FOCUS: Russia’s VimpelCom seen improving under ex-CEO, resigned amid graft enquiry

By Yekaterina Yezhova

MOSCOW, Sep 12 (PRIME) -- A bribery investigation has forced Mikhail Slobodin, head of Russia’s third biggest mobile operator VimpelCom, to resign just a couple of days after his contract had been extended by three years. Analysts said company owners and senior management were evidently content with the former executive’s work, as results of the operator improved.

Amsterdam-based VimpelCom Ltd., the Russian operator’s sole owner, accepted the top executive’s resignation on September 5 “with immediate effect, following today’s news regarding Mikhail Slobodin and his prior employer, T Plus.”

The Investigative Committee is looking into actions of former and current managers of power company T Plus, a legal successor of the reorganized KES Holding, headed by Slobodin in 2002–2010. The law enforcement authorities suspect the company’s managers of having handed more than 800 million rubles in bribes to officials of the Komi Republic, in the country’s northwest, to impose high tariffs for electric power.

The committee detained two T Plus managers and searched the power company’s Moscow office. At the moment of his resignation Slobodin, aged 43, was on a business trip outside Russia and promised to go back as soon as he accomplishes his affairs. He was put on the federal wanted list on September 7 on a request of investigators.

Finam financial analyst Timur Nigmatullin said the Russian branch is the holding’s key asset, which accounted for 47% of VimpelCom Ltd.’s revenue and 52% of EBITDA as of the end of June.

“The company’s senior management team and shareholders were apparently satisfied with Slobodin’s performance as the CEO, since his contract was recently extended for another three years,” VTB Capital analyst Ivan Kim said in a research note.

“Indeed, VimpelCom’s operational and financial dynamics have improved of late. Slobodin joined as VimpelCom CEO in 2013. The lack of management continuity had been an issue for VimpelCom before, and that might now re-surface.”

Nigmatullin agreed, adding that VimpelCom under Slobodin showed rather good financial and operating results in spite of a complicated market situation – including mobile number portability flows and an arrival of T2 RTK Holding, or Tele2, on the lucrative Moscow Region market – and the difficult macroeconomic climate.

“I would explain the success by various marketing initiatives and an active switching of subscribers to bundle tariffs, tying mobile and landline services. A rule of thumb states that such offers allow operators to cut net outflow of subscribers by up to four times, with a minor decrease in average revenue per user, resulting in à slump of operator’s expenses,” Nigmatullin told PRIME.

“It should be also pointed out that the operator demonstrated stable mobile revenue and a slight increase in the subscriber base in January–June amid a dramatic decrease of capital expenditures.

“It mostly became feasible thanks to the development of networks in teamwork with other operators. Taking into account the debt-burdened parent company, I could assume that VimpelCom Ltd.’s board of directors positively appraised the now-the-former general director’s work.”

The analyst thinks VimpelCom Ltd.’s board of directors made a correct decision when it approved Slobodin’s resignation. The negative background was fully neutralized prior to opening of trading in the U.S. on September 6, Nigmatullin said. The NASDAQ floor, where VimpelCom Ltd.’s ADRs are quoted, was closed on September 5 for Labor Day.

UralSib Capital’s analysts said the inflow of news on the management reshuffle could provoke market volatility, but operating results will ultimately overweigh. “VimpelCom is the weakest operator of the Big Three (after MTS and MegaFon) in conditions of toughening competition and the Russian figures are crucial for consolidated fundamental results,” they said.

“Meanwhile, VimpelCom Ltd. wins from approval of a merger in Italy, and its dividend yield could reach an attractive level. The company’s quotes, offering a 22% growth potential to our target price at the end of 2016, seen at U.S. $5.3 per ADR, are underestimated, and we keep a Buy recommendation,” UralSib Capital said.

New CEO

VimpelCom Ltd. handed over the reins to its major markets head Kjell Johnsen. He “has extensive experience in the country and will continue to drive the company’s transformation forward”, the company said.

“Johnsen only joined VimpelCom in August. He is familiar with VimpelCom, of course, as he served as head of Telenor Russia in 2006–2009, but he did not hold a managerial position at VimpelCom,” Kim at VTB Capital said.

“We think that Johnsen running Russia operations might be a temporary solution, and that VimpelCom Ltd. might look for somebody to replace Slobodin.”

Johnsen confirmed the analyst’s words, when he told business daily Vedomosti that he is ready to be an active chairman of the board of directors, not the general director for years, if only for several months until a new candidacy is found.

End