Russia, Italy and the Ukraine to power new VimpelCom WIND group - New operator giant will span 19 countries across the globe but will rely on its three mature markets

VimpelCom has announced a new business structure to support its imminent acquisition of WIND Telecom, though the enlarged operator will rely on just three individual markets - Russia, Italy and the Ukraine - for the majority of its revenue and earnings moving forward, according to GSMA Intelligence analysis.

The Amsterdam-headquartered (and NYSE-listed) operator is to divide into five units: Russia and the Ukraine, where it operates the Beeline and Kyivstar mobile brands, respectively; Europe & North America (the two WIND-branded units in Italy and Canada); Africa & Asia (the Orascom Telecom businesses plus VimpelCom's existing SE Asia units); and the CIS countries (VimpelCom's existing units in six central Asian republics).

Ahead of the new structure coming into force, VimpelCom has also provided pro forma financial data to model the company on the basis that both the WIND Telecom acquisition and the earlier merger between VimpelCom and Kyivstar had been completed on 1 January 2010. This gives the enlarged group earnings (EBITDA) of US$2.3 billion in Q1 2011, on net operating revenue of US$5.5 billion. These financials are up only slightly on the pro forma year-earlier quarter (Q1 2010), which saw earnings of US$2.2 billion on revenues of US$5.2 billion. However, the EBITDA margin contracted over the year, falling 1.5 percentage points to 41.2 percent in Q1 2011.

The new operator will have a presence in 19 international markets, covering 838 million of the world's population and - thanks mainly to its presence in Russia and Canada - a huge geographic area.

As an analysis of the financial figures shows, Russia will remain its most important market, accounting for 38 percent of both revenue and earnings. The Europe & North America segment, the next largest, represents 34 percent of revenue and 29 percent of earnings, but the vast majority of this relates to Italy; WIND only launched in Canada in 2009 and remains a minor player. WIND Italy is the country's third-largest mobile operator (on 20.3 million connections in Q1) and one of the most mature units in the enlarged VimpelCom group. It also runs the second-largest alternative fixed-line operator, Infostrada. WIND Italy reported earnings of US$662 million on revenues of US$1.4 billion in Q1 - with non-voice revenue accounting for over 20 percent of the total.

In earlier merger documents, VimpelCom noted that Russia and Italy combined will account for 70 percent of revenue and 69 percent of EBITDA (FY2009 pro forma). But it has a third significant market in the Ukraine, where Kyivstar is a dominant market leader (45 percent share) and - according to GSMA Intelligence data - the largest operator in Eastern Europe outside of Russia.

While these three markets will be the main contributors to the group's bottom line for the foreseeable future, it has also bought into a number of fast-growing emerging markets via its stake in Orascom Telecom (WIND Telecom owns 51.7 percent of the Egypt-based operator group). The deal will see VimpelCom take over six Orascom operations (following a few divestitures), the three largest being Mobilink in Pakistan (32.7 million connections), Bangladesh's Banglalink (20.1 million) and Algeria's Djezzy (15.5 million). Under the new structure, these markets will be rolled in with VimpelCom's existing operations in Vietnam (G-TEL), Cambodia (Beeline) and Laos (Tigo). The new 'Africa & Asia' unit will account for 39 percent of the group's total subscriber base but only 16 percent of revenue and 18 percent of earnings.

The final unit is CIS, which includes VimpelCom's existing Beeline-branded businesses in Georgia, Kazakhstan, Kyrgyzstan, Armenia, Tajikistan and Uzbekistan. VimpelCom's largest market in this group is Kazakhstan, where it had 7 million connections in Q1.

Matt Ablott, Analyst, GSMA Intelligence:

VimpelCom's acquisition of WIND Telecom has been a protracted affair, hampered by internal shareholder objections (Telenor), government interventions (Algeria) and the selling-off of some assets prior to the deal closing (Orascom's units in Egypt and Tunisia). Although the deal was eventually approved by shareholders in April, Egyptian regulators are still scrutinising the deal on the Orascom side, which has caused the latest delay. While a year ago VimpelCom boasted of becoming the fifth-largest global operator, it will slip to sixth by the time the deal is done (behind Bharti). The rationale behind the deal is one of diversification, creating a mix of mature markets (notably Russia and Italy) and Orascom's fast-growing, emerging markets. While VimpelCom did not appear to pay over the odds for the business - the deal valued WIND Telecom at US$20 billion or 6.1x EBITDA - leverage is a concern for investors and the enlarged group has promised to focus on debt reduction in the short term; it is guiding for net debt to fall below 2.0x EBITDA within two years of close and for the deal to be cash positive from year one. This suggests that large network investments will not be on the agenda initially, with the group preferring to cash-in on synergies in areas such as procurement. Indeed, according to the pro forma figures, capex as a percentage of revenue fell to 12.8 percent in Q1, down from 18.1 percent in FY2010.

VimpelCom selected financial and operational data (pro forma), Q1 2011
Source: GSMA Intelligence, Company reports