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Uralsib - Russia Daily Equity Update, Telecoms - Oct 18 , 2011.


VimpelCom Ltd

Prolongs risk-sharing agreement with Sawiris

Agreement prolonged to 15 November ... VimpelCom Ltd (VIP US - Buy) yesterday announced that it has prolonged until 15 November its agreement with Weather Investment II (representing Naguib Sawiris) to share risks related to the potential nationalization of Djezzy, the Algerian arm of Orascom Telecom (which VimpelCom acquired from Sawiris). The news indicates that resolution of the situation regarding Djezzy has taken more time than originally thought, but might also indicate that the two sides are expecting situation to be resolved soon.

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a[bar] to share risks of nationalization of Algerian subsidiary. VimpelCom's risk sharing with Sawiris was agreed after closing the deal to acquire Orascom telecom in April 2011, and should have expired on 15 October. According to the agreement, Sawiris would pay compensation to VimpelCom if the Algerian government nationalized Djezzy, and would pay VimpelCom an amount smaller than a specified valuation. However, the latter sum was not disclosed, so it is unclear to which extent VimpelCom is protected. The Algerian government reportedly recently received an appraisal from Sherman and Sterling valuing Djezzy at $7 bln, which is close to the fair value estimates indicated by VimpelCom management earlier this year, though the risk of nationalization at an unfair price cannot be ruled out completely, in our view.

VimpelCom undervalued, but MTS shares more attractive. The risks related to VimpelCom's Algerian asset have been dominating sentiment towards VimpelCom shares, so resolution of the situation would support share prices. VimpelCom is fundamentally undervalued, trading at a 2012E EV/EBITDA of 4.0, and we reiterate our Buy recommendation. However, MTS (MBT US - Buy) is similarly fundamentally undervalued but has fewer risks and is less leveraged than VimpelCom, so MTS remains our top telecoms pick.


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Publication:Russian Banks and Brokers Reports
Date:Oct 21, 2011
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