Director of Aspring Capital Alexey Kupriyanov about transactions in the telecommunications market

Director of the investment bank Aspring Capital, who acted as a consultant to Veon in the transaction for the sale of VimpelCom, Alexey Kupriyanov told Kommersant about its features and parameters that affect the investment attractiveness of the telecommunications sector.

— What were the main difficulties of the deal to sell VimpelCom? How was it structured?

— Taking into account the fact that we have an NDA with Veon, we cannot disclose details that have not been publicly announced. As for the features and difficulties, I would highlight two main points. Companies needed to obtain a large number of permits from regulatory authorities, including the US, the EU, as well as the Russian government commission and the Federal Antimonopoly Service. This affected the duration of the process. The second aspect is the structure of the deal: the bulk of the price was paid through the redemption and replacement of Veon Eurobonds, which also took time.

The facts that complicated the process, at the same time, made this transaction absolutely unique for the Russian market. We have not yet seen large transactions that would be structured through the redemption of Eurobonds.

— The investment attractiveness of the industry as a whole has decreased noticeably in recent years. This is, in particular, stated in the development strategy until 2035, which market participants are preparing together with the regulator. What do you think was the reason?

— Telecommunications companies both in the Russian Federation and abroad are, first of all, a dividend asset that provides a stable cash flow. In the West, the dividend yield for such companies averages 6–7%; in the Russian Federation it may be slightly higher. For portfolio investors, this is a stable asset with moderate growth potential.

From the point of view of the investment attractiveness of the industry, the balance between the availability of operator services and their profitability is important. At the end of 2022, Russia ranked sixth in the world in terms of availability of mobile and fixed Internet services, this is a very good indicator. But operators’ profitability growth is largely limited by their ability to raise tariffs.

— By what ratios are assets in telecommunications currently valued and what influences them? What other indicators are important for M&A?

— In foreign, Western markets, the multipliers are higher. The average EV/EBITDA multiple in the US, for example, has been around 7-8x over the last ten years. In Russia, in recent years, companies have been valued at approximately 2.5–4x EBITDA. One of the key factors that affects valuation is the level of debt load, which affects the company’s ability to pay dividends. From the point of view of operational indicators, the quality and dynamics of the subscriber base, the development of additional services for retail consumers and corporate clients are important.

— In the USA, the cost of communication is noticeably higher. It affects?

— In terms of multipliers, no. The key influence is the assessment of country risks and the cost of funding. In the US, it has now also increased noticeably, and the Fed rate is quite high – 5.5%. However, it is significantly lower than the rate of the Central Bank of the Russian Federation.

— In what cases is the consent of the regulator required for transactions?

— The criteria change periodically. The following have now been established: if the volume of assets of the company that acts as the buyer exceeds 7 billion rubles, or revenue more than 10 billion rubles, or the volume of assets of the target exceeds 800 million rubles, the transaction must be approved by the FAS. Approval is also required if the transaction price exceeds RUB 7 billion.

— How does consolidation affect shareholder value?

– Depends on each specific case. We know that M&A transactions can significantly increase shareholder value through synergies or because the asset was purchased at a favorable price. But there are also transactions that reduce shareholder value. In Veon’s case, we believe the deal is a win-win for all parties.

— Analysts have repeatedly said that the Russian market is now highly competitive and the segment needs consolidation to increase efficiency. The problem with equipment shortages is also getting worse. How do you assess the prospects for industry consolidation?

— The optimal market structure depends on the specific country. If we look at large markets, such as the US or China, when it comes to mobile communications, they are dominated by three operators each. In theory, consolidation can provide advantages in terms of the efficiency of using active (primarily base stations) and passive (primarily tower infrastructure) infrastructure. Consolidation will also potentially reduce construction CAPEX. But this problem can be solved in another way: operators can use the services of independent companies.

Returning to your question, the situation when there will be three mobile operators left on the Russian market seems quite normal. But a duopoly carries more risks, especially if one of the remaining operators is state-owned.

— What, in your opinion, will affect the investment attractiveness of the sector in the near future?

— I would highlight three factors. Firstly, this is the opportunity to develop new generation 5G networks, which is important from the point of view of the development of the economy as a whole and such high-tech areas as unmanned vehicles and VR technologies. Many promising sectors of the economy require high data transfer speeds. Secondly, the development of additional ecosystem services. We see that Russian operators are developing in this direction. And there is a third factor: since the telecommunications sector is very capital intensive, the cost of funding is important. To develop 5G and build an ecosystem, you need either affordable debt financing or the willingness of shareholders to invest their own funds.

Interviewed by Yulia Tishina