Note 3: Businesses Acquired

Bashcell acquisition—In December 2007, MTS acquired 100% of Bashcell, the GSM-1800 mobile services provider in the Republic of Bashkortostan, situated in Russia’s Volga region. Cash consideration paid amounted to $6.7 million. In connection to the purchase MTS assumed debt in the amount of $31.9 million due from Bashcell to its previous shareholder.

As of November 30, 2007, Bashcell provided services to approximately 142,000 subscribers (unaudited).

This acquisition was accounted for using the purchase method of accounting. The preliminary purchase price allocation for the acquisition was as follows:

Goodwill is mainly attributable to the synergy expected as a result of the acquisition and was assigned to “Russia” operating segment. The total amount of goodwill is not deductible for income tax purposes. The customer base is amortized over the estimated average subscriber’s life of approximately 34 months.

Although substantially complete, final adjustments, as applicable, to the purchase price allocation for the acquisition will be finalized in the first quarter of 2008.

K-Telecom acquisition—In September 2007, MTS acquired 80% stake in International Cell Holding Ltd, 100% indirect owner of K-Telecom CJSC, Armenia’s wireless telecommunication operator. Along with acquisition, the Group entered into a call and put option agreement for the remaining 20% stake to be exercised not earlier than July 2010 and not later than July 2012. In accordance with put and call option agreement, the exercise price shall be determined by an independent investment bank at the date the option is exercised. The option is valid until July 2012. The option was accounted for at fair value which was $nil at December 31, 2007.

K-Telecom operates under the VivaCell brand in the GSM-900/1800 standard covering the entire territory of Armenia. As of July 1, 2007, it provided services to over 986,000 subscribers (unaudited). The license is valid until the end of 2019.

In accordance with sale and purchase agreement, MTS paid €260.0 million ($361.2 million as of the date of acquisition) for 80% of K-Telecom and €50.0 million ($69.0 million as of the date of acquisition) shall be paid out to the sellers in the course of three years from 2008 to 2010 provided certain agreed financial targets are met by K-Telecom. Based on K-Telekom’s financial results for the year ended December 31, 2007, €10.0 million ($14.7 million as of December 31, 2007) out of €50.0 million ($73.6 million as of December 31, 2007) was recognized as a liability in the accompanying consolidated balance sheet and included in the purchase price of K-Telekom. In conjunction with the acquisition, MTS extended a €140.0 million ($194.5 million as of date of acquisition) technical loan to K-Telecom for repayment of payables for equipment and other liabilities due as of the date of acquisition to PMF Telecommunications, an entity, affiliated to the sellers. As a result, K-Telekom’s liabilities to the seller and its affiliates were settled. The loan is eliminated in consolidation and is not part of purchase price. Finders and consultants fees paid in connection with the business combination comprised $26.7 million.

This acquisition was accounted for using the purchase method of accounting. The purchase price allocation for the acquisition was as follows:

Recording contingent consideration once financial targets are met will result in future adjustments to the purchase price.

Goodwill is mainly attributable to the economic potential of Armenia, given the low mobile penetration level of the market. Goodwill is not deductible for income tax purposes.

The customer base is amortized over the estimated average subscriber’s life of approximately 46 months.

Uzdunrobita acquisition—In June 2007, MTS purchased an additional 26% stake in JV Uzdunrobita (”Uzdunrobita”), mobile operator in Uzbekistan, from a private investor for $250.0 million in cash. Previously MTS owned 74% of Uzdunrobita. As a result of this transaction, MTS ownership increased to 100%. The transaction was accounted for using the purchase method. Allocation of purchase price increased the recorded license cost by $155.7 million, customer base cost by $6.5 million, property plant and equipment cost by $5.4 million. Additional $35.0 million was recognized as goodwill. Goodwill is not deductible for income tax purposes and is mainly attributable to the economic potential of the markets where Uzdunrobita operates.

License costs are amortized over the remaining contractual terms of the licenses of approximately 9 years and the customer base is amortized over the estimated average subscriber’s life of approximately 20 months.

Dagtelecom acquisition—In July 2006, MTS acquired a 74.99% controlling stake in Dagtelecom for a cash consideration of $14.7 million. In conjunction with this acquisition, the Group entered into a put and call option agreement to buy the remaining stake at fair market value within an exercise period commencing from September 1, 2009 and ending in July 2021, for the put option, and from 2009 to 2010 for the call option. The fair values of the option was $nil at December 31, 2007 and 2006. Dagtelecom is a GSM-900 mobile services provider in the Republic of Dagestan, a region in the South of Russia with a population of 2.6 million. Dagtelecom’s customer base at the date of acquisition was approximately 170,000 subscribers (unaudited).

This acquisition was accounted for using the purchase method of accounting. The purchase price allocation for the acquisition was as follows:

Goodwill is mainly attributable to the economic potential of the macro‑region South, where Dagtelecom is located. Goodwill is not deductible for income tax purposes.

The customer base is amortized over the estimated average subscriber’s life of approximately 60 months.

ReCom acquisition—In December 2005, MTS purchased the remaining 46.1% stake in ReCom for $110.0 million. Previously, MTS owned 53.9% of ReCom. As a result of the transaction, MTS’ ownership in the subsidiary increased to 100%. The acquisition was accounted for using the purchase method of accounting. The allocation of the purchase price increased the recorded license costs by $43.9 million, the customer base costs by $15.0 million and resulted in recognition of goodwill of $16.2 million.

Goodwill is mainly attributable to the economic potential of the market given the low regional penetration level as of the date of acquisition. Goodwill is not deductible for income tax purposes.

License costs are amortized over the remaining contractual terms of the licenses of approximately 3 to 8 years and the customer base is amortized over the estimated average subscriber’s life of approximately 60 months.

BCTI acquisition—In June 2005, MTS entered into an agreement to acquire 100% of the outstanding stock of BCTI, which is a leading cellular operator in Turkmenistan with a customer base of approximately 59,100 subscribers (unaudited). BCTI holds a license to provide GSM-900/1800 services for the whole territory of Turkmenistan. The agreement provided for the acquisition of a 51% stake and included a forward commitment to complete the acquisition of the remaining 49% stake within eight months from the date of the original agreement subject to certain conditions.

MTS acquired the 51% stake in BCTI for a cash consideration of $28.2 million, including a finder’s fee of $2.5 million. The Group accounted for the purchase of the remaining 49% stake in BCTI as a financing of the minority interest and, consequently, consolidated 100% of the subsidiary starting from June 30, 2005. In November 2005, MTS completed the acquisition of the remaining 49% stake in BCTI for a cash consideration of $18.5 million.

This acquisition was accounted for using the purchase method of accounting. Total purchase price amounted to $46.7 million. The purchase price allocation for the acquisition was as follows:

License costs are amortized over the remaining contractual terms of the licenses of approximately 4 years. In accordance with certain provisions of the license agreement with the Government of Turkmenistan, the Group shares the net profit derived from the operations of the BCTI branch located in Turkmenistan. The amount of shared net profit is calculated based on the financial statements prepared in accordance with local generally accepted accounting principles subject to certain adjustments. The Group shared 49% of the net profit since the date of acquisition up to December 21, 2005, and 20% of the net profit commencing December 21, 2005.

Gorizont-RT acquisition—In June 2005, MTS acquired the remaining 24.0% stake in Gorizont-RT, increasing its ownership to 100%. The purchase price paid was $13.5 million. The allocation of purchase price increased the recorded license costs by $7.5 million. Additional $2.7 million was recognized as goodwill. Goodwill is not deductible for income tax purposes.

Telesot Alania acquisition—In December 2005, MTS acquired the remaining 47.5% stake in Telesot Alania, increasing its ownership in the company to 100%. In accordance with the purchase agreement the purchase price amounted to $32.6 million, from which $9.0 million was paid in 2005, and the remaining $23.6 million was paid during 2006.

The purchase price allocation was completed in 2006. The adjustment to the preliminary purchase price allocation made as of the date of the acquisition in 2005 resulted in a reduction of goodwill to $24.0 million and increase of license cost to $5.0 million.

License costs are amortized over the remaining contractual terms of the license of approximately 2 years and the customer base is amortized over the estimated average subscriber’s life of approximately 60 months.

Goodwill is mainly attributable to the economic potential of the market in the macro‑region “South” where the company is located. Goodwill is not deductible for income tax purposes.

Acquisitions of various regional companies—In November 2006, MTS established a wholly‑owned subsidiary TS-Retail LLC (”TS-Retail”) to further expand its retail business. On December 7, 2007, MTS stake in this company decreased from 100% to 25% following the increase of share capital by TS-Retail by $14.0 million, that was paid by MTS and certain Sistema subsidiaries. See Note 15 for detailed description of this transaction.

In December 2005, MTS acquired an additional 74% stake in MTS-Tver for $1.4 million. As a result of the transaction, MTS ownership in the company increased to 100%. The acquisition was accounted for using the purchase method.

In December 2005, MTS acquired the remaining 6.47% stake in Sibintertelecom, which resulted in an increase of MTS ownership in Sibintertelecom to 100%. The amount paid for the stake was $2.8 million. The allocation of purchase price increased the recorded license costs by $1.4 million. Additional $0.2 million was recognized as goodwill. Goodwill is not deductible for income tax purposes.

In February 2005, MTS completed the acquisition of 74.9% stake in Sweet-Com LLC for a cash consideration of $2.0 million. Sweet-Com LLC is the holder of 3.5 GHz radio frequency allocation for the Moscow region. The company is providing wide-band radio access services for the “last mile” based on Radio‑Ethernet technology. The acquisition was accounted for using the purchase method. As the result of the purchase price allocation, license costs increased by $2.4 million.

In February 2005, MTS acquired a 74% stake in MTS-Komi Republic, increasing its ownership to 100%. The consideration paid under the transaction amounted to $1.2 million. The acquisition was accounted for using the purchase method.

Pro forma results of operations (unaudited)—The following unaudited pro forma financial data for the years ended December 31, 2007 and 2006, give effect to the acquisitions of K-Telekom, Bashcell and the remaining stake in Uzdunrobita, as though these business combinations had been completed at the beginning of each year.

The pro forma information is based on various assumptions and estimates. The pro forma information is not necessarily indicative of the operating results that would have occurred if the Group acquisitions had been consummated as of January 1, 2006, nor is it necessarily indicative of future operating results. The pro forma information does not give effect to any potential revenue enhancements or cost synergies or other operating efficiencies that could result from the acquisitions. The actual results of operations of these companies are included in the consolidated financial statements of the Group only from the respective dates of acquisition.