VimpelCom Expansion Seen Risking Debt Increase: Russia Overnight

VimpelCom Ltd. (VIP)’s plan to expand operations to Canada risks increasing the debt level for Russia’s third-largest mobile phone company, according to Elina Kulieva, an analyst at OAO Alfa Bank.

“Where would the money come from if they were to make an acquisition in Canada?” Kulieva, who rates VimpelCom the equivalent of buy, said by phone from Moscow yesterday. “If it means more debt, that is not good. An attempt to stretch to yet another continent may look somewhat extreme for VimpelCom.”

American depositary receipts of VimpelCom are set for their biggest monthly decline since November and are trading at the lowest valuation in seven weeks versus OAO MegaFon (MFON), Russia’s second-largest mobile phone company. The company has the third- highest debt-to-earnings ratio among the region’s largest carriers, according to data compiled by Bloomberg. The Bloomberg Russia-US Equity Index (RUS14BN) rose as futures on the RTS Index gained.

VimpelCom has an “interesting opportunity in Canada” and may consider acquisitions to expand there, Chief Executive Officer Jo Lunder said yesterday in an interview in Barcelona. The Amsterdam-based company, which also operates in Italy and Algeria, saw its share of revenue from Russia drop to 40 percent in the third quarter from 42 percent in the previous three months at a time MegaFon, which is scheduled to report today record sales for 2012, gained market share in the country.

‘Biggest Portion’

VimpelCom gave up its rank as Russia’s second-biggest mobile provider by subscribers to MegaFon in April 2010. The Amsterdam-based company had 56.1 million customers in Russia in the fourth quarter of 2012, compared with 71.2 million for OAO Mobile TeleSystems (MBT), the country’s biggest mobile phone operator, and 62.6 million for MegaFon, data by Moscow-based researcher Advanced Communications & Media show.

“Why to seek exposure elsewhere when you lost share in the market that produces the biggest portion of your revenue?” Mansur Mammadov, who helps manage $100 million in Kazimir Partners Ltd., said by phone from Moscow yesterday. “I am puzzled over the geography and cost of their investment strategy. We prefer MegaFon’s clear-cut, Russia-focused investment case.”

Russia, Ukraine and other former Soviet states accounted for 56 percent of VimpelCom’s revenue in the third quarter. The company is scheduled to report fourth-quarter and annual results on March 6.

The Bloomberg Russia-US gauge rose 0.6 percent to 100.68 yesterday, gaining for the first time in three days. Futures expiring next month on Moscow’s dollar-denominated RTS equity index rose 0.7 percent during New York hours to 153,730.

Higher Debt

The Market Vectors Russia ETF (RSX), the biggest U.S. exchange- traded fund that holds Russian shares, gained 0.6 percent to $29.22 yesterday. The RTS Volatility Index, which measures expected swings in the index futures, fell 2.1 percent to 21.81.

VimpelCom’s net debt-to-earnings before interest, taxes, depreciation and amortization is the third highest among the region’s peers, following The Hague-based Koninklijke KPN NV (KPN) and Telecom Italia SpA (TIT) of Milan. Its debt-to-Ebitda ratio was at 2.52 yesterday, data compiled by Bloomberg show.

MegaFon has probably kept its debt-to-ebitda ratio below 1.4, which may allow it to pay an additional dividend, Alfa Bank’s Kulieva said.

VimpelCom began its global expansion, favored by Russian billionaire shareholder Mikhail Fridman, in 2011 when its Moscow-based unit merged with Italy’s Wind Telecom SpA to create the world’s sixth-biggest mobile phone company by subscribers. VimpelCom’s unit Orascom gained control of Wind Mobile Canada last month. Fridman’s Alfa Group is a shareholder of both VimpelCom and Alfa Bank.

Management Change

MTS, as Mobile Telesystem is known, rose 3.3 percent to $20.39, the biggest gainer on the Bloomberg Russia-U.S. Index. The ADRs settled at a 19.3 percent premium to the company’s Moscow-listed shares, the most since Nov. 13. The stock fell 0.2 percent to 261.10 rubles, or $8.55. One ADR is equal to two ordinary shares.

OAO Rostelecom slid 4.3 percent to $22.94, the biggest drop since Nov. 30, after Chief Executive Officer Alexander Provotorov said the company may “lose money” should the government decide to replace management.

A replacement of Moscow-based Rostelecom’s management is being discussed within the government, Interfax newswire reported yesterday, citing Deputy Prime Minister Arkady Dvorkovich in comments that were confirmed by his spokeswoman.

Oil, Russia’s biggest export earner, rose 0.1 percent to $92.76 a barrel on the New York Mercantile Exchange yesterday. Brent crude for April settlement declined 0.7 percent to $111.87 a barrel on the ICE Futures Europe exchange. Urals crude slid 1.1 percent to $108.88.

Russia’s ruble strengthened 0.3 percent to 30.5325 per dollar, gaining for the first time in three days. Ruble futures showed the currency rising 0.3 percent to 30.617 per dollar.

To contact the reporter on this story: Halia Pavliva in New York at hpavliva@bloomberg.net

To contact the editor responsible for this story: Emma O’Brien at eobrien6@bloomberg.net

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