VimpelCom to Buy Wind and Control of Orascom for US$6.6 Bil.

Russian mobile operator VimpelCom has announced that it will buy Italian mobile group Wind and gain control of Egyptian operator Orascom Telecom (OT) for US$6.6 billion; the deal will also seek an agreement with Algeria to keep Djezzy. The acquisition will lead to the world’s fifth-largest mobile operator, valued at around US$23 billion and with 174 million mobile customers. Through Weather Investments, VimpelCom will gain 51.7% of Orascom Telecom Holdings and 100% of Wind Italy. Naguib Sawiris, the chairman of Weather Investments, which prior to the deal controlled Orascom and Wind, will receive US$1.8 billion in cash, two board seats in VimpelCom, and a 20% stake in the new structure of the VimpelCom Group (worth around US$4.8 billion), bringing the total value of the deal to US$6.6 billion.

OT currently owns 100% of Pakistani mobile operator Mobilink, 48.75% of Egyptian mobile operator MobiNil, 50% of Tunisiana, 100% of sub-Saharan operator Telecel Globe, 96.81% of Orascom Telecom Algeria (Djezzy), 100% of Bangladeshi mobile operator Banglalink, 65% of Globalive Wireless, and 75% of CHEO, which is Orascom’s subsidiary in North Korea (the remaining 25% is owned by the state). VimpelCom has assets in its domestic Russian market, as well as Armenia, Georgia, Kazakhstan, Tajikistan, Ukraine, and Uzbekistan, as well as Vietnam and Cambodia.

Outlook and Implications

• Reduction of Orascom's Debt: The deal is a key step towards Sawiris reducing significant debt levels for Wind and Orascom. Wind currently has debts of around US$8 billion and OT around US$4 billion. The deal will considerably reduce Sawiris' debt exposure through the acquisition of 20% in the newly formed operator.

• Alluring Benefits for VimpelCom: While risks abound for VimpelCom, it is easy to imagine the group’s chiefs being irresistibly drawn towards the deal, blinded by the neon-lit benefits. The tie-up transforms VimpelCom into a top-tier, global mobile player, bringing the prestige and practical benefits of being the fifth-largest mobile operator in the world by subscriber numbers, increasing its global footprint to 174 million subscribers across 20 countries in Europe, Asia, Africa, and North America, with a coverage area of around 850 million people. Although there remains organic growth potential in its traditional CIS markets, VimpelCom’s core Russian market has limited room for mobile growth and, while this has prompted recent moves into the fixed and mobile broadband spheres, it clearly explains the rationale behind buying into Orascom and its emerging market exposure.

• Entry into Africa, Asia, and Western Europe: VimpelCom has recently hinted at a degree of impatience with its South-East Asian assets, with chief executive Alexander Izosimov noting earlier this month that the company would be prepared to divest its Cambodian and Vietnamese operations if they do not see growth (see Russia: 16 September 2010: VimpelCom Talks Up M&A Prospects). The acquisition of Orascom now creates fresh growth potential across a range of African and Middle Eastern markets, turning VimpelCom into a truly international operator, and creating fresh economies of scale. As well as VimpelCom’s push into these emerging markets, now very much the vogue among the leading telecoms players, it also has an entry point into Italy, a market with the potential for mobile data-driven revenue growth and smartphone uptake.

• VimpelCom's Risks in Algeria: Yet for all these potential rewards, the risks are sizeable. The issue of Algeria remains outstanding and a matter of some concern, given that it is Orascom’s biggest single source of revenue. Orascom Telecom Algeria, which operates under the brand Djezzy, has been subjected to an array of anti-competitive tactics by the Algerian government since Orascom’s construction unit sold its Algerian assets to French company Lafarge. This has led to Orascom seeking to divest from the country, even though Djezzy contributes to over half of OT’s revenues. In light of the anti-competitive action, OT sought to sell off the operation to MTN, but the deal was blocked by the Algerian government, which is also now keen on buying the operator for well under market value (see Algeria: 10 June 2010: Orascom Terminates Djezzy Talks with MTN).

• Potentially Combustible Management Structure: In addition, VimpelCom now also assumes a massive debt burden, noted in a press release at US$24 billion post-transaction. There are also inevitable risks that accompany the foray into a new market, as VimpelCom takes its first steps into the potentially lucrative, but hitherto unexplored, markets of the Middle East and Africa. Perhaps most eye-catching, however, is the new, potentially combustible ownership structure now in place at VimpelCom Ltd. The company was formed last year through the merger of the assets of Russia’s Alfa group and Norway’s Telenor following several years of bad-tempered legal wranglings. While a truce, which sees Alfa’s Mikhail Fridman and Telenor’s Jon Fredrik Baksaas in co-operation, has now been in place for exactly a year, to this mix can be added the colourful Weather chairman, Naguib Sawiris. The new, three-way arrangement is naturally enough suggested to currently be one of bonhomie, but given the personalities involved, should disagreements arise at boardroom level, they may not necessarily be dealt with quietly.