Activist Pressure – TBD Upside
This is a quick note on a very exotic setup. VEON is a US-listed telecoms company that operates mostly in risky third-world countries (Ukraine, Kazakhstan, Pakistan, etc.) and is 48% indirectly owned by sanctioned Russian oligarchs. However, the company is very cheap, which might at least partially compensate for these risks. VEON trades at 2.4x TTM and 2.1x forward EBITDA and is a stable business that generates a high unlevered-FCF yield. The interesting angle here is that Shah Capital has recently disclosed a 5% stake and has proposed a number of measures to help the company re-rate closer to emerging market telecom peers, which on average trade at c. 6x EV/EBITDA. Shah Capital already has a couple of successful activist campaigns and their involvement should not be discounted. However, considering the 48% indirect ownership by Russian oligarchs Mikhail Fridman (co-founder of Alpha Bank) and Petr Aven, I’m somewhat puzzled about Shah Capital’s game plan in this situation and what they aim to achieve.
Purely from the financial performance and valuation perspectives, VEON looks very attractive. Pro-forma for the sale of Russian operations, the company trades at 2.4x TTM EBITDA which is below the historical multiple range of 3.0x-3.4x during 2018-2021. As part of the recent exit from Russia, VEON sold its Russian operations, presumably the riskiest part of the business aside from Ukraine, at 3.2x 2022E EBITDA. Divestiture of the Russian business was approved by regulators in Feb’23 and is expected to be consummated shortly. The activist has also noted VEON has very valuable tower assets, which could be worth $1.8bn – more than the current market cap. The continued operations have generated c. $750m annually in unlevered-FCF during 2021 and 2022. This compares to the current EV=$4bn (including lease liabilities).
The activist Shah Capital has had a fair amount of activism success so far, including at Avon Products and Emeren Group. At Avon Products, Shah Capital, along with a couple of other activists, pushed the company to explore strategic alternatives, including a company sale. The company was eventually sold in 2019. At Emeren Group, Shah Capital acquired a 29% ownership stake and shortly after successfully initiated a CEO replacement as well appointment of its nominated CFO. At VEON, Shah Capital has suggested a number of measures intended to unlock value, including a $200m share buyback, bond repurchases, and listing of the Ukrainian telecom arm.
48% stake in VEON is controlled by LetterOne Investment Holdings, which used to be an investment vehicle of the aforementioned oligarchs. However, both of them stepped down from LetterOne in Mar’22 upon Russia’s invasion of Ukraine. Having said that, it’s far from clear if these oligarchs are no longer pulling the strings here