Global Insight Perspective | |
Significance | Having previously indicated that expansion across the CIS was its priority, VimpelCom's US$1 billion move into Vietnam is something of a surprise. Previously, tensions at boardroom level had appeared to have minimised the chances of such an expensive overseas expansion. |
Implications | The Vietnamese market has significant growth potential, and is becoming increasingly appealing to foreign investors. As such, this is a positive and ambitious move from VimpelCom. |
Outlook | The maturity of the Russian market, and the appeal of emerging markets in South-East Asia, suggests that further expansion in this region is likely from VimpelCom in the longer term. Rival Russian operator MTS is also likely, ultimately, to look to this region for further subscriber and revenue growth. |
Russian mobile operator VimpelCom has announced that it has signed a Principal Agreement to establish a mobile joint venture (JV) in Vietnam, in partnership with the Vietnamese Ministry of Public Security and U.S. company Millennium Global Solutions Group. The JV will see VimpelCom invest US$1 billion in GSM network development and the provision of technical and operational expertise. VimpelCom will hold an unspecified minority voting stake but also a majority of the economic interest in the JV, and has stated in a press release that it will "exercise significant influence" on the JV's operations. The mobile unit will operate under the name "GTel Mobile".
Outlook and Implications
Vietnamese Privatisation Programme: With a growing population of approximately 85 million people and a mobile penetration rate of approximately 30%, Vietnam's mobile market presents significant growth potential. For foreign investors, market opportunities, however, have to date been limited to business co-operation contracts (BCCs)—Sweden's Comvik, South Korea's SK Telecom and Hong Kong's Hutchison Telecom were allocated limited participation through BCCs. The situation is set to change following the government's pledge to privatise two leading mobile operators, VinaPhone and MobiFone. Both companies are reported to be preparing for partial privatisation in 2008. This could create a route for foreign operators into what is shaping up to be a strong growth market. However, uncertainty exists as the government does not have a legal guide for the privatisation process. Nevertheless, a number of foreign players—including SingTel, Taiwan's Chunghwa Telecom, and even the British mobile giant, Vodafone Group—are eyeing a potential entry into the market (see Vietnam: 10 May 2007: MobiFone Plans IPO in 2008 and 4 December 2006: Telecoms Minister Predicts Increased Foreign Investment in Vietnamese Market).
VimpelCom's Investment Comes Despite Boardroom Squabbles: VimpelCom is currently the second-largest operator in its domestic Russian mobile market, with 40.1 million subscribers at the end of the second quarter. The operator has adopted a strategy of regional expansion in recent years, and now boasts assets in Ukraine, Uzbekistan, Kazakhstan, Tajikistan, Armenia and Georgia. Earlier this year, chief executive officer (CEO) Alexander Izosimov hinted that "expansion into new markets of the Commonwealth of Independent States (CIS) was VimpelCom’s priority" (see CIS: 30 April 2007: VimpelCom Considers Expanding Through Regional Acquisitions). Consolidation beyond the CIS had therefore seemed unlikely in the short term, despite the appeal of emerging markets such as those in South-East Asia. Moreover, disputes at boardroom level have bedevilled the operator for several years, appearing to diminish further the likelihood of wider expansion. VimpelCom's 29.9% shareholder, Telenor, has previously stated its reluctance to acquire "expensive and disputed assets", and in March 2007 blocked amendments to the VimpelCom charter that would have allowed acquisitions beyond the CIS (see CIS: 30 March 2007: Telenor Blocks Altimo's Overseas Expansion Ambitions for VimpelCom). By contrast, 44% shareholder Altimo had set up an international advisory board with a view to forging ahead with international expansion. News of such a large investment in Vietnam therefore suggests that either the differences at boardroom level have been shelved, or that the US$1-billion move into Vietnam could spark off an almighty fresh battle between Altimo and Telenor.
South-East Appeals to Russian Operators: In a broader sense, if the shareholder dispute can be resolved, the move into Vietnam represents a positive and ambitious strategic move from VimpelCom. Expansion beyond the CIS and into the fast-growing markets of Asia opens up a number of operational and financial possibilities. Altimo has previously mentioned an ambition to become the "Eurasian Vodafone", indicative of its ambitions to expand beyond the CIS, but also of the potential for growth it sees in South-East Asia. To this end, it has already opened a representative office in Vietnam and, in the medium and longer term, further consolidation in Asia is likely, particularly if the JV in Vietnam proves successful (see Vietnam: 14 November 2006: Altimo Divests Golden Telecom Stake, Announces Vietnamese Expansion Plan). Moreover, Global Insight expects VimpelCom's main rival, leading Russian mobile operator Mobile TeleSystems (MTS) to pursue a similar strategy of international expansion in the longer term. The Russian mobile market is highly penetrated and showing limited room for further growth, and while the unexplored markets of the CIS—such as Georgia, Armenia, Kazakhstan, Azerbaijan and Moldova—are more obvious initial targets for immediate expansion, the same desire to broaden operations and revenue potential is likely to govern MTS's strategy ultimately.