VEON Ltd. (formerly VimpelCom) 2011 Annual Report Summary
Business Context and Reporting Period
This Form 20-F covers the fiscal year ended December 31, 2011. The registrant, VimpelCom Ltd. (now VEON), is a Bermuda-domiciled holding company providing mobile and fixed-line telecommunications services across Russia, Europe, Africa, and Asia. The reporting period is significantly impacted by the Wind Telecom Transaction, completed on April 15, 2011, which added operations in Italy, Algeria, Pakistan, Bangladesh, and other regions. Consequently, comparative data for periods prior to April 15, 2011, excludes Wind Telecom results. The company operates under five business units: Russia, Europe & North America, Africa & Asia, Ukraine, and CIS.
Key Financial Metrics
| Metric (in millions USD) | 2011 | 2010 | 2009 |
|---|---|---|---|
| Total Operating Revenues | 20,262 | 10,522 | 8,813 |
| Operating Profit | 2,854 | 2,794 | 2,618 |
| Profit for the Year (Net Income) | 269 | 1,873 | 1,172 |
| Adjusted EBITDA (Non-GAAP) | 8,127 | 4,906 | 4,334 |
| Adjusted EBITDA Margin | 40.1% | 46.6% | 49.2% |
| External Debt (Principal) | ~26,800 | Not Disclosed | Not Disclosed |
| Cash and Cash Equivalents | 2,325 | 885 | 1,451 |
| Working Capital | (3,074) | (1,023) | (562) |
Note: Net income for 2011 includes a significant non-controlling interest adjustment of $(274) million. Profit attributable to owners of the parent was $543 million.
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues nearly doubled from $10.5 billion in 2010 to $20.3 billion in 2011, primarily driven by the consolidation of Wind Telecom.
- Profitability Decline: Despite revenue growth, Net Income dropped sharply from $1.87 billion to $269 million. This was due to increased finance costs ($1.59 billion vs. $0.54 billion), higher depreciation and amortization, and a $527 million impairment loss.
- Subscriber Base: Total mobile subscribers surged from 92.7 million to 205.2 million. Broadband subscribers increased from 3.7 million to 12.3 million.
- Leverage: External debt increased substantially to approximately $26.8 billion to fund the Wind Telecom acquisition and refinance acquired debt.
- Working Capital: The company reported a working capital deficit of $3.1 billion, worsening from a $1.0 billion deficit in 2010.
Guidance, Outlook, and Risks
Outlook and Strategy: Management targets a mid-single-digit CAGR for revenue and EBITDA through 2014. Strategic goals include reducing the Capex/Revenue ratio to below 15% and Net Debt/EBITDA to below 2.0 by the end of 2014. The company intends to maintain dividend payments of at least $0.80 per common share annually through 2013.
Key Risks and Contingencies:
- Substantial Leverage: High debt levels create significant debt service obligations. The company relies on cash flow from operations to meet these obligations, with limited ability to access additional capital markets on favorable terms.
- Regulatory and Legal Risks (Algeria): The Algerian government has made substantial tax claims against OTA (Orascom Telecom Algérie), totaling approximately $955 million in prepaid amounts. Additionally, the Bank of Algeria has restricted foreign banking transactions for OTA, preventing dividend repatriation. A criminal case against OTA management resulted in fines of approximately $1.3 billion (as of March 2012), which is under appeal.
- Regulatory and Legal Risks (Russia): The Russian Federal Antimonopoly Service (FAS) has filed a claim challenging the validity of a share purchase between strategic shareholders Telenor and Weather II. An interim injunction restricts voting rights on certain major transactions and board changes for OJSC VimpelCom.
- Shareholder Disputes: Ongoing tensions and litigation history between major shareholders Telenor and Altimo pose governance risks, though recent arbitration proceedings were withdrawn following a share purchase by Telenor.
- Market Risks: Exposure to foreign currency fluctuations, as costs are often in USD/EUR while revenues are in local currencies. Political instability in emerging markets (e.g., Egypt, Ukraine) and inflation risks are also highlighted.
Investor Verification Checklist
- Debt Service Capacity: Verify the company's ability to generate sufficient free cash flow to service the $26.8 billion debt load, particularly given the working capital deficit.
- Algerian Litigation Status: Monitor the outcome of the Algerian tax disputes and criminal proceedings against OTA, as well as the status of the injunction preventing dividend repatriation.
- Russian Regulatory Injunction: Track the FAS claim regarding the Telenor/Weather II share transaction and its potential impact on corporate governance and dividend approvals in Russia.
- Integration Synergies: Assess the progress of integrating Wind Telecom operations and the realization of anticipated cost synergies.
- Dividend Sustainability: Confirm the ability to maintain the $0.80 per share dividend policy amidst high leverage and potential cash flow constraints from subsidiaries.