Veon may sell Vimpelcom to Russian top management

According to Kommersant, the terms of the deal to exit Veon from the Russian business have been agreed upon: VimpelCom will go to top management, the deal does not involve a buyback and will be completely cash-free. As part of it, in particular, VimpelCom acquired Veon bonds for 130 billion rubles, issuing replacement bonds with a longer maturity. As a result, the company’s debt to EBITDA ratio will be 3.5. Analysts call this level critical and believe that in the near future the company will need to attract a new investor – through a direct sale of shares or an IPO.

According to three Kommersant sources in the market and an interlocutor close to one of the parties to the deal, Veon has agreed on the final conditions for exiting the Russian business. The deal could be announced next week. As a result, 100% of Vimpelcom PJSC will be transferred to Copernicus-invest 3 OJSC, which belongs to the operator’s CEO Alexander Torbakhov and four other top managers. One of Kommersant’s interlocutors clarified that there is no plan to buy back shares. Veon did not respond to Kommersant’s request. VimpelCom said that “the information about the closure of the deal with Veon is not true.”

VimpelCom is valued at 370 billion rubles, the company’s net debt is 240 billion rubles. Accordingly, one of Kommersant’s sources explains, the equity value amounted to 130 billion rubles. One of the terms of the agreement was that VimpelCom buys Veon Eurobonds for a comparable amount and issues its own replacement securities with a longer maturity in favor of their holders. There was also an option to buy back securities at a discount (79.57–92.71% depending on the issue), but almost all holders chose replacement, Kommersant’s interlocutor clarified. He assured that “the condition has been met.”

As a result, after the transaction, VimpelCom’s debt will increase. Based on the company’s financial indicators at the end of the second quarter, one of Kommersant’s sources clarified, the debt to EBITDA ratio will be 3.5: “This is higher than the indicators of comparable companies. The optimal ratio for the industry is 2–3 to EBITDA. But given that VimpelCom is a high-margin business, the company will be able to service the debt, although the ability to pay dividends will be limited.” Perhaps, he admits, VimpelCom will also limit capex. “Essentially, the new shareholders are taking on the risks associated with the debt. It was important for the holding to ensure continuity, so the asset was transferred to the management team,” emphasizes one of Kommersant’s sources.

A debt-to-EBITDA ratio of 3.5 is the upper limit of the debt load for a financially stable telecommunications company, says Anna Avakimyan, chief analyst at RegBlok: “Fundamentally, cash flows from VimpelCom’s operating activities should pull the operator through. But there is a significant negative factor affecting corporate borrowers with elevated levels of debt—the cost of borrowing.” Judging by the reporting of VimpelCom, the expert explains, until 2022 the average cost of borrowing from the company was around 7%, in 2022 it was already 10%, and in 2023 it could rise to 13.0–13.7% “due to situation in the money market.”

The debt to EBITDA ratio is significant, agrees independent analyst Anna Kupriyanova: “For industry leaders or state-owned companies, exceeding 2.5 is acceptable, but in the case of VimpelCom, in my opinion, it is critical. The emergence of a new investor is absolutely logical; ultimately, the business will be bought by one of the large multifunctional players; management can only act as a temporary holder of the asset.” Previously, Kommersant sources named Gazprom Media Holding, MTS and Sberbank among the contenders for the asset.

Such a debt load potentially severely limits the CAPEX of any telecommunications company, but in the case of VimpelCom one can hardly expect a significant deterioration compared to previous years, when it was part of a heavily debt-laden Veon, notes Timur Nigmatullin, senior investment consultant at Finam: “ Thus, before the reclassification of assets related to the Russian Federation for sale, the corresponding value of debt to EBITDA was close to 5. Nevertheless, it is important to understand currency risks – VimpelCom’s debt after replacement will be denominated in rubles, and, presumably, currency risks associated with the weakening national currencies are not hedged.” At the same time, the analyst notes, the company retains the option of an IPO on the Moscow Exchange, which will allow replacing part of the debt financing with equity financing.

At the same time, the issuance of replacement bonds by first-tier Russian issuers is “a factor that favors the company’s credit rating and investment pipeline,” explains financial market expert Andrei Barhota: “Moreover, VimpelCom had ruble revenue, but foreign currency liabilities, which created for him a certain financial vulnerability.” The issue of replacement securities will make it possible to prolong the issuer’s investment history against the backdrop of a change of shareholder while maintaining a “proven team,” the expert adds. He sees VimpelCom’s potential for increasing its return on capital to 18–20%, taking into account the increase in communication prices in Russia.

Yulia Tishina