Potential Vimpelcom Pull Out From Canada May Lead To Wind/Mobilicity Merger – Analyst

Reports that VimpelCom is preparing to drop its telecom assets in African and Asia is the “strongest signal to date that VimpelCom may eventually exit Wind Canada,” writes Scotia Capital telecom analyst Jeff Fan.

Fan in his October 29 Equity Research report refers to a Financial Times (FT) report that VimpelCom (VIP), Wind Mobile Canada’s parent, is expected to sell its sub-Saharan African units and its Zimbabwean business, Telecom Zimbabwe. VimpelCom is also preparing for a sale of its three businesses in Cambodia and Laos as part of the company’s strategy to focus on more mature markets such as Russia and Italy.

He notes that when Amsterdam-based VimpelCom took control of Wind Canada after its Orascom Telecom acquisition, it classified its sub-Saharan African and southeast Asian businesses in the same basket of assets.

“If the FT report is true, then Canada would be the only asset in that basket that it has not reportedly acted on. We believe the action on Canada has been slower because of regulatory hurdles,” explains Fan.

Fan says the spectrum licences owned by Wind are not transferable to incumbents until March 2014. “Although they are transferrable to non-incumbents today, we suspect the interest level has been low and would not allow VIP to maximize the potential sale proceeds.”

He adds that with Canadian telecom foreign ownership rules just recently removed for small operators in mid-2012 that Wind Mobile’s capital structure required a “clean-up.” He further notes that just last week Orascom Telecom (legal parent of Wind Canada) (ORTE.CA) announced it would undertake a number of corporate transactions that would provide Orascom and VimpelCom legal control over Wind Canada. The board proposals will be voted by the shareholders in November. (Tony Lacavera, Chairman and CEO of Wind Mobile however maintained last week that “VimpelCom Group and Wind Mobile remain committed to the Canadian marketplace and becoming Canada’s fourth-largest carrier.”) 

“For VIP to maximize the return on Wind Canada, it may need to consolidate Mobilicity to be viewed as a legitimate fourth player in the market with better scale and spectrum position. Within the next three to six months, we think VIP will likely support Wind’s effort to consolidate with Mobilicity, if that opportunity presented itself. We believe that would pave the path for the ultimate exit in 2014 when the licences are transferable to the incumbents Rogers, BCE, and Telus,” writes Fan.

He concedes that obtaining regulatory approval for Wind to merge with one of the incumbents is a “major hurdle.”

“But even if the regulator does not permit Rogers, BCE, or Telus to acquire Wind/Mobilicity, the structure and the competitive dynamics will likely end up looking very similar to the United States today (i.e., tier 1 incumbents Verizon Wireless and AT&T extending their lead against the challengers Sprint-Nextel, T-Mobile, and the regional operators). And unless a new deep-pocketed strategic investor emerges (like Softbank/Sprint in the United States), we think the development over the next one to two years will be positive for all Canadian wireless operators. Without additional capital injection and with the five-year transfer restrictions on the licences, we do not believe Wind/Mobilicity will participate in the 700 MHz auction in 2013.” 

Consolidation of Wind would benefit all three incumbents says Fan, but in particular Rogers given its “wireless exposure and that Rogers had been most impacted by competition in the past three years.”

Fan forecasts that Rogers Communications will outperform and reach a $50 one-year target price. With improving wireless revenue and EBITDA growth in 2013, “we expect RCI will achieve 5% consolidated EBITDA growth. We believe this will result in both higher consensus estimates and positive valuation multiple expansion.”