Merger with Perekriostok

12th Apr 2006 07:00

Pyaterochka Holding N.V.12 April 2006 NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION IN, INTO OR FROM THE UNITED STATES,AUSTRALIA, CANADA OR JAPAN 12 April 2006 Merger of Pyaterochka and Perekriostok Alfa Group to become majority shareholder in the Enlarged Group The Board of Supervisory Directors of Pyaterochka is pleased to announce themerger of Pyaterochka and Perekriostok, a majority-owned subsidiary of AlfaGroup, to create the clear leader in the fast growing Russian food retailmarket. Alfa Group, one of the largest and most successful financial investorsin Russia and a long-standing investor in the Russian food retail sector,together with certain members of Perekriostok management, will also acquire astake in Pyaterochka from companies controlled by Pyaterochka's FoundingShareholders, resulting in Alfa Group becoming the majority shareholder in theEnlarged Group. Andrei Rogachev and Alexander Girda, the founders ofPyaterochka, together with other members of Pyaterochka's senior management,strongly support the merger and will retain a stake of 21.2% in the EnlargedGroup. Transaction highlights • Pyaterochka is leading the consolidation of the Russian food retail market; • Merger will create the clear leader in the fast growing Russian food retail market with combined 2005 net sales of US$2.4 billion; • Total of 880 stores, including 467 company-managed stores and 413 franchisee stores as at 1 January 2006; • Diversified and complementary geographic presence, creating the leader in the key markets of Moscow and St Petersburg and a strong and proven platform for rapid regional expansion; • Multi-format capability with potential for accelerated future growth, with target sales of approximately US$6 billion in 2008; • Potential for substantial synergies; • Combination of two strong management teams; and • Alfa Group, one of the largest and most successful financial investors in Russia and a long-standing investor in the Russian food retail sector, to become Pyaterochka's majority shareholder, committed to the long term development of the Enlarged Group. Transaction summary Pyaterochka has agreed to merge with Perekriostok, the leading supermarket chainin Russia. The merger will be effected through an acquisition, by Pyaterochka,of the entire issued share capital of Perekriostok Holdings Limited from asubsidiary of the Alfa Group and Templeton Strategic Emerging Markets Fund LLC.The consideration for the acquisition of Perekriostok is US$300 million in cashand the issue of 15,813,253 new Pyaterochka Shares as ordinary shares or in theform of GDRs. Based on the average closing price per Pyaterochka GDR ofUS$16.83 during the 30 trading days prior to 5 April 2006, the last trading dayprior to Pyaterochka's announcement that it was in merger discussions withPerekriostok, the transaction values Perekriostok at US$1,365 million. In addition, Alfa Group has purchased 2,467,917 million Pyaterochka Shares fromthe Founding Shareholders for US$200 million in cash, and has agreed to purchasea further 12,068,115 million Pyaterochka Shares from the Founding Shareholders,subject to certain adjustments, for US$978 million in cash on completion. AlfaGroup's purchase of a total of 14,536,032 million Pyaterochka Shares from theFounding Shareholders for a total of US$1,178 million in cash is equivalent toUS$20.26 per Pyaterochka GDR, and represents a 20.4 per cent premium to theaverage closing price per Pyaterochka GDR of US$16.83 during the 30 trading daysprior to 5 April 2006, the last trading day prior to Pyaterochka's announcementthat it was in merger discussions with Perekriostok. Upon completion of thetransaction, Alfa Group (together with certain members of Perekriostokmanagement) will become the majority shareholder in Pyaterochka with a holdingof 54.0 per cent, the Founding Shareholders will retain a holding of 21.2 percent and the remaining shares will be held by institutional investors. If the merger or the acquisition of Pyaterochka Shares from Pyaterochka'sFounding Shareholders does not complete, Pyaterochka's Founding Shareholders and/or Alfa Group, as applicable, may be required to pay a significant break fee.If Alfa Group is required to pay a break fee to the Founding Shareholders,Pyaterochka is entitled to up to US$15m of that break fee. Pyaterochka has obtained formal commitment letters from a number of leadinginternational financing banks in connection with the financing of the US$300million cash element of the consideration payable for the acquisition ofPerekriostok, to refinance the existing debt of Perekriostok, and to provide fora capex facility to finance the future development of the Enlarged Group HSBC has issued a fairness opinion to the Board of Supervisory Directors ofPyaterochka stating its opinion that the consideration payable by Pyaterochkafor its acquisition of Perekriostok is fair, from a financial point of view, toPyaterochka. Upon completion of the merger, and subject to Pyaterochka shareholder approval,it is intended the Pyaterochka Board of Supervisory Directors will consist ofthe following: Mr David Noble, who will continue in his current capacity asindependent non-executive Chairman, Andrei Rogachev and Tatyana Franous, whowill continue their roles as members of the Board of Supervisory Directors, oneadditional independent director, who is expected to be appointed by the end of2006, and five representatives from Alfa Group, including Mikhail Fridman,Chairman of Alfa Group, and Alexander Kosianenko, the current CEO ofPerekriostok. It is intended that Alexander Girda and Igor Vidiaev will leavethe Board of Supervisory Directors. Subject to shareholder approval of his appointment to the Management Board, LevKhasis, currently Chairman of Perekriostok, will become CEO of the EnlargedGroup. Lev Khasis brings to the Enlarged Group a wealth of experience in Russianretail, including positions held at Perekriostok (Board member since 1999 andChairman of the Board since 2002), State Department Store "GUM" (Chairman of theBoard from 2003 until 2004), Central Department Store "TsUM" (Chairman of theBoard from 2001 until 2003), as well as his role as co-founder of severalstart-up food retail businesses in Russia including Fauchon, Globus Gourmet andHediard. In addition, subject to shareholder approval of his appointment to theManagement Board, Vitaliy Podolskiy, currently CFO of Perekriostok, will becomeCFO of the Enlarged Group. Upon completion of the merger Pavel Musial, current COO of Perekriostok, willbecome CEO of Perekriostok and will replace Alexander Kosianenko, who will jointhe Board of Supervisory Directors and retain overall responsibility forPerekriostok's strategy and existing operations. Subject to shareholderapproval of his appointment, Pavel Musial will also join the Management Board ofPaprika. The existing management team of Pyaterochka, including Oleg Vysotskyas CEO and Anzhelika Lee as CFO, will continue to run the Pyaterochka business. As part of the terms of the transaction, companies controlled by Andrei Rogachevand Alexander Girda have agreed to grant Pyaterochka a call option to acquirethe entire share capital of Formata Holding B.V.,which operate a chain ofhypermarkets under the Carousel brand in St. Petersburg, the Leningradsky regionand Nizhni Novgorod. Completion of the acquisition of Perekriostok is subject to certain conditions,including Pyaterochka shareholder and regulatory approval. Completion of each ofthe Perekriostok Transaction and the purchase of Pyaterochka Shares from theFounding Shareholders is also conditional on completion of the other. An Extraordinary General Meeting of Pyaterochka's shareholders to approvecertain resolutions, including the acquisition of Perekriostok, the appointmentof the members of the new Board of Supervisory Directors and the appointment ofthe new Management Board directors, is expected to be held in May 2006. TheBoard of Supervisory Directors intends to send a notice convening this meetingto Pyaterochka shareholders shortly after the announcement of Pyaterochka'spreliminary results for the year ended 31 December 2005. Closing of the merger and the purchase of Pyaterochka Shares from the FoundingShareholders is expected in Q2 2006. Creating a dynamic new force in Russian food retailing Pyaterochka believes that its merger with Perekriostok represents a trulyexciting prospect for the company, creating the clear leader in the fast growingRussian food retail market with the potential for accelerated future growth as aresult of the Enlarged Group's multi-format capability. The multi-format approach will consist of running Pyaterochka's andPerekriostok's current store format strategies separately, resulting in minimalmerger disruption. This will therefore allow management to continue to focus onrapid growth whilst simultaneously optimising various aspects of theiroperations including purchasing, distribution, logistics, IT, new storedevelopment and real estate purchasing. The diversification into a wider rangeof store formats will provide the Enlarged Group with a larger share of therapidly growing Russian food retail market and is expected to significantlyenhance its growth outlook. Pyaterochka believes that the Enlarged Group will benefit from: (a) a clear leadership position in the fast growing Russian food retailmarket; (b) a combination of two strong management teams as well as an enhancedability to attract and retain management talent; (c) a diversified and complementary geographic presence, creating theleader in the key Moscow and St Petersburg markets and a strong and provenplatform for rapid expansion in the large and relatively under-developed marketsof the Russian regions (particularly in the European parts of Russia), Ukraineand Kazakhstan; (d) a multi-format capability by combining Pyaterochka's successfuldiscount format with Perekriostok's leading chain of supermarkets, with thepotential for accelerated growth; (e) improved access to high quality real estate in Moscow, StPetersburg and the Russian regions with the opportunity to share informationrelating to new store opportunities; and (f) potential for substantial synergies, including economies of scalein purchasing, logistics and IT, and sharing of best practices within theEnlarged Group. David Noble, Non-Executive Chairman of the Board of Supervisory Directors ofPyaterochka, commented: "This merger combines two high quality businesses and will change the face ofRussian retailing. Our new presence in the supermarket format willsignificantly expand the scale and scope of our operations, creating the clearleader in the dynamic Russian food retail market with a strong platform foraccelerated and more profitable future growth, which will be to the benefit ofall our shareholders." Lev Khasis, Chairman of Perekriostok and CEO designate of the Enlarged Group,said: "Perekriostok and Pyaterochka have complementary strengths. We will continue tobuild on those strengths and will share our understanding of the market and ourbest business practices with each other. Together we will use our new positionin the market to deliver enhanced value to all our customers and shareholders." Andrei Rogachev, one of the founders of Pyaterochka, said: "As a founder of Pyaterochka I am proud of what we have achieved in pioneeringnew retail formats in Russia. As a member of the Board of Supervisory Directorsand a significant shareholder in the combined company, I look forward to workingclosely with my new colleagues to continue to build on our combined achievementsduring the next phase of the company's development." Mikhail Fridman, Chairman of the Board of Alfa Group said: "Retailing is one of the fastest growing sectors in the Russian economy and onethat Alfa Group understands well given our track record of active investmentover the last decade. I believe that the merger creates an exciting combinationof two great companies, and we are committed to creating a truly world-classbusiness over the longer term." Enquiries: Pyaterochka Tanja Djurdjevic, Investor Relations Tel: +7 495 724 6414 Tel: +1 646 229 3782 HSBCPatrick Cazalaa Tel: +44 207 991 8888Julian Gray Morgan StanleyMagomed Galaev Tel: +7 495 589 2208Robert Foster Tel: +44 207 425 5853Verdi Israelian Tel: +7 495 589 2226 CitigateDavid Westover Tel: +44 7768 897 722Marina Zakharova Tel: +44 207 282 1079 Alfa GroupAndrei Gusev Tel: +7 495 787 0077PerekriostokVitaliy Podolskiy, CFO Tel: +7 495 232 5924Alexander Barhatov, Public Relations Tel: +7 495 783 6419 Credit SuisseJohn Owen Tel: +44 207 888 8888William Mansfield This summary should be read in conjunction with the full text of theannouncement. HSBC is acting for Pyaterochka and no one else solely in connection with thePerekriostok Transaction and will not be responsible to anyone other thanPyaterochka for providing the protections afforded to clients of HSBC or forproviding advice in relation to the Perekriostok Transaction. Credit Suisse is acting for Alfa Group and no one else in connection with thePerekriostok Transaction and the Pyaterochka Transaction and will not beresponsible to anyone other than Alfa Group for providing the protectionsafforded to clients of Credit Suisse or for providing advice in relation to thePerekriostok Transaction and the Pyaterochka Transaction. Morgan Stanley is acting for the Founding Shareholders and no one else solely inconnection with the Pyaterochka Transaction and will not be responsible toanyone other than the Founding Shareholders for providing the protectionsafforded to clients of Morgan Stanley or for providing advice in relation to thePyaterochka Transaction. This announcement does not constitute an offer to sell, or the solicitation ofan offer to subscribe for or buy, New GDRs or any other securities in anyjurisdiction. The New GDRs will not be generally made available or marketed tothe public in any jurisdiction in connection with the Admission. The release, publication and distribution of this announcement may be restrictedby law. No action has been or will be taken by Pyaterochka to permit thepossession or distribution of this announcement in any jurisdiction where actionfor that purpose may be required. Accordingly, neither this announcement nor anyadvertisement or any other material relating to it may be distributed orpublished in any jurisdiction except under circumstances that will result incompliance with any applicable laws and regulations. Persons into whosepossession this announcement comes should inform themselves about and observeany such restrictions. Any failure to comply with these restrictions mayconstitute a violation of the securities law of any such jurisdictions. No global depositary receipts, shares or other securities of Pyaterochka havebeen registered under the Securities Act or otherwise qualify for sale or resaleunder federal or state laws in the United States of America or under theapplicable laws of any of Canada, Australia or Japan, and, subject to certainexceptions, may not be offered or sold in the US or to, or for the account orbenefit of, US persons (as such term is defined in Regulation S under theSecurities Act) or to any national, resident or citizen of Canada, Australia orJapan. Neither this document nor any copy of it may be sent to or taken intothe US, Canada, Australia or Japan nor may it be distributed to any US person(within the meaning of Regulation S under the Securities Act) or to any Canadianpersons. This announcement includes statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements can be identifiedby the fact that they do not only relate to historical or current events.Forward-looking statements often use words such as" anticipate", "target", "expect", "estimate", "intend", "expected", "plan", "goal" believe", or otherwords of similar meaning. By their nature, forward-looking statements involve risk and uncertainty becausethey relate to future events and circumstances, a number of which are beyondPyaterochka's control. As a result, Pyaterochka's actual future results maydiffer materially from the plans, goals and expectations set out in theseforward-looking statements. Any forward-looking statements made by or on behalf of Pyaterochka speak only asat the date of this announcement. Save as required by any applicable laws orregulations, Pyaterochka undertakes no obligation publicly to release theresults of any revisions to any forward-looking statements in this document thatmay occur due to any change in its expectations or to reflect events orcircumstances after the date of this document. Appendix I contains the definitions of certain terms used in this announcement. Notes to editors: About Pyaterochka Pyaterochka is one of the largest grocery retailers in Russia in terms of sales,with a chain of 347 company-managed stores located in the Moscow and St.Petersburg areas and the regions as of 1 January 2006. Net sales in 2005 wereUS$1,359 million. In addition to the company's own stores, franchisees operated 404Pyaterochka-branded stores in the Russian regions outside of Moscow and St.Petersburg, Kazakhstan and Ukraine as of 1 January 2006. Pyaterochka's stores are conveniently located "soft" discount stores, open sevendays a week from 9am to 10pm or 11pm, offering a product range of up to 5,000items covering the day-to-day needs of its customers. About Perekriostok Perekriostok is the largest supermarket chain in Russian with 120company-managed stores in Moscow, St. Petersburg, the Russian regions andUkraine. Perekriostok, which was founded in 1995, operates three types ofstores - convenience stores, supermarket and city hypermarket stores (all ofwhich operate under the same "Perekriostok" fascia), which provide it withflexibility to grow in different segments of the market. Net sales in 2005 wereUS$1,015 million, an increase of 54% over the previous year. About Alfa Group Alfa Group is one of Russia's largest privately owned financial investors, withstrategic interests in four key sectors including retail, oil and gas,telecommunications and financial services. Alfa Group typically focuses onvalue-oriented, longer-term opportunities, primarily in Russia and the CIS, butalso invests in other markets which form part of Alfa Group's strategic businessobjectives. Alfa Group has been an active investor in the Russian food retail sector overthe last decade, having been the founder and majority shareholder inPerekriostok since Perekriostok was founded in 1995. NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION IN, INTO OR FROM THE UNITED STATES,AUSTRALIA, CANADA OR JAPAN 12 April 2006 Merger of Pyaterochka and Perekriostok Alfa Group to become majority shareholder in the Enlarged Group 1. Transaction summary The Board of Supervisory Directors of Pyaterochka is pleased to announce themerger of Pyaterochka and Perekriostok, a majority-owned subsidiary of AlfaGroup, to create the clear leader in the fast growing Russian food retailmarket. Alfa Group, one of the largest and most successful financial investorsin Russia and a long-standing investor in the Russian food retail sector,together with certain members of the Perekriostok management, will also acquirea stake in Pyaterochka from companies controlled by Pyaterochka's foundingshareholders, resulting in it becoming the majority shareholder in the EnlargedGroup. Andrei Rogachev and Alexander Girda, the founders of Pyaterochka,together with other members of Pyaterochka's senior management, strongly supportthe merger and will retain a stake of 21.2% in the Enlarged Group. Pyaterochka has agreed to merge with Perekriostok Holdings Limited("Perekriostok"), the leading supermarket chain in Russia. The merger will beeffected through an acquisition, by Pyaterochka, of the entire issued sharecapital of Perekriostok from Luckyworth Limited ("Luckyworth") (a majority-ownedsubsidiary of Alfa Group, with the remaining shares owned by members ofPerekriostok's management) and Templeton Strategic Emerging Markets Fund LLC ("Templeton") (together with Luckyworth the "Perekriostok Sellers") (the"Perekriostok Transaction"). The consideration for the acquisition ofPerekriostok is US$300 million in cash and the issue of 15,813,253 newPyaterochka Shares in the form of ordinary shares or GDRs (the "New PyaterochkaShares"). Based on the average closing price per Pyaterochka GDR of US$16.83during the 30 trading days prior to 5 April 2006, the last trading day prior toPyaterochka's announcement that it was in merger discussions with Perekriostok,the transaction values Perekriostok at US$1,365 million. In addition, Cesaro Holdings Limited ("Cesaro"), a wholly-owned subsidiary ofAlfa Group, and Luckyworth have purchased 2,467,917 million Pyaterochka Sharesfrom the Founding Shareholders for US$200 million in cash, and have agreed topurchase a further 12,068,115 million Pyaterochka Shares from the FoundingShareholders, subject to certain adjustments, for US$978 million in cash oncompletion (the "Pyaterochka Transaction"). Alfa Group's purchase of a total of14,536,032 million Pyaterochka Shares from the Founding Shareholders for a totalof US$1,178 million in cash is the equivalent to US$20.26 per Pyaterochka GDR,and represents a 20.4 per cent premium to the average closing price perPyaterochka GDR of US$16.83 during the 30 trading days prior to 5 April 2006,the last trading day prior to Pyaterochka's announcement that it was in mergerdiscussions with Perekriostok. Upon completion of the Perekriostok Transactionand the Pyaterochka Transaction, and before any adjustments, Alfa Group(together with certain members of Perekriostok management) will become themajority shareholder in Pyaterochka with a holding of 54.0 per cent. and theFounding Shareholders will retain a holding of 21.2 per cent. Templeton willhave a holding of 2.1 per cent. in the Enlarged Group, and has entered into an18-month lock-up agreement with CTF, a wholly owned subsidiary of Alfa Group, inrespect to its holding. Pursuant to the Pyaterochka Agreement, Alfa Group hasentered into a lock-up undertaking with the Founding Shareholders, valid for oneyear after the expected closing date of the transaction. If the merger or the acquisition of Pyaterochka Shares from Pyaterochka'sFounding Shareholders does not complete, Pyaterochka's Founding Shareholders and/or Alfa Group, as applicable, may be required to pay a significant break fee.If Alfa Group is required to pay a break fee to the Founding Shareholders,Pyaterochka is entitled to up to US$15m of that break fee. Strong incentive plans have been put in place for both Pyaterochka andPerekriostok to meet their respective 2006 financial targets and pursuant to thePyaterochka Acquisition Agreement entered into between Alfa Group and theFounding Shareholders, under certain circumstances, the percentage ofPyaterochka Shares transferred to Alfa Group may increase or decrease, and thefounding shareholders' interest will correspondingly decrease or increase,subject to the 2006 financial performance of the businesses. As part of the terms of the Perekriostok Transaction and PyaterochkaTransaction, companies controlled by Andrei Rogachev and Alexander Girda haveagreed to grant Pyaterochka a call option, exercisable in 2008, to acquire theentire share capital of Formata Holding B.V. ("Formata") and certain othercompanies controlled by Formata, which operates a chain of hypermarkets underthe Carousel brand in St. Petersburg, the Leningradsky region and NizhniNovgorod. The consideration for the exercise of the call option will becalculated by reference to the future financial performance of Formata. HSBC has issued a fairness opinion to the Board of Supervisory Directors ofPyaterochka stating its opinion that the consideration payable by Pyaterochkafor its acquisition of Perekriostok is fair, from a financial point of view, toPyaterochka. Completion of the Perekriostok Acquisition Agreement is conditional on, amongother things: (a) the shareholders of Pyaterochka: (i) approving the Perekriostok Transaction at an Extraordinary General Meeting intended to be held in May 2006; and (ii) approving the issue of the New Pyaterochka Shares and excluding the pre-emption rights relating to such New Pyaterochka Shares. (b) FAS giving their unconditional consent; (c) Pyaterochka issuing the New Pyaterochka Shares; (d) the Pyaterochka Agreement becoming unconditional (save as to the condition requiring the Perekriostok Acquisition Agreement to become unconditional) and not being terminated; (e) the due execution and delivery of the Finance Documents by Pyaterochka or the issue of the Loan Notes by Pyaterochka (as applicable); and (f) delivery by Pyaterochka of the Pyaterochka Accounts for the twelve month period ending on 31 December 2005. Closing of the merger and the purchase of Pyaterochka Shares from the FoundingShareholders is expected in Q2 2006. 2. Transaction highlights • Pyaterochka is leading the consolidation of the Russian food retail market; • Merger will create the clear leader in the fast growing Russian food retail market with combined 2005 net sales of US$2.4 billion; • Total of 880 stores, including 467 company-managed stores and 413 franchisee stores as at 1 January 2006; • Diversified and complementary geographic presence, creating the leader in the key markets of Moscow and St Petersburg and a strong and proven platform for rapid regional expansion; • Multi-format capability with potential for accelerated future growth, with target sales of approximately US$6 billion in 2008; • Potential for substantial synergies; • Combination of two strong management teams; and • Alfa Group, one of the largest and most successful financial investors in Russia and a long-standing investor in the Russian food retail sector, to become Pyaterochka's majority shareholder, committed to the long term development of the Enlarged Group. 3. Board of Supervisory Directors and management Upon completion of the Pyaterochka and Perekriostok Transactions and, subject toPyaterochka shareholder approval, it is intended that the Pyaterochka Board ofSupervisory Directors will consist of the following: Mr David Noble, who willcontinue in his current capacity as independent non-executive Chairman, AndreiRogachev and Tatyana Franous, who will continue their roles as members of theBoard of Supervisory Directors, one additional independent director, who isexpected to be appointed by the end of 2006, and five representatives from theAlfa Group, including Mikhail Fridman, Chairman of Alfa Group, and AlexanderKosianenko, the current CEO of Perekriostok. It is intended that AlexanderGirda and Igor Vidiaev will leave the Board of Supervisory Directors. Subject to shareholder approval of his appointment to the Management Board, LevKhasis, currently Chairman of Perekriostok, will become CEO of the EnlargedGroup. Lev Khasis brings to the Enlarged Group a wealth of experience inRussian retail, including positions held at Perekriostok (Board member since1999 and Chairman of the Board since 2002), State Department Store "GUM"(Chairman of the Board from 2003 until 2004), Central Department Store "TsUM"(Chairman of the Board from 2001 until 2003), as well as his role as co-founderof several start-up food retail businesses in Russia including Fauchon, GlobusGourmet and Hediard. In addition, subject to shareholder approval of hisappointment to the Management Board, Vitaliy Podolskiy, currently CFO ofPerekriostok, will become CFO of the Enlarged Group. Pavel Musial, current COO of Perekriostok, will become CEO of Perekriostok andwill replace Alexander Kosianenko, who will join the Board of SupervisoryDirectors and retain overall responsibility for Perekriostok's strategy andexisting operations. Subject to shareholder approval of his appointment, PavelMusial will also join the Management Board of Paprika. The existing managementteam of Pyaterochka, including Oleg Vysotsky as CEO and Anzhelika Lee as CFO,will continue to run the Pyaterochka business. As disclosed above, Lev Khasis, through an investment company co-founded by him,established as a co-owner two food retail businesses operating in Russia, inwhich he still continues to own minority beneficiary equity interests: • "The Stolichnaya Torgovaya Kompaniya" (Stolichnaya Trade Company)LLC (Moscow) which operates a top-premium grocery store chain, under the brandsFauchon and Hediard (as a licensee) and under a brand of its own - "GlobusGourmet"; and • "Daily Foods" LLC (Moscow) that develops a chain of small (about100 sq. meters) convenience food stores under its own brands "Daily" and "DailyExpress". Whilst these businesses are of much smaller scale compared to the Enlarged Group(Fauchon, Hediard, Globus Gourmet and Daily had combined 2005 net sales of lessthan US$20 million), and operate in a different segment of the Russian foodretail market versus the Enlarged Group, conflicts of interest may arise. Inorder to avoid any potential or perceived conflict of interest, and based onlegal advice received to date, Lev Khasis has agreed to place his beneficiaryequity interests in these food retailers into a blind trust domiciled in aWestern country and will have no management involvement with any of theseassets. 4. Financing the Perekriostok Transaction The Perekriostok Transaction will be financed through a combination of cash andthe issue of New Pyaterochka Shares. Pyaterochka has obtained formal commitmentletters from a number of leading international financing banks in connectionwith the financing of the US$300 million cash element of the considerationpayable for the acquisition of Perekriostok, to refinance the existing debt ofPerekriostok, and to provide for a capex facility to finance the futuredevelopment of the Enlarged Group. The availability of such financing dependsupon the banks finalising their due diligence process and Pyaterochka agreeingand entering into legal documentation relating to the financing with thefinancing banks. Pyaterochka is confident that such agreement will be reachedand the financing obtained prior to completion of the Perekriostok Transaction.If financing is not obtained from the banks, Pyaterochka shall issue the LoanNotes to the Perekriostok Sellers for US$300 million in satisfaction of the cashelement of the consideration payable for the acquisition of Perekriostok. 5. Rationale for the Perekriostok Transaction Pyaterochka and Perekriostok operate in different segments of the Russian foodretail market. Pyaterochka operates discount stores, while Perekriostokoperates convenience stores, supermarkets and city hypermarkets. Although there are continued significant growth prospects for Pyaterochka'sformat on a stand-alone basis, Pyaterochka believes that its merger withPerekriostok represents a truly exciting prospect for Pyaterochka, creating theclear leader in the fast growing Russian food retail market with the potentialfor accelerated future growth as a result of the Enlarged Group's multi-formatcapability. The multi-format approach will consist of running Pyaterochka's andPerekriostok's current store format strategies separately, resulting in minimalmerger disruption. This will therefore allow management to continue to focus onrapid growth whilst simultaneously optimising various aspects of theiroperations including purchasing, distribution, logistics, IT, new storedevelopment and real estate purchasing. Pyaterochka believes that the Enlarged Group will benefit from: (a) a clear leadership position in the fast growing Russian foodretail market; (b) a combination of two strong management teams as well as an enhancedability to attract and retain management talent; (c) a diversified and complementary geographic presence, creating theleader in the key Moscow and St Petersburg markets and a strong and provenplatform for rapid expansion in the large and relatively under-developed marketsof the Russian regions (particularly in the European parts of Russia), Ukraineand Kazakhstan; (d) a multi-format capability by combining Pyaterochka's successfuldiscount format with Perekriostok's leading chain of supermarkets, with thepotential for accelerated growth; (e) improved access to high quality real estate in Moscow, StPetersburg and the Russian regions with the opportunity to share informationrelating to new store opportunities; and (f) potential for substantial synergies, including economies of scalein purchasing, logistics and IT, and sharing of best practices within theEnlarged Group. Clear leadership position Market leadership in the highly-fragmented and rapidly-evolving Russian foodretail market is of high importance. An established and proven infrastructureto support a rapid store roll-out strategy, a strong management team and theability to secure advantageous purchasing terms with suppliers through economiesof scale are critical sources of competitive advantage to support the long-termsuccess of the Enlarged Group. The Enlarged Group will be the largest food retailer in Russia in terms ofsales, with combined 2005 net sales of US$2.4 billion. As at 1 January 2006Pyaterochka and Perekriostok operated 467 company-managed stores, of which 347are discount stores, 25 are convenience stores, 88 are supermarkets and 7 arecity hypermarkets. In addition, the franchisees of Pyaterochka and Perekriostokoperated 413 franchised stores, as at 1 January 2006, which are mainly discountstores. The Enlarged Group expects to have a leading market position in the key marketsof the Moscow area and the St Petersburg area, which have an aggregatepopulation of more than 23 million people and account for approximately onethird of total Russian retail sales, and also expects to benefit from thecreation of a strong growth platform in the large and relatively under-developedmarkets in the Russian regions, Ukraine and Kazakhstan. Combination of two strong management teams The combination of two sets of strong management will, in Pyaterochka's view,create a team with unrivalled industry experience and success. This is ofparticular importance in the Russian market, which features a significantshortage of experienced retail professionals. The market leadership willfurther attract the best management talent and employees to facilitateaccelerated growth and enhance leadership. Diversified and complementary geographic presence The Enlarged Group will benefit from a highly diversified and complementarygeographic presence through a combination of Pyaterochka's strengths in theMoscow area and its traditional home market of the St Petersburg area, andPerekriostok's strength in the Moscow area, Russian regions and the Ukraine.Following completion of the transaction, the Enlarged Group will be the leaderin the key Moscow and St Petersburg markets, and will have a strong and provenplatform for rapid expansion in the large and relatively under-developed marketsof the Russian regions (particularly in the European parts of Russia), Ukraineand Kazakhstan. As at 31 December 2005 Pyaterochka operated 159 stores (124 atyear end 2004) that were located in the Moscow area and 167 stores (111 at yearend 2004) located in the St Petersburg area and Perekriostok operated 73 stores(62 at year end 2004) that were situated in the Moscow area, 43 (28 at year end2004) in St Petersburg and the Russian regions and 4 in Ukraine. In addition to the strong position in the core markets, the Enlarged Group has aproven track record of successful expansion and access into the Russian regions,Kazakhstan and Ukraine through the 404 franchisee stores that Pyaterochkaoperates in these regions as at 1 January 2006 (207 at year end 2004), and thestrong presence of Perekriostok stores in these locations. Multi-format capability with the potential for accelerated growth Pyaterochka believes that the merger of Pyaterochka and Perekriostok will createa multi-format player with a combination of discount stores, convenience stores,supermarkets and city hypermarkets. This multi-format strategy, which mirrorsthe approach taken by the leading food retailers in Western Europe, such asTesco and Carrefour, is expected to bring a number of benefits to the EnlargedGroup, including: (a) ability to target a broader range of customer segments in the geographicmarkets in which it operates through its multi-format business; (b) greater flexibility in securing sites for new stores, particularly in theRussian regions, as the Enlarged Group operates formats suitable for a widerarray of property sizes and locations; (c) greater adaptability to evolving customer needs, allowing the EnlargedGroup to maintain or grow market share in spite of changes in shopping habitsand demographic trends; and (d) improved ability to benefit from expected growth in Russian consumerspending. One of Pyaterochka's key competitive advantages has been its focus onserving the lower income segment of the Russian population, aggressively gainingmarket share from open markets and kiosks. However, as Russian consumerpurchasing power is increasing, Pyaterochka believes there is an attractiveopportunity to access the emerging middle-class segment with more sophisticatedshopping habits and demands. While Pyaterochka continues to recognize andaddress the need to upgrade both its product range and the appearance of its ownsoft discounter stores, Pyaterochka believes that the Perekriostok Transactionprovides an excellent opportunity to establish a leading presence in the mid tohigher end of the market, which will allow the Enlarged Group to address thefull spectrum of the modern Russian food retail market. Improved access to high-quality real estate in Moscow, St Petersburg, theRussian regions with opportunity to share information relating to new storeopportunities It is anticipated that the combined expertise of Pyaterochka and Perekriostok inacquiring rights to the most attractive land plots and properties at reasonablecost will provide the Enlarged Group with a robust pipeline supporting thesuccessful execution of its store roll-out strategy. By virtue of themulti-format model, the Enlarged Group is expected to be better positioned tomake acquisitions, including parcels of real estate and of merger andacquisition targets in the regions which were previously unsuitable for therespective companies on their own. A high quality store base in key locationswill be essential to the continued success of the Enlarged Group. Obtainingland plots, executing construction plans, and eventually obtaining the exclusiveright to acquire title to the land plot or to obtain it on a long-term lease inRussia involves a process of several stages. There is growing competition forkey plots for retail sites and through the Perekriostok Transaction the EnlargedGroup believes that it will be better positioned to compete for these plots. Potential for substantial synergies Quantified cost synergy benefits Pyaterochka management has identified and quantified cost synergy benefitsarising from the Enlarged Group's greater economies of scale in purchasing,including the opportunity to increase sourcing from overseas. The estimatedannual purchasing savings are expected to amount to approximately US$85 millionby the financial year ending 31 December 2008. As these synergies are expectedto be achieved through the renegotiation of supplier agreements, Pyaterochka'smanagement believes that the capital expenditure and one-off costs necessary toachieve these synergies will be negligible, and expect this to result in onlylimited operational disruption to the Enlarged Group. Unquantified cost synergy benefits Pyaterochka management believes that the Enlarged Group will also be able tobetter leverage future investments in distribution, logistics and IT, therebyreducing the aggregate amount of capital investment and operating costs relatedto these functions. Management, however, is focused on minimising operationaldisruption in order to support the Enlarged Group's continued strong growth, andtherefore has no plans to rationalise or alter Pyaterochka and Perekriostok'srespective distribution, logistics and IT platforms in the near term. In addition, the Perekriostok Transaction is expected to result in improvementsfrom sharing best operating practices within the Enlarged Group, including storemerchandising, human resource management and motivation, and management controland budgeting systems. Additional central costs Pyaterochka management estimates that the incremental operating costs to managethe combined entity, including co-ordination of core areas such as purchasing,store network development, and the transfer of best practices, will amount toapproximately US$ 5 million per annum. 6. Strategy of the Enlarged Group The strategic focus of the Enlarged Group outlined below will be to maintainprofitable growth, increase the Enlarged Group's profitability and minimisemerger disruption. Maintain market leadership in the Russian food retail market The Enlarged Group intends to continue the aggressive rollout of new stores.During 2006, the Enlarged Group plans to open approximately 130 new discountstores, and at least 40 new "Perekriostok" stores (the latter expected tocontribute approximately 60,000 square metres of additional selling space).With respect to the new "Perekriostok" stores to be opened during 2006, 70% ofsites have already been secured and the remaining 30% are under negotiation. The Enlarged Group plans to continue its rapid expansion over the medium term,targeting over 700 discount stores and approximately 240 "Perekriostok" storesby 2008, including approximately 30 convenience stores, 180 supermarkets and 30city hypermarkets. (a) Enhance leadership position in the key Moscow and St Petersburg markets In the Moscow area, which currently accounts for approximately 25 per cent ofRussia's total food retail sales, the Enlarged Group has plans to increase thenumber of its stores from 232 (at 31 December 2005) to over 500 by the end of2008. The Moscow oblast, which has a growing population of more than six millionpeople, does not have many modern food retail formats and therefore managementbelieves this geography represents a particularly attractive growth opportunityfor the Enlarged Group. Furthermore, the combined distribution centres shouldallow for efficiency gains of the logistics operations in the Moscow area. In the St. Petersburg area, which has a population of more than six millionpeople and currently accounts for approximately 4 per cent of total Russian foodretail turnover, the Enlarged Group has plans to increase the number of storesfrom 176 (as at 31 December 2005) to approximately 275 by the end of 2008.Management believes that these store opening plans will further consolidate theEnlarged Group's leadership position in St Petersburg, whilst allowing for theappropriate deployment of the Enlarged Group's financial and managementresources to support future strong growth in the Moscow area, the Russianregions and Ukraine, where competition is relatively benign. (b) Regional leadership through multi-format approach The Enlarged Group intends to maintain profitable growth in the fast-growingRussian food retail market by developing its market presence through amulti-format approach, focusing on its core regional markets as well asexpanding into other Russian regions and neighbouring countries throughacquisitions and franchising. The multi-format approach will consist of runningPyaterochka's and Perekriostok's current store format strategies separately,side by side, whilst simultaneously optimising various aspects of theiroperations including distribution, logistics, IT, new store development and realestate purchasing. The Enlarged Group has plans to increase the number of ownedstores in the regions (excluding St Petersburg) from 59 (as at 1 January 2006)to approximately 165 by the end of 2008. In addition, the Enlarged Group intends to supplement its own store expansion inthe Russian regions, Kazakhstan and the Ukraine with the continued developmentof its franchise network. The Enlarged Group intends to have franchiseoperations in at least 30 out of 88 Russian regions by the end of 2012. TheEnlarged Group also intends in the longer term to significantly expand itsexisting franchise network in Kazakhstan and Ukraine, as well as establish afranchise operation in Belarus and Moldova. Pyaterochka believes that theexpansion of franchise operations will increase the Enlarged Group's purchasingpower with suppliers, strengthen the recognition of its brand and enable theEnlarged Group, where appropriate, to expand its own store network by purchasinginterests in the operation of some of its franchisees. Increase the Enlarged Group's profitability (a) Deliver purchasing scale benefits The Enlarged Group expects to be able to negotiate lower prices from suppliersthrough increased purchasing power. These benefits will be enhanced by thecontinued rationalisation of the number of suppliers and SKUs. Economies ofscale will create the potential to increase direct imports through the openingof dedicated importing operations in various key geographic locations, includingChina. (b) Increased contribution from private label goods The Enlarged Group expects to strengthen its leadership in the sale of privatelabel goods in Russia. Over the next few years, the management of the EnlargedGroup is planning to increase the percentage of Pyaterochka private label goodssales to 50 per cent of Pyaterochka net sales, and for Perekriostok privatelabel goods to contribute 13 per cent of Perekriostok net sales. The managementbelieves that the increased sales contribution from private label goods willgive the Enlarged Group a cost advantage over its competitors and increasecustomer loyalty, thereby allowing it to remain competitive on price whilstincreasing profitability. (c) Continued investment in distribution and logistics The Enlarged Group will continue to invest in distribution and logistics toreduce complexity, increase profitability and increase stock availability. Pyaterochka has expanded its distribution capacity in St. Petersburg and has18,900 square metres of distribution centre space and is building a newdistribution centre in the Moscow area, approximately 10 kilometres outside ofMoscow (first phase of 30,000 square metres expected to be completed in 2006,with a subsequent expansion to 50,000 square metres expected in 2007).Construction of a second Pyaterochka distribution centre in the St Petersburgarea of 15,000 square metres is planned in 2007. Perekriostok plans to open a60,000-80,000 square metres distribution centre in Moscow by the end of 2007. As a result of the additional investment, the Enlarged Group aims tosignificantly reduce the number of deliveries to individual stores by increasingits own distribution centre capability. Pyaterochka's target is to raise itsown distribution centre share of volumes from 50 per cent to 80 per cent by2008, whilst Perekriostok aims to increase its share from 25 per cent to 75 percent in the same time period. The combined effect of this would lead tosignificant supplier delivery savings and an increase in stock availability. (d) Other operating cost efficiencies The Enlarged Group will continue to optimise staffing levels in its stores.Furthermore, for "Perekriostok" stores management has plans to increaseproduction and sales of own salads and deli products, as well as benefit from anew meat processing plant opened in Moscow during the first quarter of 2006. Minimise potential merger disruption The Perekriostok Transaction effects the combination of two already highlysuccessful and fast growing companies. Given the dynamic Russian food retailmarket, it is important that speed and efficiency is maintained in all aspectsof operations. Therefore, in the short term, while extracting the purchasingsynergies and optimising future investments, there will be limited changes inoperations, including no re-branding of stores or change in logistics. TheEnlarged Group will continue to run Pyaterochka's and Perekriostok's currentstore format strategies separately. The management structure will bedecentralised with the two business units retaining their operating independenceand profit and loss responsibilities. The corporate centre will focus oncorporate strategy and M&A, ensuring synergies are realised throughco-ordination of core functional areas (including purchasing, store networkdevelopment and best practice transfer), deployment of capital expenditure,corporate funding, consolidated financial reporting, Group wide legal andstrategy issues, and investor relations. 7. Information on Pyaterochka Throughout its history, Pyaterochka has positioned itself as a value-focusedretailer. Pyaterochka has developed a successful strategy and strong customeroffering, centred on the following three key factors: (a) convenient store location; (b) competitive prices; and (c) well-chosen range of products. Pyaterochka's stores are typically "soft" discount stores, open seven days aweek from 9am to 10pm or 11pm, offering up to 5,000 products that cover the dayto day needs of customers, including food and non food products, fresh produceand perishables. The average size of the Pyaterochka's stores is approximately1,000 square metres, with an average trading area of approximately 600 squaremetres. Pyaterochka is one of the largest grocery retailers in Russia in terms of salesand as at 31 December 2005 operated 326 stores (235 at year end 2004), of which159 stores (124 at year end 2004) were located in the Moscow area and 167 stores(111 at year end 2004) were located in the Company's traditional home market ofthe St Petersburg area. Pyaterochka's stores are "soft" discount stores. Inaddition, as at the end of 2005 Pyaterochka's franchisees operated 425 stores(207 at year end 2004) under the Pyaterochka brand in the Russian regionsoutside the Moscow and St Petersburg areas and in the neighbouring countries ofKazakhstan and Ukraine. As at 1 January 2006, 21 stores in the Yekaterinburgregion became company-managed stores. Therefore, as at 1 January 2006, a totalof 404 stores were operated by Pyaterochka franchisees while Pyaterochka manages347 stores in St. Petersburg, Moscow and Yekaterinburg. For the year ended 31December 2004, Pyaterochka had net sales of approximately US$1.1 billion and itscustomers made over 196 million visits to Pyaterochka's stores. Pyaterochka'snet sales rose to US$1,359 million for the year ended 31 December 2005. In2004, the stores operating under the Pyaterochka brand had gross banner salesapproaching US$1.6 billion. Gross banner sales reached approximately US$2.1billion in 2005. The table below sets out summary IFRS financial information for Pyaterochka forthe periods indicated. For the six months ended For the year ended 30 June (unaudited) 31 December (audited) 2005 2004 2004 2003 2002 (US$ thousands) (US$ thousands)Combined and consolidated incomestatement data Net Sales 638,178 532,576 1,105,803 759,584 493,240Cost of sales (485,277) (418,393) (860,356 ) (612,852 ) (409,838) Gross profit 152,901 114,183 245,447 146,732 83,402Selling, general and (148,444 ) (101,747 ) (51,078)administrative expenses (86,712) (69,182) Operating profit 66,189 45,001 97,003 44,985 32,324 Finance costs, net (3,084) (1,450) (3,736 ) (1,170 ) (1,452)Other expenses, net (3,419) (1,002) (427) (1,577 ) (778)Net monetary gain - - - 3,131 -Foreign currency exchange (1,018) 1,505 1,119 258 -gain Profit before income tax 58,668 44,054 93,959 42,496 33,225 Income tax (11,336) (9,759) (19,524 ) (8,713 ) (4,488) Net profit 47,332 34,295 74,435 33,783 28,737 8. Information on Perekriostok Overview Perekriostok is the largest supermarket chain in Russia, both in terms of salesand number of stores, and one of the fastest growing supermarket chains inRussia. As at 31 December 2005, Perekriostok operated a chain of 120 ownedstores (90 in 2004) located primarily in Moscow, Nizhni Novgorod, St Petersburg,other large cities in the European part of Russia and Ukraine with a total netselling space of over 141,495 square metres (102,428 square metres in 2004). Inaddition, as at 31 December 2005 Perekriostok had nine stores under franchiseagreements (four stores in 2004). For the year ended 31 December 2004, thePerekriostok Group reported net sales of approximately US$660 million (anincrease of 77 per cent over the US$373 million of net sales reported in 2003),and for the year ended 31 December 2005 reported net sales of approximatelyUS$1,015 million (an increase of 54 per cent over the previous year).Perekriostok like-for-like sales increased by 15.7% in 2004, and by 17.6% in2005. Perekriostok operates a mixture of leased and owned stores, with the majority ofthese being leased. As at 31 December 2003, 2004, 2005 the breakdown betweenleased and owned stores was: 2003 - 37 and 27, 2004 - 54 and 36 and 2005 - 73and 47. Typical lease terms for new supermarkets are 10 - 15 years. Perekriostok operates three types of stores - convenience store, supermarket andcity hypermarket stores - which provide it with flexibility to grow in differentsegments of the market. Each type operates under the same "Perekriostok" fascia,although the depth and range of product differs depending on the size of thestore. Perekriostok is currently primarily a food retail business, with somenon-food products activity, although Perekriostok management expects the revenuecontribution from non-food products to increase in the future. While Perekriostok has historically been a mid-market and higher food retailertargeting the Russian middle class, the company has broadened its consumer reachto target consumers at all income levels. The company sells a wide range ofevery-day grocery lines at "best prices" (a basket of 400-500 products whichPerekriostok stores price below its competitors in the local area), including arange of "economy" private label products and price promotions, to targetlower-income customers. Perekriostok prides itself on offering customersquality (including a wide range of fresh and ready-to-eat products), convenience(many stores are typically open 24 hours a day, seven days a week), a wideproduct range, excellent service (including modern, clean and brightly litstores) and a differentiated and competitive price proposition. Perekriostok's multi-type store capability is supported by the fact that therehas been substantial investment in its logistics and distribution network, astrong management team, access to quality real estate as well as strong supportfrom its principal shareholder, Alfa Group. As a result, Perekriostok hassuccessfully expanded its operations, from one supermarket in Moscow 10 yearsago, to become one of the leading food retailers in Russia. History Perekriostok's business was founded by Alfa Group and Alexander Kosianenko(currently CEO of Perekriostok) in 1995, opening its first supermarket in Moscowthat year. The following year, Perekriostok secured a seven-year US$42 millionloan from EBRD, which helped to finance Perekriostok's initial growth.Perekriostok was the first Russian food retailer to open its own distributioncentre (in 1998, located in Moscow), and in 2002 launched its first storeoutside of Moscow. From 2002 to 2004, Perekriostok raised substantial capital in order to fund thenext stage of its store expansion strategy. In 2003, Templeton Emerging MarketsFund bought a 7.7 per cent stake in Perekriostok, in what was one of the firstprivate equity deals in Russian retail, and in 2004, Perekriostok secured athree-year US$75 million international syndicated loan facility (the firsttransaction of its kind for a Russian food retailer) and raised US$50 million innew equity from its existing shareholders. During 2005, Perekriostok issued aRUR 1.5 billion bond (US$52 million) and signed a €125 million unsecuredmulti-currency syndicated loan with a consortium of international banks. During 2003 and 2004, Perekriostok doubled the capacity of its Moscowdistribution centre, launched its own ready meals manufacturing facility (nowsupplying more than 70 Perekriostok stores) and doubled its number of stores(from 45 stores at the end of 2002 to 90 stores by the end of 2004) throughorganic growth (34 stores) and through acquisitions, including the purchase ofthe SPAR Middle Volga in 2003 and Yaroslavl "365" supermarket chains in 2004.Perekriostok experienced further rapid growth in 2005, opening a further 26stores in Russia, and entering the Ukrainian food retail market through theacquisition of SPAR Ukraine, a chain of four supermarkets, in April 2005. As at31 December 2005, Perekriostok operated 120 owned stores and nine franchisedstores. Operations and Stores Perekriostok operates three types of stores under the "Perekriostok" fascia,which offer the same styling identity, core assortment of SKUs and have the samepricing policy: • Convenience Stores: offering up to 7,500 products with a trading area of approximately 400 - 600 square metres; • Supermarkets: offering up to 20,000 products with a trading area of one of approximately 800, 1,200 or 1,600 square metres; and • City Hypermarkets: offering up to 35,000 products with a trading area of approximately 4,000 - 7,000 square metres. Perekriostok management believes that this multi-type store capability, whichmirrors the approach taken by the leading food retailers in Western Europe, suchas Tesco and Carrefour, gives the company a number of competitive advantages,including: • increased market share by covering the full spectrum of shopping needs, ranging from convenience to the weekly shopping; • greater flexibility to tailor new openings to available sites, thereby increasing the speed with which Perekriostok can expand its operations and hence increase its market share; and • better leveraging Perekriostok's distribution and logistics operations, and generating scale benefits in purchasing and marketing. (a) Convenience stores Perekriostok reported 2005 convenience store net sales of US$134 million* andoperated 25 convenience stores at 31 December 2005 (2004, 20, and 2003, 8), withtotal net selling space of 13,544 square metres (2004, 11,124, and 2003, 4,158).Each Perekriostok convenience store has up to 7,500 SKUs in stock, with foodproducts accounting for approximately 95 per cent of sales (the remaining 5 percent from the sale of household goods). Convenience stores are typicallylocated in residential districts. (b) Supermarkets Perekriostok reported 2005 supermarket net sales of US$704 million* and operated88 supermarket stores at 31 December 2005 (2004, 66, and 2003, 52), with totalnet selling space of 100,495 square metres (2004, 75,052, and 2003, 59,068).Each supermarket store has up to 20,000 SKUs in stock and has in-store bakeriesand fresh meat and fish counters. Food products account for approximately 85 percent of sales. Supermarket stores are typically located in residentialdistricts, close to or in major shopping centres, adjacent to major trafficcentres, thoroughfares or major roads. (c) City hypermarkets Perekriostok reported 2005 city hypermarket net sales of US$149 million* andoperated seven city hypermarket stores at 31 December 2005 (2004, 4, and 2003,4), with total net selling space of 27,456 square metres. Each city hypermarketstore has up to 35,000 SKUs in stock, including various non-food SKUs. Keynon-food product categories include clothing, electronics and white goods andother household goods. Food products account for approximately 60 per cent ofsales. Customers will typically drive their cars to shop at Perekriostok cityhypermarket stores, all of which are located in shopping centres within thevicinity of residential areas. * Perekriostok revenues by type of store do not include other revenues such aswholesaling, franchisees and information services (d) Franchise operations Unlike Pyaterochka and other Russian food retailers, such as Kopeika,Perekriostok does not pursue an active franchising strategy. As at 31 December2005, only nine stores, all but one of which are located in the Moscow area, areoperated under franchise agreements. Franchising is extended into the Russianregions and Ukraine on a selective basis, although Perekriostok management'score strategy is to develop and operate its own stores. Franchising arrangements are mostly provided by Perekriostok on a "white label"basis, which involves the use of Perekriostok IT systems, infrastructure andpurchasing arrangements. However, the "Perekriostok" brand itself is notfranchised externally, except for two stores that fully meet Perekriostok'stechnology and format requirements. Summary Historic Financials The table below sets out summary audited IFRS financial information forPerekriostok extracted from the audited IFRS consolidated financial statementsfor the periods indicated. For the year ended 31 December 2005 2004 2003 (US$ thousands) Consolidated income statement dataNet Sales 1,014,785 660,047 373,402Cost of goods sold (737,721) (481,284) (270,524) Gross profit 277,064 178,763 102,878Operating expenses (253,877) (158,227) (93,615)Gain/(loss) from disposal of 18,139 (17) (144)property, plant and equipmentLease/sublease income 15,582 9,727 4,081 Operating profit 56,908 30,246 13,344 Finance costs, net (14,395) (7,696) (2,951)Net foreign currency exchange (4,420) 6,108 1,899(loss)/gain Profit before income tax 38,093 28,658 12,292Income tax expense (9,074) (11,672) (3,816) Profit for year 29,019 16,986 8,476 As at 31 December 2005, Perekriostok had net debt of US$167 million. 9. Information on Carousel Carousel is a hypermarket operator owned by Formata, a company indirectly ownedby Andrei Rogachev and Alexander Girda. Since its inception in December 2004,Carousel has opened 7 hypermarkets in St Petersburg, Leningradsky and NizhnyNovgorod. Carousel's stores vary in size, from approximately 4,000 square metresto approximately 11,000 square metres of sales area and offer food and non-foodproducts. By the end of 2008, Carousel is expected to have approximately 30hypermarkets. OOO "Rusel", a wholly owned subsidiary of Formata, has an arms-length agreementwith OOO "Agrotorg" and OOO "Agroaspekt", both wholly owned subsidiaries ofPyaterochka with respect to the provision of certain shared services, includinga joint-purchasing arrangement. Agrotorg, Agroaspekt and Rusel have agreed toextend the term of this agreement for a further two years. In May 2005, thePyaterochka Group entered into a shared services agreement with Formata for theprovision to Formata and certain related companies of services to facilitate theoperation and management of the Carousel chain of hypermarkets. Pyaterochka andFormata have agreed to terminate this agreement. As part of the terms of the Perekriostok Transaction and the PyaterochkaTransaction, the shareholders in Formata have agreed to grant Pyaterochka a calloption to acquire the entire share capital of Formata and its subsidiaries. Theconsideration for the exercise of the call option will be calculated byreference to the future financial performance of Formata and it will besatisfied by a mixture of cash and shares. The option is exercisable during theperiod beginning on 1 January 2008 and ending on 1 July 2008. The optionagreement is conditional on completion of the Pyaterochka Agreement. Anyacquisition of option shares is also subject to certain conditions, includingPyaterochka receiving any required regulatory, shareholder or third partyapproval or consent. 10. Information on Alfa Group Alfa Group is one of Russia's largest privately owned financial investors, withstrategic interests in four key sectors including retail, oil and gas,telecommunications and financial services. Alfa Group typically focuses onvalue-oriented, longer-term opportunities, primarily in Russia and the CIS, butalso invests in other markets which form part of Alfa Group's strategic businessobjectives. Alfa Group's key investments include: Retail Alfa Group has been an active investor in the Russian food retail sector overthe last decade, having been the founder and majority shareholder inPerekriostok since Perekriostok was founded in 1995. It also has an interest inthe Smirnov Trade House, a world vodka producer. Oil and gas Together with Access Industries/Renova, Alfa Group holds a 25% stake in TNK-BP,Russia's third largest vertically integrated oil company (in terms ofproduction). In 2005 it controlled daily output in excess of 1.58 millionbarrels of oil (77 million tonnes per year). TNK-BP operates five refineries inRussia and Ukraine and nearly 2,000 filling stations across the two countries. Telecommunications The Group, through Altimo, has significant investment in cellular communicationsproviders VimpelCom and MegaFon as well as Kyivstar, a leading cellular providerin Ukraine. In addition, the Group, through Altimo invests into fixed-line andinternet service provider - Golden Telecom. The Group also invests in Turkcell,a leading GSM operator in Turkey. Financial Services Alfa Bank, Russia's largest private bank, is the Group's flagship company. TheBank provides a full range of corporate, retail and investment banking servicesand has the second largest branch network in Russia and has subsidiaries inUkraine, Kazakhstan, London, New York and Amsterdam. Alfa Capital Management isthe Group's asset management arm whose clients include Russian as well asinternational institutional and private clients. Alfa Capital Partners is the Group's private equity and real estate investmentarm. Alfa Group is also the owner of AlfaStrakhovanie Insurance Group, one ofthe largest non-obligatory insurance companies in Russia. 11. Earnings impact The Perekriostok Transaction will have a transforming impact on the financialposition of Pyaterochka. The Company believes that the acquisition ofPerekriostok will be earnings enhancing to the Enlarged Group in the first fullyear of the acquisition. This statement should not be interpreted to mean thatfuture earnings of the Enlarged Group will necessarily match or exceedPyaterochka's historical published earnings. 12. Dividend policy The Company does not currently plan to pay a dividend. 13. Pyaterochka current trading and prospects On 12 January 2006, Pyaterochka announced sales figures for the year ended 31December 2005 (the "2005 Sales Announcement"). In the 2005 Sales Announcement,the Company stated that consolidated net sales for the year ended 31 December2005 were US$1,359 million, up 23 per cent from 2004. Net sales from StPetersburg stores reached US$708 million, and Moscow stores contributed netsales of US$644 million. EBITDA for 2005 is expected to be at least in linewith analyst consensus estimates. A more detailed update on current trading and future outlook will be providedwith the announcement of Pyaterochka's 2005 audited results which are intendedto be released on 18 April 2006. 14. Extraordinary General Meeting The Perekriostok Transaction is conditional upon, among other things,Pyaterochka shareholders approving the Perekriostok Transaction and the issue ofthe New Pyaterochka Shares pursuant to the Perekriostok Transaction. It isintended that a shareholder circular, including notice convening anExtraordinary General Meeting of Pyaterochka will be published and sent toPyaterochka shareholders shortly after the announcement of Pyaterochka'spreliminary results for the year ended 31 December 2005. The ExtraordinaryGeneral Meeting is currently scheduled in May 2006 at which the approval ofPyaterochka shareholders will be sought for certain resolutions, includingPyaterochka's acquisition of Perekriostok. 15. Settlement and Listing If the Company issues the Prospectus prior to closing the PerekriostokTransaction, application will be made to the UKLA and to the London StockExchange respectively, for admission of the New GDRs (i) to the Official List;and (ii) to trading on the London Stock Exchange's market for listed securities. In this circumstance, it is expected that listing will become effectivefollowing the date on which it is announced that all conditions to thePerekriostok Transaction have been fulfilled. Enquiries: PyaterochkaTanja Djurdjevic, Investor Relations Tel: +7 495 724 6414 Tel: +1 646 229 3782 HSBCPatrick Cazalaa Tel: +44 207 991 8888Julian Gray Morgan StanleyMagomed Galaev Tel: +7 495 589 2208Robert Foster Tel: +44 207 425 5853Verdi Israelian Tel: +7 495 589 2226 CitigateDavid Westover Tel: +44 7768 897 722Marina Zakharova Tel: +44 207 282 1079 Alfa GroupAndrei Gusev Tel: +7 495 787 0077 PerekriostokVitaliy Podolskiy, CFO Tel: +7 495 232 5924Alexander Barhatov, Public Relations Tel: +7 495 783 6419 Credit SuisseJohn Owen Tel: +44 207 888 8888William Mansfield HSBC is acting for Pyaterochka and no one else solely in connection with thePerekriostok Transaction and will not be responsible to anyone other thanPyaterochka for providing the protections afforded to clients of HSBC or forproviding advice in relation to the Perekriostok Transaction. Credit Suisse is acting for Alfa Group and no one else in connection with thePerekriostok Transaction and Pyaterochka Transaction and will not be responsibleto anyone other than Alfa Group for providing the protections afforded toclients of Credit Suisse or for providing advice in relation to the PerekriostokTransaction and Pyaterochka Transaction. Morgan Stanley is acting for the Founding Shareholders and no one else inconnection with the Pyaterochka Transaction and will not be responsible toanyone other than the Founding Shareholders for providing the protectionsafforded to clients of Morgan Stanley or for providing advice in relation to thePyaterochka Transaction. This announcement does not constitute an offer to sell, or the solicitation ofan offer to subscribe for or buy, New GDRs or any other securities in anyjurisdiction. The New GDRs will not be generally made available or marketed tothe public in any jurisdiction in connection with the Admission. The release, publication and distribution of this announcement may be restrictedby law. No action has been or will be taken by the Company to permit thepossession or distribution of this announcement in any jurisdiction where actionfor that purpose may be required. Accordingly, neither this announcement nor anyadvertisement or any other material relating to it may be distributed orpublished in any jurisdiction except under circumstances that will result incompliance with any applicable laws and regulations. Persons into whosepossession this announcement comes should inform themselves about and observeany such restrictions. Any failure to comply with these restrictions mayconstitute a violation of the securities law of any such jurisdictions. No global depositary receipts, shares or other securities of the Company havebeen registered under the United States Securities Act 1933, as amended (the"Securities Act") or otherwise qualify for sale or resale under federal or statelaws in the United States of America or under the applicable laws of any ofCanada, Australia or Japan, and, subject to certain exceptions, may not beoffered or sold in the US or to, or for the account or benefit of, US persons(as such term is defined in Regulation S under the Securities Act) or to anynational, resident or citizen of Canada, Australia or Japan. Neither thisdocument nor any copy of it may be sent to or taken into the US, Canada,Australia or Japan nor may it be distributed to any US person (within themeaning of Regulation S under the Securities Act) or to any Canadian persons. This announcement includes statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements can be identifiedby the fact that they do not only relate to historical or current events.Forward-looking statements often use words such as" anticipate", "target", "expect", "estimate", "intend", "expected", "plan", "goal" believe", or otherwords of similar meaning. By their nature, forward-looking statements involve risk and uncertainty becausethey relate to future events and circumstances, a number of which are beyondPyaterochka's control. As a result, Pyaterochka's actual future results maydiffer materially from the plans, goals and expectations set out in theseforward-looking statements. Any forward-looking statements made by or on behalf of Pyaterochka speak only asat the date of this announcement. Save as required by any applicable laws orregulations, Pyaterochka undertakes no obligation publicly to release theresults of any revisions to any forward-looking statements in this document thatmay occur due to any change in its expectations or to reflect events orcircumstances after the date of this document. Appendix I contains the definitions of certain terms used in this announcement. - End - APPENDIX I DEFINITIONS "2005 Sales Announcement" announcement made by Pyaterochka on 12 January 2006 of its sales figures for the year ended 31 December 2005; "Admission" admission of the New GDRs to the Official List and to trading on the market for listed securities of the London Stock Exchange; "Alfa Group" CTF Holdings Limited and its subsidiaries including Cesaro and Luckyworth from time to time; "banner sales" the total revenue of all stores operating under the Pyaterochka brand, including the franchisee stores; "Board of Supervisory Directors" the Board of Supervisory Directors within Pyaterochka's management structure; "Cesaro" Cesaro Holdings Limited; "CEO" Chief Executive Officer; "CFO" Chief Financial Officer; "Citigate" Citigate Dewe Rogerson Limited; "Company" Pyaterochka Holding N.V.; "COO" Chief Operations Officer; "CTF" CTF Holdings Limited; "Credit Suisse" Credit Suisse Securities (Europe) Limited;"Depositary" The Bank of New York or any other depositary which may from time to time be appointed under the Deposit Agreement; "Deposit Agreement" the deposit agreement entered into between Pyaterochka and the Bank of New York dated 11 May 2005, as amended or supplemented; "Enlarged Group" Pyaterochka and its subsidiaries from time to time following completion of the Perekriostok Transaction; "Extraordinary General Meeting" an extraordinary general meeting of the shareholders of Pyaterochka; "FAS" the Federal Anti-Monopoly Service of the Russian Federation and its respective territorial divisions; "FSA" The Financial Services Authority of the United Kingdom; "FSMA" The Financial Services and Markets Act 2000; "Finance Documents" the facility agreement to be entered into by the Company with the lenders referred to therein consistent in all material respects with the terms of the Termsheet and together with any other documents ancillary thereto and required to raise at least US$300 million to finance the cash element of the consideration payable for the entire share capital of Perekriostok; "Formata" Formata Holding B.V.; "Founding Shareholders" Marie-Carla Corporation N.V. and Tayleforth N.V., companies controlled by Andrei Rogachev and Alex Girda; "franchisee stores" as the context requires, the stores operated under the Pyaterochka brand by the Pyaterochka Group's franchisees and/or under the Perekriostok Group brands by the Perekriostok Group franchisees; "GDRs" the global depositary receipts deposited in the Depositary under the terms of the Deposit Agreement; "HSBC" HSBC Bank plc; "IFRS" International Financial Reporting Standards; "Leningrad oblast" the administrative region immediately surrounding the city of St Petersburg; "LIBOR" the London Interbank Offered Rate; "Listing" listing of the New GDRs on the Official List of the UKLA; "Loan Notes" the loan notes to be issued by Pyaterochka to the Perekriostok Sellers for a sum equal to US$300 million, due for payment 60 calendar days after the date on which the Perekriostok Acquisition Agreement closes, or if such a date is not a business day, on the next business day, and accruing interest at the rate of LIBOR plus 3.75 per cent; "London Stock Exchange" the London Stock Exchange plc; "Luckyworth" Luckyworth Limited. a majority owned subsidiary of Alfa Group with the remaining shares held by certain members of Perekriostok's managment; "Management Board" board of management within Pyaterochka's management structure; "Morgan Stanley" Morgan Stanley and Co Limited; "Moscow area" the area comprising Moscow and the Moscow oblast; "Moscow oblast" the Russian administrative region immediately surrounding the city of Moscow; "New GDRs" 63,253,012 GDRs which may be issued pursuant to the Perekriostok Transaction for which Admission may be sought; "New Pyaterochka Shares" the 15,813,253 new Pyaterochka Shares to be issued in the form of New GDRs as part of the consideration for the Perekriostok Transaction; "Official List" the official list of the FSA; "Parties" Pyaterochka and Perekriostok; "Perekriostok" or "Perekriostok Group" Perekriostok Holdings Limited and, as the context requires, the companies it controls or which are otherwise included in Perekriostok's audited consolidated financial statements; "Perekriostok Acquisition Agreement" the sale and purchase agreement dated 12 April 2006 entered into between the Perekriostok Sellers and Pyaterochka relating to the acquisition of the entire issued share capital of Perekriostok by Pyaterochka in exchange for cash consideration and the issue of shares in Pyaterochka to the Perekriostok Sellers; "Perekriostok Sellers" Templeton Strategic Emerging Markets Fund LLC and Luckyworth Limited; "Perekriostok stores" the stores operated by Perekriostok excluding the franchise stores; "Perekriostok Transaction" the proposed acquisition of the entire issued share capital of Perekriostok from the Perekriostok Sellers by Pyaterochka contemplated by the Perekriostok Acquisition Agreement; "Prospectus" the prospectus to be issued by Pyaterochka in relation to the Admission; "Pyaterochka" or "Pyaterochka Group" Pyaterochka Holding N.V. and, as the context requires, the companies it controls or which are otherwise included in the Company's audited combined and consolidated financial statements; "Pyaterochka Accounts" the audited consolidated accounts of the Pyaterochka Group prepared in accordance with IFRS for the 12 month period ended on 31 December 2005; "Pyaterochka Agreement" the sale and purchase agreement dated 12 April 2006 entered into between the Founding Shareholders and Alfa Group relating to the acquisition by Alfa Group of a shareholding in Pyaterochka; "Pyaterochka Shares" ordinary shares of €1.00 in the capital of Pyaterochka; "Pyaterochka's stores" or the stores operated by Pyaterochka excluding the franchise stores; "Pyaterochka Group's stores" "Pyaterochka Transaction" the purchase by Alfa Group of 14,536,032 Pyaterochka Shares from the Pyaterochka Sellers for a total cash consideration of US$1,178 million in cash; "RUR" the lawful currency for the time being of Russia; "Securities Act" United States Securities Act 1933, as amended; "SKUs" stock-keeping units; ""soft" discount stores" or terminology used by the Institute of Grocery Distribution to refer to a type of modern grocery retail format; "soft discounters" "St. Petersburg area" the area comprising St Petersburg and the Leningrad oblast; "Templeton" Templeton Strategic Emerging Markets Fund LLC; "Termsheet" the commitment letter and summary of terms attached thereto approved by the lenders referred to therein signed by on or about the date of the Perekriostok Acquisition Agreement; "US$" the currency of the United States of America; "US" or "United States" or "United United States of America, its territories and possessions, anyStates of America" state of the United States and the District of Columbia; "UKLA" or the FSA acting in its capacity as the competent authority for the purposes of Part IV of the FSMA and in exercise of its functions "UK Listing Authority" in respect of the admission to the Official List otherwise than in accordance with Part IV of FSMA; This information is provided by RNS The company news service from the London Stock Exchange

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