Sistema JSFC



Leontevskiy Per. 10
Moscow 125009
Russia
Telephone: +7 95 229 36 83
Fax: +7 95 232 33 91
Web site: http://www.sistema.ru

Public Company
Incorporated: 1993
Employees: 30,000
Sales: $5.7 billion (2004)
Stock Exchanges: Moscow London
Ticker Symbol: SSA
NAIC: 334210 Telephone Apparatus Manufacturing; 236116 New Multi-Family Housing Construction (Except Operative Builders); 236220 Commercial and Institutional Building Construction; 334419 Other Electronic Component Manufacturing; 453998 All Other Miscellaneous Store Retailers (Except Tobacco Stores); 515112 Radio Stations; 515120 Television Broadcasting; 524128 Other Direct Insurance Carriers (Except Life, Health, and Medical); 551112 Offices of Other Holding Companies; 561510 Travel Agencies; 561520 Tour Operators

Sistema JSFC is one of Russia's largest and most diversified private sector consumer-oriented services companies in Russia and the Commonwealth of Independent States (CIS). Whereas other Russian business empires have been built on a foundation of the country's natural resources, Sistema has gathered a portfolio of leading companies in the telecommunications, banking, insurance, press and media, and retail industries, among others. The company's primary asset is its 50.6 percent control of Mobile TeleSystems (MTS), the number one provider of mobile telephone services in Russia and the CIS, with more than 34 million subscribers at the end of 2004. MTS alone accounts for more than 90 percent of Sistema's net profits. MTS is grouped under subsidiary Sistema Telecom, which also controls the Sky-Link satellite telephone service, Moscow's leading fixed line telephone operator MGTS, and, since the end of 2004, a nearly 30 percent stake in MTT, a nationally operating telecommunications and network interconnection services provider. Altogether, Sistema Telecom oversees more than 50 subsidiaries in Russia and the CIS. Sistema's Insurance division focuses on its control of Rosno, a leading provider of a full range of insurance products in Russia. Germany's Allianz is a strategic partner in Rosno, with a 47 percent stake. Sistema Hals is one of Russia's most profitable and successful real estate development groups, with a variety of high-profile projects under its belt, including properties for DaimlerChrysler, Raiffeisenbank, Samsung, and Banque Nationale de Paris. Sistema also controls the Moscow Bank for Reconstruction & Development (MBRD), providing both corporate and retail banking products and services. The company also controls the Detsky Mir Group, which operates Russia's leading children's clothing retail chain. Under its Media division, Sistema is active in pay-TV, through a 50 percent stake in Kosmos TV, and has interests in radio broadcasting and print media and news distribution, including the Moscow newspaper Metro , the national newspaper Rossiya , and the daily Smena , as well as the Rosbalt news agency. Other company investments include pharmaceuticals, helicopters, biotechnology, and the Intourist travel and tourism agency network. In 2004, Sistema reported revenues of $5.7 billion, up from $3.8 billion in 2003. The company is listed on the Moscow Stock Exchange, and, since early 2005, on the London Stock Exchange. Founder Vladimir Yevtushenkov retains control of 75 percent of Sistema's stock.

New Markets in the 1990s

The collapse of the Soviet regime and the institution of a free market system in Russia and the CIS opened a range of new business opportunities at the beginning of the 1990s. A small number of entrepreneurs managed to seize these opportunities, and by the end of the decade, the country boasted a handful of billionaires, at least on paper. Nearly all of the country's new business leaders built their fortunes based on what appeared as more or less a "land grab" for the country's natural resources. In almost each case, these resources were acquired at a nominal price. By the early 2000s, many of the initial generation of entrepreneurs had fallen—and a number, such as Yukos's head Mikhail Khodorkovsky, found themselves facing arrest.

Amid the somewhat chaotic early period of Russia's transition to a free market economy, Vladimir Yevtushenkov proved to be one of the few to build a business empire based on consumer-oriented products and services. Yevtushenkov (also spelled as Evtushenkov) was born in 1948, and had attended the D. Mendelev Moscow Chemical Engineering Institute, before earning a doctorate in economics from Moscow State University. Under the Soviet regime, Yevtushenkov started his career at the Karacharovo Plastic Works, rising to the rank of deputy director and chief engineer by 1982. He then transferred to the Polymerbyt Scientific and Production Association, serving as chief engineer and then deputy general director. In 1987, however, Yevtushenkov came to Moscow, becoming the chief of the city's Technical Administration and the chief of the Central Administration on Science and Engineering of the Moscow City Executive Committee. By 1990, Yevtushenkov had become chairman of the city's Committee on Science and Engineering.

As Moscow emerged from Soviet dominance, Yevtushenkov found a powerful ally at the head of Moscow's government: his brother-in-law and close friend, Yuri Luzhkov, who became mayor of the city. Luzhkov's government itself proved highly entrepreneurial. Over the course of the next decade, the city bought stakes in some 400 countries, in industries ranging from fast food to oil refineries.

The climate appeared right for Yevtushenkov to go into business for himself. In 1993, Yevtushenkov led a group of investors in the creation of Sistema JFSC. Yevtushenkov nonetheless retained majority control of the company, with nearly 80 percent of its shares.

From the outset, Sistema was organized as a holding company seeking to acquire former state-run businesses as they came up for privatization. Sistema's strategy was to acquire companies, which as often as not were unprofitable, and play an active and direct role in their management. As such the company launched a series of takeovers starting in 1993, acquiring operations in a variety of industries, ranging from telecommunications, to tourism, to electronics, to oil and petroleum products. The company also launched its own real estate development and construction businesses. By 1995, Sistema controlled nearly 40 companies.

Sistema had not ventured into business alone—the city of Moscow often held significant stakes in companies acquired by Sistema. The company also received a large number of high-profile construction and development contracts from the city. Of importance, Sistema also was awarded an early license to set up a mobile telephone service in Moscow. For this, Sistema backed the founding of pioneering cellular phone provider Vimpelcom in 1993. That company launched its first pilot network, based on the U.S.-standard AMPS protocol, in Moscow that year. The service began with an initial subscriber base of just 400. By June 1994, Vimpelcom had launched full-scale operations, and its subscriber base soared past 5,000. By 1995, Vimpelcom claimed the leadership of the nascent Russian cellular phone market, leading to the company's listing on the New York Stock Exchange—the first Russian company to do so since 1903.

Sistema's other operations were growing strongly as well. In 1994, the company set up Sistema Hals, grouping its real estate and construction operations, which had grown with a number of acquisitions of other companies established in Moscow since the liberalization of 1990. The company also acquired control of the children's clothing chain Detsky Mir (Children's World). Under Sistema, Detsky Mir quickly grew into Russia's second largest retail group, and one of the country's best-known retail names. Helping to fuel the group's acquisition strategy was its own bank, the Moscow Bank for Reconstruction & Development (MBRD), established in 1993. Although MBRD offered both commercial and retail banking services, it remained relatively small in terms of assets. Nonetheless, the bank played a central role in financing Sistema's acquisition strategy.

The oil industry also became an early target for the company, in part in partnership with the city of Moscow. The company formed Sistema-Invest in order to oversee its investments in this area, which included the development of oil fields in Komi Republic, and the creation of a network of Kedr-M service stations in the Moscow area.

Leading Consumer-Driven Private Sector Corporation in the New Century

The public listing of Vimpelcom in 1996 enabled Sistema to exit its shareholding in that company in favor of the acquisition of a new mobile telephone company, Mobile TeleSystems (MTS), that year. Unlike Vimpelcom, MTS launched operations using the more advanced GSM mobile standard that had been adopted on a European-wide scale. Sistema quickly brought in the expertise of Deutsche Telekom to help it develop MTS's network in Moscow and then on a national level. In exchange, Deutsche Telekom acquired a minority stake in MTS.

With the investment in MTS, telecommunications took on a major role in Sistema's balance sheet and future development. MTS grew quickly, and by the mid-2000s had become the leading mobile telephone service provider in Russia and the CIS. MTS also formed the most profitable area of Sistema's holdings, accounting for more than 90 percent of the group's total profits.

Sistema continued to invest in the telecommunications sector, acquiring Moscow's leading fixed line telephone operator MGTS, and a 50 percent stake in the satellite telecommunications service Skylink. In 1998, Sistema established a new subsidiary for its telecommunications holdings, Sistema Telecom. That subsidiary then brought MTS public, with a listing on the New York Stock Exchange, in 2000.

In the meantime, Sistema had targeted a new area for expansion, acquiring one of Russia's leading insurance groups, Rosno, in 1998. Once again, Sistema sought a more experienced partner for its new business. In 2001, the company signed a strategic partnership agreement with Germany's Allianz AG. Under the guidance of Allianz, Rosno solidified its status in the Russian insurance market.

Sistema's business interests also continued to expand, encompassing diverse areas such as pharmaceuticals, electronics, trucks—in a partnership with Volvo Truck Corp. signed in 2000—and other manufacturing areas. The company also began building a portfolio of media holdings, including newspaper titles such as the Moscow-oriented Metro , the national daily Rossiya , and the daily Smena , as well as the Rosbalt news agency.

In 2002, Sistema launched a restructuring as it began to refocus its holdings in an effort to become a pure-play consumer-oriented products and services company. As part of that restructuring, Sistema began selling its oil industry holdings, including its Kedr-M service station network. That process was completed, in large part, in 2004.

Instead, the company began focusing more closely on its telecommunications and electronics businesses. The company made a number of acquisitions to boost these operations, including the purchase of OAO Science Center Corporation, a 50 percent stake in Comstar Company, 50 percent of ZAO Cosmos-TV, and 100 percent of the Czech Republic's Strom Telecom S.R.O. The company also boosted its stake in MTS, buying another 10 percent in 2003. At the same time, Sistema moved to bring a number of its other businesses under tighter company control. As such the company boosted its shareholding in its travel and tourism business Intourist to 91 percent in 2002, and its shares of two banks, MBRR Commercial Bank and East-West United Bank, to 52 percent and 30 percent, respectively.

These changes led the company to the next phase of its development in 2004, when it listed its shares on the Moscow Stock Exchange. This step, given the relatively limited size of the Moscow market, was seen as only a preliminary to the group's full market listing, however. At the beginning of 2005, Sistema turned to the London Stock Exchange, launching what became Russia's largest-ever initial public offering (IPO). In the IPO, Sistema sold more than 16 percent of its shares, a block valued at $1.56 billion. Vladimir Yevtushenkov nonetheless retained control of the company, holding 65 percent of Sistema's stock. In little more than a decade, Sistema had grown into Russia's leading consumer-oriented private sector company.

Principal Subsidiaries

Bs Telecom; Detsky Mir Group; East-West United Bank; Fram Resource (Sweden); Intourist Hotel Group; Intourist Japan (Japan); Intourist Warsaw (Poland); Intours Corporation (Canada); Iskratel; Kamov Holding; Kosmos TV; Literaturnaya Gazeta; Maxima Communications Group; Mediatel; Medical Technologies Holding Company; Metro Newspaper; Metroreklama Group; Moscow Bank for Reconstruction & Development (MBRD); Nasha Pressa Group; Niidar Research & Production Complex; Niime and Mikron; Radio Centre Concern; Radio Tesla Sistema; Rosbalt News Agency; Rosno; Rossiya Public Newspaper; Rti-Sistemy Concern; Sistema Hals; Sistema Multimedia; Sistema Telecom; Strom Telecom Group of Companies; Ten Viaggi (Italy); Tesla Tech (Prague); Vzpp-Mikron Industrial & Consumer Electronics.

Principal Competitors

Interros Holding Co.; Sovtransavto; Moskhleb Joint Stock Co.; Perm Timber Producers Joint Stock Co.; Evraz Holding Group; Urals Mining and Metals Co.; Pipe Metallurgical Co; Avtoselkhozmash-Holding Joint Stock Co.; Metalloinvest Holding Co.; RBC Information Systems Joint Stock Co.; Transmash Holding.

Key Dates:

1993:
Vladimir Yevtushenkov leads in the creation of Sistema as a holding company for diversified investments; the company establishes its own bank, MBRD, and begins acquisition of former state-owned businesses in tourism, retail, oil, construction, and other industries; the company joins in the creation of Vimpelcom, a pioneering mobile telecommunications group in Russia.
1995:
Sistema now holds stakes in more than 100 companies.
1996:
Vimpelcom is listed on the New York Stock Exchange, allowing Sistema to exit that company's shareholding and launch a new mobile telephone service MTS, based on the GSM standard, in partnership with Deutsche Telekom.
1998:
Sistema acquires Rosno insurance group, one of the leading insurance companies in Russia.
2000:
MTS is listed on the New York Stock Exchange.
2001:
Allianz AG becomes a strategic partner in Rosno.
2002:
Sistema begins restructuring to focus on consumer-oriented businesses, with a core of telecommunications and high technology.
2004:
The company completes the sale of its oil industry interests; Sistema launches stock on the Moscow Stock Exchange.
2005:
Sistema launches an IPO on the London Stock Exchange, selling 16.5 percent of its shares in the largest Russian IPO to date.

Further Reading

"Forgive and Forget?," Economist (US) , February 12, 2005, p. 74US.

"Investors Eat out of Sistema's Hand As IPO Show Gets Going," Euroweek , January 28, 2005, p. 27.

"Sistema Continuing to Diversify," Euromoney , January 2002, p. 81.

"Sistema Floats for $1.4bn As Top Funds Flock to Russia," Euroweek , February 11, 2005, p. 1.

"Sistema (Launches Public Offering)," Corporate Finance , March 2005, p. 10.

"Sistema $1.6bn IPO on Track Say Bankers, Despite Analyst Doubt Over Price Range," Euroweek , February 4, 2005, p. 32.

Yevtushenkov, Vladimir, "Sistema JSFC: A Holding Company with Interests That Span 12 Key Business Areas," Worldlink , January-February 2002, p. 158.

—M.L. Cohen



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