Newly-enlarged VimpelCom hits 90 million subscriber milestone - New operator group set to be at the forefront of future M&A activity

The newly-formed VimpelCom Ltd - a merger between Russia’s VimpelCom and Kyivstar of the Ukraine – has created a global operator with over 90 million mobile connections, according to new GSMA Intelligence data. The new entity – now headquartered in Amsterdam and listed on the NYSE - reported consolidated financial results (2Q10) for the first time last week following completion of the merger on 21 April. The firm is now poised to be at the forefront of future global M&A activity, notably via a rumoured tie-up with Egypt’s Orascom.

The earlier merger between VimpelCom and Kyivstar brought an end to almost five years of legal wrangling between the two operators’ main shareholders: Norway’s Telenor and Russia’s Alfa Group (Altimo). The two players jointly own around two thirds of the new company, which now reports as four separate business units: Russia, Ukraine, CIS and Southeast Asia (SEA). The firm uses the Beeline mobile brand in most of its markets.

The consolidation of Kyivstar – the Ukrainian mobile market leader – has increased VimpelCom’s customer base by around 40 percent, becoming its largest market outside of Russia. According to the firm’s Q2 figures, which consolidate Kyivstar with VimpelCom’s existing (loss-making) Ukrainian operations for the first time, the Ukrainian unit reported profit of US$29.8 million on operating revenue of US$311 million for the quarter. This makes the business roughly the same size as VimpelCom’s CIS division, which comprises the firms operations in Kazakhstan, Uzbekistan, Armenia, Kyrgyzstan, Tajikistan and Georgia. However, ARPU in the Ukraine is less than half that reported in Russia, a situation partially explained by the fact that 3G has yet to be launched in the Ukraine; by contrast, VimpelCom had migrated over 10 percent of its Russian customer base to WCDMA by the end of Q2, according to our figures.

Russia comfortably remains the group’s most important market; revenues at the Russian unit (mobile and fixed-line) surpassed the US$2 billion mark for the first time in Q2, accounting for over three-quarters of the group total. Total mobile connections in Russia have remained flat at around 51 million for the last year - but the group points to an encouraging uptake in mobile broadband services during this period. In Q2, VimpelCom said that 1.3 million of its mobile customers were also taking mobile broadband, up from 763,000 a year ago. Mobile broadband traffic (via dongles) increased threefold during the same period, the operator said.

Meanwhile, VimpelCom’s CIS division was boosted in Q2 by the consolidation of its mobile unit in Kyrgyzstan. VimpelCom has been running the country’s market leader – formerly known as Sky Mobile (now branded as Beeline) – as part of a management contract since 2008. However, neighbouring Kazakhstan remains the operator’s largest and most profitable market in the region, accounting for around half of the CIS division’s mobile connections and operating revenue. VimpelCom said last week it had increased capex "substantially" in its CIS markets over the last year to support both 2G and 3G rollout. It is also thought to be using many of these markets as testbeds for LTE rollout, and is currently trialling LTE networks in Kazakhstan and Armenia.

VimpelCom’s presence in Southeast Asia remains tiny; the SEA unit reported a US$20.5 million net loss in Q2 on revenues of just US$5.5 million. Its Vietnamese network – a joint venture with local firm G-Tel – saw its connections base halve in Q2 to 800,000 as investment was withdrawn. VimpelCom admitted the group had to “temporarily slow down further development” in Vietnam while it worked out financing options with G-Tel. The group is also currently in the process of acquiring its third SEA mobile network in Laos.

Matt Ablott, Analyst, GSMA Intelligence:

The resolution of the conflict between VimpelCom and Kyivstar has created a new mobile player with potentially global reach and influence - and the new entity has stated its intention to expand through acquisitions. This strategy recognises the fact that the operator will struggle to achieve major organic growth in its current markets; our figures show that VimpelCom’s connections declined year-on-year in Russia and the Ukraine in Q2, and only Uzbekistan can be said to be recording high subscriber growth. Operating cash flow at the enlarged group stands at US$1 billion, though the rumoured acquisition of Orascom would require additional equity; this would lead to another reshuffle of the group ownership structure with Orascom potentially ending up owning as much as a quarter of the merged group. The deal would also see VimpelCom taking on a significant amount of extra debt. In the meantime, VimpelCom is investing heavily in its networks in many of its regional markets in a bid to kickstart nascent 3G services - and it is already seeing evidence of ROI in markets such as Armenia. As we have seen recently in markets such as Uzbekistan, many of these CIS markets are also deemed suitable for rolling out first-generation LTE networks.

VimpelCom Ltd mobile connections, Q2 2010
Source: Company reports, GSMA Intelligence

¹ Consolidated Kyivstar/URS (pro forma)
² Operated under management contract