially planned $200 million as will allow MTS to provide directly services of a pay TV and broadband access in the Internet.

The CEO of the analytical agency "Rustelekom" Yury Bryukvin calls correct the made decision. "Without complete company merger consolidation of subscriber bases will be only virtual, besides there will be legal risks connected with transfer of personal data of subscribers from one subsidiary company to parent, - Bryukvin says. - But process of events confirms the version that the transaction of MTS with Comstar was initially planned for replenishment of budgets of AFK "Sistema", and only then in the company began to think of carrying out full integration".

MTS copies experience of VimpelCom which in 2008 acquired 100% of the shares Golden Telecom for $4.24 billion and at once began to perform a company merger, the expert of CNews Analytics Alexander Moroshkin considers. "However, anybody has no experience of carrying out merge of such huge structures and the stated synergy effect of consolidation of Comstar with MTS did not manage to be reached, - he reminds. - In a case with Comstar integration will be carried out even more difficult because of its tangled structure".

• Comstar-OTS announced completion of works on upgrade of the communication hub of the international IP network in Stockholm (Sweden). Within upgrade the new high-performance Cisco ASR 9000 router is installed.

"The communication hub in Stockholm is one of the most important for the organization of foreign IP network "Comstar-OTS": it is one of gateways Comstar in a global network the Internet. Hardware upgrade allows the operator to create a better procedure for granting of service and to guarantee smooth operation of a communication network, – the development director of service platforms and Comstar-OTS networks Victor Belov told. – In such projects the choice of equipment supplier is important. The new high-performance Cisco platform will allow to translate in the future the European segment of the trunk on new transport technologies 100 Gigabit Ethernet".