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VimpelCom Has Multiple Strategic Moves in Play

Written by on April 1, 2013

Recent news suggest  could have multiple deals in the works that could improve the firm’s operational profile and strengthen its moat. VimpelCom and Mobile TeleSystems MBT have entered into a joint venture to acquire Tele2 AB’s TEL2 B Russian unit. Last week, Tele2 agreed to sell its Russian unit to VTB (for $2.4 billion in cash and $1.15 billion in net debt) after failing to receive a 4G wireless license last year.

The two Russian giants might be joining forces in order to preempt VTB from flipping the unit to either MegaFon or Rostelecom–two Russian competitors who both own a 4G license. VimpelCom and Mobile TeleSystems have offered $4.25 billion for the unit (equivalent to an enterprise value multiple of just over 5 times EBITDA), which owns roughly a 10% share of the Russian market. We’d be willing to endorse a price even higher than that given the potential synergies, and the ability to keep the unit away from its other rivals.

There are also rumors swirling that VimpelCom could be ready to sell its Wind Mobile unit in Canada. Wind, and the other new entrants Public Mobile and Mobilicity, have been struggling since launching service back in 2009. We agree with VimpelCom’s decision to sell off its stake given that it is not an economically viable proposition for these subscale, no-moat, players to incur the considerable costs of acquiring spectrum in the upcoming 700 megahertz auction, building out the new network, and trying to support it with only 1%-2% market share.

We continue to believe that the most likely outcome is for Wind Mobile (regardless of who eventually controls it) to merge with one of the other new entrants, operate unprofitably as the fourth player in the market for a few years before ultimately being taken out by one of the three incumbents.

Given these data points, and the firm’s recent margin improvement in Russia, we believe the stage is set for VimpelCom’s shares to rise toward our fair value estimate.

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