VEON’s attempt to consolidate Global Telecom Holding (GTH) was unsuccessful for the second timein five years, but we still think consolidation is rational in the long term. Market conditions have become more challenging in GTH’s countries of operations. We revise down our forecasts and decrease our TP to EGP6.2 (from EGP7.7); maintain HOLD.
Second unsuccessful buyout attempt
On Tuesday (3 April), VEON (BUY, TP $3.9/ADS, CP $2.7/ADS) announced that it has withdrawn its mandatory offer to purchase a 42.3% stake in GTH for EGP7.90/share due to the “lapse of time and absence of approval”. Egypt’s Financial Regulatory Authority stated, in turn, that VEON had not completed some procedures with government authorities. There is still no clarity regarding the disputed GTH taxes ($56mn) with the Egyptian Tax Authority (ETA). In 2013, Alfa Group already made an attempt to fully consolidate GTH and to buy out minorities for $0.7/share. GTH management recommended shareholders to reject the offer as the price was too low and the required minimum of 26.6% for the buyout was not achieved (shareholders offered to sell only 15.9%); the regulator declined to waive the minimum threshold. We see the rationale for consolidation as: 1) lower costs by closing down the Egyptian office and avoiding exposure to Egyptian country risks; and 2) the ability to manage opcos more effectively and to upstream cash directly.
There are 264 listed stocks on the Egyptian Stock Exchange, only nine of them with market cap of above $1bn and only three (including GTH) that are part of the MSCI Egypt Index. The regulator’s rejection of the buyout offer may have had these considerations in mind, as losing one of the three MSCI Index stocks would be at odds with its aim of deepening the local stock market. One option still open to VEON is to continue with minority buyout offers, as the rules allow it to make an unlimited number of offers to purchase up to 10% of outstanding stock. This would be a protracted process for VEON but might eventually achieve the same result: amassing a near-100% stake in the company and squeezing out remaining shareholders.
Lower valuation given more challenging market conditions
We have factored in more conservative assumptions to our forecasts, given that market conditions in GTH’s countries of operations are becoming more challenging:
- In Algeria and Bangladesh, markets continue to be highly competitive, with top-line growth likely to be under pressure. In the former, Djezzy will continue to roll out the LTE network (LTE coverage was around 25% at YE17), and in the latter Banglalink has acquired LTE spectrum for $309mn ex. VAT ($220mn payment in 2018 and $123mn over four years) and launched LTE services in February.
- In Pakistan, the only growing market in local currency terms in 2018, on our estimates, GTH’s operations will be challenged by a weaker currency and higher withholding taxes. Tower deal approval is still pending and we think is likely to happen, with cash inflow from towers of $666mn after deal closure and $94mn within 12 months.
We have revised down our forecasts and reduced our equity valuation by 18%; our new TP is EGP6.2/share (from EGP7.7/share); maintain HOLD.