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Capex Watch: VimpelCom Cuts Back

Ray Le Maistre
11/26/2008

More bad news for the vendor community: Even major carriers in growth markets such as Russia are scaling back their spending plans for 2009. (See Capex Watch: Expect Shrinkage in 2009 and Emerging Markets Offer Capex Hope.)

Take VimpelCom Ltd. (NYSE: VIP), for example, which boasts 57.8 million mobile subscribers (up by 7.1 million year-on-year) and 696,000 broadband customers. It's growing and profitable, having generated revenues of $2.8 billion and net income of $269 million in its third quarter. (See VimpelCom Reports Q3.)

The carrier, which is at the center of an ongoing battle between its two main shareholders, Russian telecom holding group Altimo and Norwegian carrier Telenor Group (Nasdaq: TELN), says its revenues and subscriber bases grew in every territory in which it operates during the third quarter. (See Telenor Dismisses Letter and Brrr! Russian Court Freezes Vimpelcom Shares.)

Its main market is Russia, where it has 45 million mobile and 673,000 broadband customers. It also offers services in Kazakhstan (its main market outside Russia), Ukraine, Armenia, Uzbekistan, Tajikistan, and Georgia.

Belts tightening
But the operator's management is now concerned that growth might slow. In addition, it has "debt obligations" of $1.8 billion for 2009, and needs to find a way to cover that sum. VimpelCom closed September with a cash balance of $727 million.

So belts are being tightened and, as a result, capital expenditure (capex) in 2009 is set to come in below the $2.5 billion VimpelCom is on course to spend this year. The company has already frozen any new nonessential equipment orders, renegotiated contracts with suppliers, suspended any potential M&A actions, put a freeze on hiring new staff, and begun looking for areas where it can cut staff. Those actions will, says the carrier, enable it to generate enough cash in 2009 to meet its debt payments.

The carrier's CEO Alexander Izosimov told investors and analysts on the operator's third-quarter conference call that the impact of the cost-cutting measures would take effect in the first quarter of 2009, and that VimpelCom's model allowed it to increase or decrease its capex investment by 20 percent without impacting its ongoing operations.

A 20 percent decrease in capex for 2009 would take VimpelCom's investments down to $2 billion for the year.

VimpelCom's main capex focus in 2008 has been building out its 3G mobile network and expanding its fiber-to-the-building (FTTB) coverage, but both projects are set to suffer a slowdown next year.

VimpelCom acquired Golden Telecom late last year, just as it was starting its fiber-access construction in about 10 major Russian cities, including Moscow, St. Petersburg, and Nizhny Novgorod -- a rollout that currently passes 5.9 million households. While the carrier intends to complete the planned FTTB construction process in the cities where work has already started, it won't embark on any new markets. (See Vimpelcom to Buy Golden and Russia's Golden Goes Out With a Bang.)

That's bad news for Alcatel-Lucent (NYSE: ALU). (See AlcaLu Wins Golden Deal.)

Instead, it will focus on increasing the number of fiber-access connections in existing coverage areas. At the end of September, 538,000 customers were hooked up to VimpelCom's FTTB network, an uptake rate of 9.2 percent.

The carrier is taking the same approach to 3G -- it will finish rolling out in markets where network construction has already begun, but hold off from starting new deployments.

That's bad news for Ericsson AB (Nasdaq: ERIC). (See Ericsson Lands VimpelCom Deal.)

But the operator isn't sticking its head in the sand and waiting for the global economic slowdown to run its course. Although VimpelCom is taking the appropriate measures to deal with any slowdown, it's not possible to predict the actual impact, Izosimov said during the conference call. And because demand for services and network usage could continue to grow, the carrier will be ready to restart its network expansion program at any time.

— Ray Le Maistre, International News Editor, Light Reading

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