To reach Vladimir Rybakin these days, better try his mobile phone. When he's not cruising the Ural Mountains city of Perm to check on his company's cellular and fiber-optics projects, the 41-year-old CEO of the local phone company, Uralsvyazinform, is jetting off to chat up investors. "People are asking to meet us all the time," Rybakin says. In February, investors snapped up Uralsvyazinform's $32 million private placement of shares through the London Stock Exchange. Next stop: the New York Stock Exchange.
These are good times for Russian Baby Bells such as Uralsvyazinform. Just a few years ago, the country's 85 regional phone companies were part of a mammoth state monopoly. Now partly-privatized, they are boosting revenues by jacking up residential rates--until now among the world's lowest. More cash is on the way as the Kremlin prepares to sell 49% of Svyazinvest, the state-controlled holding company that owns 51% of each Baby Bell. But managers such as Rybakin aren't waiting for Moscow's help. They're plugging directly into the capital markets.
STANDOUTS. Investors are abuzz. Share prices for the 15 most actively traded Baby Bells have swelled to six to nine times what they were a year ago. In an economy bogged down in unpaid bills, the phone companies stand out because their customers must pay in cash--or promptly get cut off. Growth potential is mouthwatering, too: More than 80% of Russians still lack phones.
Higher residential tariffs are key to the regionals' future. Business rates are already at or above Western levels. But most Russians can make unlimited local calls from home for only about $2 a month. Free local service "was considered a birthright for Soviet citizens," says Thomas Balestrery, research director for Moscow's Credinstalt-Grant investment bank. To change that, the companies have lobbied local regulators for rate hikes and per-minute charges, winning a first round of increases in 1995. Now, with the elections over, more are getting the go-ahead to boost rates.
Telecom companies are using the extra cash for much-needed improvements. In many areas, the phone system is so decrepit that calls between some cities are impossible. Fixing the system will mean laying thousands of kilometers of cable and installing modern switching equipment. Already, companies are putting in 2 million new lines a year. But overhauling Russia's phone system is expected to take 20 years and cost more than $100 billion. A few companies have teamed up with foreign partners to offer new services. In the city of Nizhny Novgorod, for example, local phone company Nizhnov Svyazinform has set up a cellular phone system with US West Inc.
Regional companies are reluctant to borrow. With interest rates running above 25%, commercial bank loans are prohibitively expensive. Some funds will be coming from Svyazinvest with the planned sale of a 25% stake in the holding company to foreign investors and an additional 24% to domestic buyers. Those deals could bring more than $2 billion. But that would barely make a dent in the regionals' needs.
To keep its grip on the regional companies, Svyazinvest is trying to limit their new share issues. Even so, some companies are finding ways to raise capital. Uralsvyazinform is buying shares from its employees and selling them to foreign investors. It's one of several regionals, including Nizhnov Svyazinform, considering American depositary receipt issues this year. Others, such as the Moscow City Telephone Co., plan Eurobond issues.
To be sure, not all of Russia's Baby Bells are thriving. Many are run by Soviet-era managers and have done nothing to lure investment or upgrade service. The industry seems headed for a shakeout in which stronger companies will absorb weaker siblings, and very weak ones in remote regions will offer only minimal service, unless the government subsidizes them.
For investors, the trick will be picking the winners before their share prices soar. Shares in Moscow City Telephone now trade for $1,480, up from $200 a year ago. But with dozens of companies grooming themselves for the market, it shouldn't be hard for investors to find a few more live wires.