VEON plots more profitable, post-Russian future

Before Vladimir Putin sent tanks and troops across the border with Ukraine, VEON was casually referred to in industry circles as a "mainly Russian" operator. Despite basing itself in Amsterdam, and operating across territories stretching from Bangladesh to Ukraine, the company then under the ultimate control of Russian oligarch Mikhail Fridman owed about 50% of its business to the Russian market.

It was a nightmare for VEON's managers, who watched the company being cut off from international capital markets as the US and Europe moved against Russia and Russian companies following Putin's invasion of Ukraine. VEON's response was to embark on a de-Russification of the group as swiftly as possible. Booted out of LetterOne, the Luxembourg-investment group that is VEON's biggest shareholder, Fridman quit the VEON board in March 2022, just days after war began. The Russian unit – branded VimpelCom – was put up for sale later that year.

VEON reached an agreement to sell VimpelCom to local managers, led by CEO Aleksander Torbakhov, in a deal valued at $2.2 billion. But while VimpelCom has been categorized as a "discontinued" operation for months, the process of selling it has not been straightforward. "There are rules and regulations and we're committed to complying and they are multiplying like rabbits," said Kaan Terzioglu, VEON's CEO, during a call with Light Reading.

He is now positive, however, that de-Russification will be done within the next few weeks. "I have full confidence that we will be completing this transaction before the October maturities of our bonds arrive," he said. As part of the process, VEON has had to submit documentation to clearinghouses, including Euroclear and Clearstream, regarding the cancellation of Eurobonds held by VimpelCom. Terzioglu, meanwhile, has now resigned from his position on VimpelCom's board.

Good riddance to debts

The upshot, he believes, will be a much healthier VEON that can fully reengage with capital markets and focus on its mission of providing connectivity and "digital" services in emerging markets home to some 510 million people. "Without Russia we are a more compact operation," he said. "We grow faster and are more profitable."

As detailed in its recent annual filing with the US Securities and Exchange Commission, group headcount tumbled to just 16,422 last year, from 44,585 in 2021, with the carveout of VimpelCom. Savings have also been found at group headquarters in Amsterdam, where costs are down 55% since VimpelCom was marked as a discontinued business, reports Terzioglu. "Our board is basically not anymore now 11 people, it's seven people," he said. "Our headquarters even accelerated decentralization further and took $85 million of cost out of the cost base."

Divestment will clearly change the capital structure of the company, allowing VEON to offload almost $5 billion of debt when the deal goes through, according to Terzioglu. VEON's gross debt was $5.2 billion on June 30, but this excludes VimpelCom. The figure one year earlier, including the Russian business, was $12.3 billion. Corresponding to that is a massive change in leverage. Including VimpelCom, VEON's net-debt-to-earnings ratio was 3.8 in June 2022. Without it, the ratio drops to 1.3 a year later.

VEON's five-year share price in Amsterdam ( euro )(Source: Google Finance)

All that should support investment activity, including a $600 million commitment VEON has made to Ukraine, now its second-biggest market by sales (after Pakistan) and its largest for earnings. Capital expenditure fell by 32% for the first half, to about $262 million, compared with the year-earlier period. But capital intensity (capex as a percentage of sales) is still relatively high at 18.7%. And Terzioglu dismisses any suggestion VEON is not investing enough, blaming the recent decline on exchange rates and problems in Pakistan.

"There is an impact from the foreign currency crisis in Pakistan, where the government did not allow us to import equipment," he said. "We do investment wherever it is needed and wherever we can and if you look at the details of the Ukraine results you will see our capex investment has increased in Ukraine by 35% as we are building the network every single day." Kyivstar, VEON's Ukrainian subsidiary, spent about 1.4 billion Ukrainian hryvnia (US$38 million) on capex in the second quarter, roughly 20% of what it made in sales.

Sticky Toffee pudding

Operationally, VEON's results continue to look good in local-currency terms and relatively poor when converted to US dollars. Headline sales growth was nearly 20% year-on-year for the second quarter, but the reported figure was down 4.3%, to $916 million. Earnings (before interest, tax, depreciation and amortization), similarly, rose almost 14% in local currencies but fell about 11% in US dollars, to $415 million.

Is there a concern that currency weakness and rising interest rates will make it harder in future for VEON to service its dollar-denominated debts? Terzioglu draws attention to recent inflation-linked price rises that boosted reported figures for the month of July by almost 4%. "At the end of the day, we can protect ourselves from further depreciations and that will be extremely valuable for our investors."

There is not much Terzioglu can do about currency fluctuations and interest rates and his investors have reason to be happy about his operational management across the various subsidiaries. VEON has just raised full-year guidance and is now targeting sales growth of 16-19% in local currencies and an earnings increase of 10-14%. "We are not only gaining market share but also wallet share," he said, reeling off the names of various banking, entertainment and other applications provided by VEON's operating companies.

Under Terzioglu, VEON has moved swiftly to capitalize on the relative absence of US streaming platforms and Internet companies in its emerging markets, hiring its own software developers and launching its own services. Growth has tended to come not from charging for those services but from additional engagement with customers. And Terzioglu now sees a big opportunity to lure subscribers from rival networks, pointing out that 70% of people using Toffee, VEON's video platform in Bangladesh, are customers of Grameenphone and Robi, VEON's rivals.

"My message to competition is watch us and either send us a thank you message, because I know that these 6 million people are consuming six times more data and driving your growth as well, or we are coming after them," he said. "There are privileges of being our customer and consuming Toffee at the same time." Competitors have been warned.

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— Iain Morris, International Editor, Light Reading