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. Last Updated: 07/27/2016

Investors Line Up for City Telephone

Moscow's obsolete telephone system, part of which dates back to the turn of the century, has long been a source of irritation for the capital's callers. But in Russia's emerging market, it has also become a hot investment.

The Moscow City Telephone Network, or MGTS, with a captive market in which customers still wait years for telephone lines, has completed a number of sweet deals with foreign telecommunications companies eager to tap the city's unsatisfied demand. In the process its quoted stock price has quintupled in a mere two months.

City officials have postponed the company's plans to capitalize on its stock growth by selling off a 22-percent government stake, but MGTS still plans to gain several hundred thousand new telephone lines over the next few years and to modernize key exchanges in three joint projects with foreign firms.

Earlier this month, funding was finalized for a project in which Comstar, a joint venture between MGTS and the British company GPT Ltd., will build 170,000 digital telephone lines. Eighty percent of those will be allocated to MGTS. Comstar was granted a $75 million loan from the British government to finance the project, said Executive Director Igor Labovsky.

Labovsky said that the decision to give up 80 percent of the lines had required "sober consideration," but that he considered Moscow's telecommunications market attractive enough to make the venture profitable.

"We're working in this city and have to help its development, but 20 percent of the lines will be enough for us to cover the cost of the project," he said. "Communications is much like a milking cow: Once you're there, it'll give you the milk."

MGTS will gain another bunch of new lines in a project run by Telmos, a joint venture between U.S. telecom giant AT&T and Rostelekom of Russia. Under the project, 400,000 new lines will be built in Moscow by 1997, according to Vladimir Kostrov, MGTS marketing director. He said MGTS will get a certain percentage of the new lines, but did not provide an exact figure.

In a third line-sharing deal, MGTS division MTU-Inform recently announced a joint project with Sovintel, a joint venture between Rostelekom and the U.S. telecommunications company SFMT, that will build a modern exchange for 30,000 lines by February. MTU-Inform will get 25 percent of the lines.

Irena Fadeyeva, spokeswoman for Sovintel, said that the access to Russia's telecommunications system would be a major asset for her firm.

"We expect to attract more clients because integration into the Russian system will allow us to offer local, intercity and international service as a single package," Fadeyeva said.

MGTS executives refuse to give exact figures on the total amount of investment involved in the three projects, but by any estimate they are still far from what the company needs to bring its network up to Western standards. Kostrov said that the projects would cover no more than 15 percent of the $5 billion to $10 billion the company needs to carry out initial modernization.

Boris Lastovich, securities director at MGTS, said the company is also investing its own money in a modernization program that is expected to bring the company 1 million new lines by 1998. MGTS is auctioning telephone lines to finance the program, he said.

Despite the new investment that the joint projects bring, MGTS is worried that they will give foreign firms too much access to its market.

"We're forced to rely on such projects," said Lastovich. "If we could sell shares, we would have raised enough money ourselves."

MGTS announced in July that it would set a date in August for the sale of 22 percent of its shares at auction. However, the auction has never materialized, indefinitely postponed by Moscow privatization officials.

Meanwhile, Moscow brokers' quotations for MGTS shares have risen from 90,000 rubles per share in October to more than 440,000 rubles this week.

At that share price, MGTS would have a market capitalization of more than $170 million, or about $38 per line, more than twice the capitalization per line of St. Petersburg Telephone.

Some analysts consider MGTS one of the few hot prospects in Russia's anemic stock market.

Lastovich said, however, that the company's stock price should not be taken too seriously, because there were few shares available on the market. MGTS has so far sold off only 10 percent of voting shares to workers and 5 percent to management.

"There is not any serious trade in our shares at the moment," Lastovich said.