VimpelCom's Africa-Asia Withdrawal May Attract Etisalat And Viettel

Russia ' s Vimpel Communications (VimpelCom) is planning to sell some of its underperforming operations in Africa and Asia as part of an initiative to reduce its debt pile and allow it to focus on its more profitable businesses, particularly those in Europe. Businesses expected to be sold include mobile and wireless broadband operators in Burundi, the Central African Republic (CAR) and Zimbabwe. W ith regional leaders such as Etisalat and Bharti Airtel known to be looking for new investment opportunities across Africa , BMI expects bid ding to be fierce, despite our belief that these countries have poor and unreliable investment climates .

The Financial Times suggests that the three African businesses - which generated revenue in excess of US$90mn in 2011 and served 3.736mn subscribers at the end of June 2012 - cou ld fetch more than US$60mn. Although each of the three markets is considerably underserved and therefore offers significant expansion potential, each carries considerable risks to inv estment , including volatile political conditions , very low personal wealth levels , inadequate regulatory frameworks and high levels of competition that, in some cases, have sparked off unsustainable price wars.

In BMI 's most recent Risk/Rewards Ratings for the Sub-Saharan Africa region, Zimbabwe ranked 16th out of 26 markets surveyed while Burundi came 25th. We do not currently co ver the CAR market in sufficient detail to warrant its inclusion in this analysis, but it is likely to rank very low in relation to its peers. The poor market and macroeconomic conditions are also thought to be behind VimpelCom ' s decision to sell these businesses.

Summary Of VimpelCom Asia-Africa Assets Under Review
Market VimpelCom Ownership (%) Mobile Subscribers, Q212 ('000) Competitors
Source: BMI
Burundi 100% 1,305 Africell Tempo, Onamob (Onatel), Econet Burundi, Smart Lacell, HITS Telecom
Central African Republic 100% 428 Orange, Azur, Moov (Etisalat)
Zimbabwe 100 % 2,003 Econet Wireless, NetOne
Cambodia 90% 1,126 Metfone (Viettel), CellCard, Smart Mobile (TeliaSonera), Hello (Axiata)
Laos 78% 378 Unitel (Viettel), Lao Telecom (Thaicom/ Lao government), ETL (incumbent), Sky Telecom

UAE-based Etisalat is considered to be a prime candidate to buy one or more of the units. The company already operates in Africa through its Atlantique Telecom subsidiary ( Moov ) as well as directly . Moov is already activ e in the CAR and, while the poorly resourced regulator would likely be in no position to block the merger of two of the country's four mobile units, we believe Etisalat has no desire to increase its exposure to this massively underperforming market. Instead, we consider Zimbabwe to be a more attractive market for Etisalat as the only real competitive threat is Econet Wireless and as there is demonstrably strong demand for cheap mobile services.

South Africa-based Vodacom and MTN must also be considered potential purchasers of the Afr ican assets, although they are both highly focused on more stable, mature markets, where they can leverage value-added serv ices such as mobile money. T herefore , we believe they might find Buru ndi and the CAR u nappealing. MTN has prioritised African expansion as part of its core growth strategy, but its focus on stable markets such as Ghana and Nigeria suggests that it will be disinclined to risk investing in less robust markets.

Kuwait-based HiTS Telecom is a low-key investor in frontier markets such as Equatorial Guinea, the Democratic Republi c of Congo, Liberia and Burundi. Although it has yet to report significant growth on t he back of those investments, i t may not be deterred by the conditions in Zimbabwe and the CAR .

Asian operators are increasingly keen to tap the growth potential of African markets and India ' s Bharti Airtel has become a serial investor in the region. We would expect the company to be very interested in acquiring VimpelC om's African assets as it has a strong track record of kick-starting market growth through disruptive pricing strategies. BMI also expects interest from Vietnam-based Viettel , which has made a series of strategic investments in challenging markets across Asia, Africa and Latin America. Like Bharti, it is unafraid to enter markets where low consumer incomes and inadequate regulatory mechanisms prevail. We believe it may be especially interested in Zimbabwe, which offers better revenue growth potential via services such as mobile money.

The Financial Times reports that, in the case of Cambodia and Laos, VimpelCom has received considerable interest from its rivals in each market. This is not surprising to BMI . We have long held the view that excessive licensing has held these markets back as too many operators are competing for too few paying customers and a downward pricing spiral has effectively quashed any chances of profiting from mobile services, despite the very high number of subscribers. In Cambodia, VimpelCom's Beeline unit competes with as many as eight other brands while in Laos at least four other players vie with Beeline for market share. Viettel is present in both markets and we expect this company to offer attractive bids for the Beeline units. Both markets have begun a slow process of consolidation and the fact that Bharti Airtel has - so far - resisted the opportunity to invest suggests that the Indian operator will not table bids for either Beeline c ompany.

BMI considers that this opportunity to slim down and refocus its attentions on more mature markets , where there is a growing appetite for lucrative non-voice services , will be good for VimpelCom and should appeal both to investors and the analyst community. It should also give the company greater flexibility in negotiating access to finance needed to modernise networks in Russia, the CIS region, Italy, Pakistan, Bangladesh and Algeria. Across its remaining footprint, the emphasis will be on deploying 3G and 4G networks as appropriate, securing high-end smartphones and rolling out more value-added services. Shedding its low-growth, capital-intensive businesses is therefore a welcome strategic move.

This article is tagged to:
Sector: Telecommunications
Geography: Africa

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