Alfa-Bank - Alfa Group

Retail TradeIn May 2006 we merged Perekrestokwith London Stock Exchange listedPyaterochka, one of the largest groceryretailers in Russia with operations inSt. Petersburg and in Moscow. In doingso, Pyaterochka purchased 100% of Perekrestokand Alfa Group, together with itsfriendly minorities, became the owners of54% of the combined company (48% AlfaGroup effective stake). This merger createdthe clear leader in the fast growingRussian food retail market with over 1,200stores (including franchisees) and consolidatedpro-forma net sales of US $3.55 billion(includes Merkado) for the yearended 31 December 2006, a 50% increaseover the prior year and consolidated proformaEBITDA for 2006 was US $295 million(including one-time expenses andgains), a 21% increase over the prior yearand pro-forma gross margin of 27.9% in2006 versus 25.4% in 2005. In October2006, the LSE-listed holding company wasre-named X5 Retail Group N.V.We believe that the combined business willbenefit from: 1) A clear leadership positionin the fast growing Russian food retailmarket; 2) A diversified and complementarygeographic presence in Moscow andSt. Petersburg with a strong and provenplatform for expansion into the underdevelopedmarkets of Russia’s regions aswell as into the CIS; 3) A multi-formatcapability of Pyaterochka’s successful discountformat with Perekrestok’s leadingchain of supermarkets; 4) Potential forsubstantial synergies including economiesof scale in purchasing, logistics and IT; 5)Increased opportunities in the area ofmergers and acquisitions in pursuingmulti-format acquisition targets.At the end of 2006 X5 Retail Group N.V.closed a US $200 million purchase(including assumed debt) of theMerkado retail chain having 16 supermarketsas well as a wholly-owned17,000 m 2 distribution and office center.The supermarkets and the distributionand office center are located in attractivelocations in Moscow.We are certain that prudent, large-scaleexpansion through the acquisition oftechnologically sound retail chains willplay a key role in expanding Alfa Group’sretail presence in Russia and in key CISmarkets.Continuing Development of the GroupAs investors we have taken the view that substantial re-investment of the Group's net profits, both into our existing businessesand investment into new businesses is the highest and best use of our capital. In the eight-year period ended 31December 2006 we re-invested US $8.55 billion of our US $8.96 billion in net profits – a 95.4% re-investment rate. Duringthe same period only US $408.7 million (4.6%) of the Group's net profits were paid as dividends.alfa group’sprincipalholdingsAlfa-BankLargest private bank in Russia andsignificant presence in Ukraine.Wide range of financial services,including commercial andinvestment banking, trade finance,and asset management.Alfa CapitalIncludes Alfa Capital Management(“ACM”) and Alfa Capital Partners(“ACP”). ACM managesinvestment portfolios of publiclytraded debt and equity securities.ACP manages private equity andreal estate investments.AlfaStrakhovanieGroupLeading issuer of non-obligatoryinsurance in Russia.AltimoOne of the largest private investorsinto wireless and fixed-linetelecommunications companiesin Russia, the CIS and otherpromising emerging markets.MegaFon3rd largest wirelesstelecommunications servicecompany in Russia.Golden TelecomLeading facilities-based providerof integrated telecommunicationsand Internet services in major populationcentres in Russia and CIS.KyivstarLeading wirelesstelecommunications servicecompany in Ukraine.X5 Retail Group N.V.Largest food retailer in terms of salesin Russia listed on London StockExchange.PerekrestokLeading chain of supermarketsand hyper-markets in Moscowand other population centersin Russia and the CIS.PyaterochkaLeading food retailer in Russia witha dominant position in the highgrowthdiscounter segment.OutlookWhile we believe that Russiawill continue its inevitableintegration into the worldeconomy, as investors, while we seeopportunity, we also see a number ofpotential risks – some more manageablethan others. Undeniable macro-economicprogress has served to furtherbroaden the Russian investor base andhas given companies with access tointernational capital markets a lowercost of funding. Foreign direct investmenthas risen to respectable levels during2006 and the strong domestictrends of rising consumption andincreasingly-wide availability of creditwill bolster the Russian economy wellinto the medium-term. Fiscal expansionwill surely start to play a biggerrole in influencing the Russian economyas Russia’s surpluses are reinvestedback into public infrastructure beginningin 2007. Despite the laudableachievements of the Russian economy,progress could be significantly hinderedby sluggish reforms and as the statebecomes increasingly embedded in theRussian economy, as well as domesticpolitics in the run-up to parliamentaryelections at the end of 2007 and thepresidential elections in 2008.Furthermore, the diminishing impact ofRussia’s high oil and other naturalresource prices and an appreciatingRussian Rouble signifies that the yearsof easy opportunistic growth are over.Notwithstanding our best attempts atforecasting Russia’s economic future,one thing is for sure – Russia always hasthe capacity to surprise. As experiencedinvestors we are comfortablewith our ability to navigate the changes,manage the risks and surprises that areendemic to Russia, and most importantlyto capitalize on investment and exitopportunities.In addition to prudent investment inRussia, we are increasingly interested insensible expansion outside of Russia inthe CIS and other emerging markets.The most attractive CIS markets are inparticular attractive to us as Russia hasa shared history with them and thebusiness climate and practices arefamiliar to us. A meaningful diversificationwill provide a larger pool of attractiveopportunities, increased stability inearnings, and should lower the risk profilefor the Group. Furthermore, webelieve that the additional risks fromentering new geographic markets aremanageable. As investment outside ofRussia continues to play a larger role indevelopment of the Group we are resolutethat such investment will not be incontravention to our investment philosophy(see page 15), an investment philosophywhich has served us well for thepast 18 years.TNK-BP3 rd largest (by production) verticallyintegrated oil company in Russia.А1Proprietary and for-client investmentin Russia, the CIS and other developingmarkets.Russian TechnologiesInvestment in and developmentof promising Russian commercial andconsumer technologies.CTC Media, Inc.One of the largest commercial televisionbroadcasters in Russia offeringentertainment programming.VimpelComLeading wireless telecommunicationsservice company in Russiawith presence in Kazakhstan,Ukraine, Tajikistan, Uzbekistan,Georgia and Armenia.Turkcell*Leading wireless telecommunicationsservice company in Turkey.* Investment in Turkcell is managed by Altimo andis owned by Alfa Finance Holdings SA20 / ALFA GROUP / ANNUAL REPORT 2006 ALFA GROUP / ANNUAL REPORT 2006 / 21