MOSCOW: Russian mobile phone operator Vimpelcom is in talks with Egyptian businessman Naguib Sawiris about buying Italy’s Wind and 51 percent of Orascom in Egypt, denting the share price.
Shares in the company are down around 10 percent since the discussions were first revealed last month, while the group’s bonds plunged 1-1.5 percent as jitters surrounded the deal.
Analysts say a lack of clarity from either party is making investors wary of buying into Vimpelcom, recently formed from a merger with Ukraine’s Kyivstar.
But others argue that there is a sound logic to the deal, and the current share price depression represents a buying opportunity for the less fearful investor.
Sniffing a bargain
Vimpelcom, in which Russia’s Alfa Group and Norway’s Telenor both have 40 percent stakes, has nearly 90 million mobile subscribers almost entirely based in Russia and the former Soviet Union.
A deal for Wind and Orascom would more than double its subscriber base and expose the group to its first developed market in Italy — where a user spends a lot more than in a developing country — as well as new emerging markets such as Algeria, Pakistan and North Korea.
Vimpelcom Chief Executive Alexander Izosimov told investors on a conference call for the group’s Q2 results on Thursday that he was convinced western telecoms groups are undervalued — largely due to the uncertainty surrounding the mobile market’s transition from voice revenue to data such as downloading.
There are also strong grounds for considering Sawiris a desperate seller — and one who may be willing to accept a low price tag. Saddled by debt, his recent attempts to sell Orascom’s Algerian unit Djezzy to South Africa’s MTN were thwarted by the Algerian government.
"Vimpelcom sees a distressed seller — Sawiris does not have a lot of time left to sell Orascom, maybe two or three years. There is a possibility Vimpelcom could get a good price," says Tibor Bokor, an analyst at stockbroker Otkritie.
Vimpelcom must also decide what to do with its high level of cash flow, which amounted to $1 billion during the second quarter of this year. It could pay higher dividends, or launch a transformational acquisition.
Sell sell sell
Sawiris’ problems in Algeria deliver the strongest argument for naysayers. The Algerian government says it wants to buy Djezzy for itself, but has been treading water during the summer months and is only now beginning to value the company.
Investors do not know whether Algeria would be more willing to sell Djezzy to a Russian company rather than a South African one, or if Orascom will get a good price for the unit in the event of a deal.
"The immediate questions are these: Why would it be any different this time around? Is Vimpelcom somehow able to resolve the problems that have afflicted Orascom in Algeria?" asks UBS analyst Alex Wright.
Outside Algeria there are anti-monopoly risks: Vimpelcom would compete with its own shareholder Telenor in Pakistan and Bangladesh, where Wright estimates the combined Vimpelcom-Orascom-Telenor group would control 55 percent and 70 percent respectively.
As Vimpelcom is freshly out of a bitter shareholder battle between Telenor and Alfa partly stemming from competition, even the possibility of a renewed debate would send investors fleeing for the exit.
From a financial perspective, Vimpelcom would have to take on a substantial amount of debt. Wind alone has $10.7 billion, while Orascom and Vimpelcom each have around $4 billion, meaning the group would increase leverage and potentially attract the attention of credit rating agencies.
"If Vimpelcom goes ahead with these M&A transactions, the rating agencies will likely take negative actions in regard to its ratings," says Mikhail Galkin at VTB Capital.
Bond analysts say the less new debt the company has to raise the better for its bonds’ yields.
"The most positive news will be if the deal is cancelled," says Nikolay Podguzov at Renaissance Capital.
