VEON - VEON: Old Troubles Behind New Troubles Ahead

2023-10-12 20:55:46 ET

Summary

• VEON was a catastrophically bad investment in the past ten years.
• After the sale of its Russian business, VEON got prerequisites for a turnaround in the stock.
• However, I have a serious concern about the fate of VEON's Ukrainian business.

As a telecom company with deep Russian roots, VEON ( VEON ) has been on my radar for years. Although, most of the time it was a long-suffering stock, which brought huge losses for investors only if you haven't bought it at the very bottom around this and last year. Underwhelming profitability, huge debt load, and exposure to wartime Russia significantly weighed on investors' sentiment.

Nonetheless, the sale of Russian assets in the form of Vimpelcom telecom operator (works in Russia under the "Beeline" brand) marks a whole new era in the history of the company. Now VEON is no longer present in the Russian telecom market, but that doesn't mean all the hardships are finally over. Let's take a look at what's going to change for the company after the deal.

Post-Deal Landscape

On October 9th, VEON announced that it closed the sale of its Russian business unit and completes the company's exit from Russia. Before the sale, the Russian market accounted for roughly half of the company's revenue and EBITDA. The renewed EBITDA structure looks like this:

As we can see, the top-3 markets for the company are now Pakistan, Ukraine, and Kazakhstan, which collectively account for 82% of VEON's EBITDA. However, the most important outcome of the sale is a significant reduction of the debt load.

Given that VEON deconsolidated results from its Russian business as of Q2 2023, we're talking about a reduction of up to 72% in net debt.

It should be noted, though, that these numbers are preliminary given that the sale wasn't finalized as of the publication of Q2 results. Therefore, investors will have to wait until VEON publishes Q3 results to get a full picture of how the company's financials have changed after the sale.

For an overly indebted company in the past, such a deleveraging is a game-changer for VEON's investment case. With a forward P/E multiple of just 5.16x and EV/EBITDA of 2.93x (according to Seeking Alpha), it's quite obvious that the company has a really low valuation.

Even though a huge discount applied to VEON because of poor financials should be eventually gone after the sale, a new major story for the company is on the horizon: a potential nationalization of its Ukrainian business.

Kyivstar: Why It May Be Nationalized

Before we move on to the topic, I need to make a few clarifications first. VEON operates in Ukraine through a telecom operator Kyivstar. At the same time, VEON itself is owned by LetterOne Holdings (47.9% stake), which was initially founded by sanctioned Russian oligarchs Mikhail Fridman and Petr Aven. In March 2022, right after both oilgarchs were sanctioned, Fridman and Aven stepped down from the LetterOne. While both oligarchs retain their share in LetterOne ownership structure, they can't dispose of their shares in the company due to sanctions. Now let's talk about nationalization.

In its Q2 trading update presentation, VEON shared its strategic view on the Ukrainian telecom market, pledging to invest around $600 million in the recovery of Ukraine over the next three years. Unfortunately for VEON, this doesn't seem to convince the Ukrainian authorities, who recently arrested the "corporate rights" of several Ukrainian companies with presumed Russian links, including Kyivstar.

The logic behind this move seems to be such: Russian oligarchs formally (though not de facto) partially control LetterOne Holdings; LetterOne has a substantial stake in VEON; VEON fully owns Kyivstar. Therefore, Ukraine wants to get rid of any formal or informal presence of Russian-related entities.

According to Forbes Ukraine , with reference to its sources, "the nationalization of the asset, rather than its sale, is more likely." In addition to the "seizure of the corporate rights" of Kyivstar, the Ministry of Justice of Ukraine is preparing a lawsuit in the High Anti-Corruption Court regarding the confiscation of a share of the mobile operator. It is unclear whether there is consistency between the actions of various government departments of Ukraine, but one fact is perfectly clear. Considering that Kyivstar is owned by VEON and not by Russian oligarchs directly, there's currently no legal mechanism that could allow the share of Russian oligarchs to be "separated" without affecting other VEON shareholders.

In this regard, there are three potential outcomes:

1. Ukraine fully nationalizes Kyivstar without any compensation to VEON;
2. Ukraine doesn't nationalize Kyivstar, but forces VEON to sell the whole or at least major stake in Kyivstar;
3. Ukraine doesn't nationalize Kyivstar, but demands generous investments on the side of VEON in the Ukrainian telecom sector as a form of "settlement" of the issue (the least probable scenario).

My thoughts on this matter should be taken with a grain of salt given the lack of details, though I personally view the risk of the nationalization as pretty high. Losing almost a third of EBITDA will inevitably turn out to be a big hit to VEON's financials, thus the Kyivstar case will remain a primary concern for investors for the foreseeable future.

The Bottom Line

While the sale-related deleveraging definitely unlocks some serious upside for VEON, somewhat accurate estimates of the company's future potential will be possible no earlier than the publication of Q3 results. However, the nationalization of Kyivstar may easily overshadow the positive effects of the sale of VEON's Russian business, therefore I'd recommend investors avoid buying the stock at this point.

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