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VimpelCom Mobile Telecommunications, Ukraine




Key Data


VimpelCom, one of the largest Russian mobile telecommunications companies, completed the purchase of the Ukrainian mobile company Ukrainian Radio Systems (URS) in November 2005. VimpelCom has now contracted Ericsson to build a Global System for Mobile communications (GSM), General Packet Radio Service (GPRS) and Enhanced Data for Global Evolution (EDGE) network across the Ukraine, replacing and upgrading the existing URS network equipment.

Under the deal, agreed in late November 2005, URS (now controlled by VimpelCom) will purchase US$200 million of new equipment from Ericsson over the next three years and Ericsson will buy back the existing URS equipment for $52.6 million in cash. In addition, VimpelCom will require an additional $300 million worth of equipment and services from Ericsson over the next three years for their URS acquisition to further expand and enhance the network. The overall deal is very attractive for Ericsson, being worth US$500 million over the three years until 2008.

The VimpelCom–Ericsson partnership was commented on by Alexander Izosimov, CEO of VimpelCom 'We are happy to expand our partnership with Ericsson into Ukraine. As a result of this agreement, we will be able to upgrade the network with state-of-the-art equipment and have tangibly reduced the originally budgeted level of investments required to build out the URS network through 2007.'

VimpelCom will introduce their successful 'Bee-line' brand to the Ukraine immediately and build on the URS subscriber base, by offering new deals and good roaming plans between Russia, Kazakhstan and the Ukraine.

VIMPELCOM SHAREHOLDERS

Alfa Group and Telenor, the two largest VimpelCom shareholders, were at loggerheads over the purchase of URS. Alfa Group believed that due to a saturation of the Russian market a move into the Ukraine was sensible via a small acquisition because growth rates were faster in the Ukraine, while the Norwegian shareholder Telenor believed that this was not the way forward for VimpelCom and the deal was a mistake.

The dialogue about this began in July 2005 with Telenor against the transaction. The deal did go ahead in November 2005 at an EGM where 89% of VimpelCom shareholders voted for the deal. The total price (with the permission of the Ukrainian monopolies and mergers commission) was $231.3 million, which included the purchase price of $206.5 million and URS expenditures of $24.8 million; VimpelCom also assumed a debt of $24.8 million on behalf of URS.

Alexander Izosimov commented: "We are very pleased to announce this acquisition in Ukraine as VimpelCom’s second expansion outside of Russia. We believe our entry into Ukraine is strategically important for VimpelCom". The relationship between VimpelCom and Telnor is frosty with Telnor threatening legal action and to block the new URS business plan, but the two companies are still communicating. VimpelCom launched a $300 million bond issue in Russia in April 2005.

URS NETWORK AND ERICSSON

URS has a GSM-900 licence which covers the whole of the Ukraine (population 47.6 million) as well as a GSM-1800 licence, which covers 23 (79.8% of the population) of the 27 administrative regions in the country (their licence excludes the city of Kyiv, the Kyiv region and the Dnipropetrovsk region).

According to independent estimates prior to the purchase of URS being agreed, the mobile penetration in the country was 52% (figure from late October 2005). URS currently has 51,200 subscribers (0.31% of the mobile market according to figures from the Ukrainian Communication Department.) It is unclear how much of the URS network will remain following the upgrade by Ericsson, although it is clear that VimpelCom mean business in the Ukraine with their additional investment in network expansion.

Ericsson will supply radio and switching components for the new URS network as well as carrying out installation and rollout services across the country. The advanced high-tech network will support GSM, GPRS and EDGE standards and provide a wide range of services, such as MMS, and also include an Intellectual Network (IN), platform to support the latest version of the prepaid system.

EDGE TECHNOLOGY

EDGE is a technology which gives GSM the capacity to challenge 3G mobile data rates. EDGE can provide three times the data capacity of GPRS and operators can handle three times more subscribers than GPRS; tripling their data rate per subscriber, or add extra capacity to their voice communications.

Ericsson EDGE uses the same TDMA (Time Division Multiple Access) frame structure, logic channel and 200kHz carrier bandwidth as current GSM networks, which allows existing cell plans to remain intact. VimpelCom are sticking with a tried and tested technology which they can enhance to give near 3G performance. They will build their brand in the Ukraine and then develop their business plan accordingly.