VEON - Russian Tower Assets Sold for $970 mln

VEON has announced that it sold its Russian tower assets. We see the deal as creating value for the company. Apart from allowing it to monetize a portion of its tower assets at a significant premium to its own multiple, the company is effectively reducing its debt load, which could help improve the dividend outlook. We see the news as having a material positive impact on VEON's investment case and therefore put our target price and recommendation for the stock UNDER REVIEW.> The sale of VEON's towers in Russia should create value... VEON has announced the sale of its Russian tower assets (15.4k towers) to Service Telecom (an independent Russian tower company) for $970 mln. The deal terms imply a valuation of $63k/tower and an EV/EBITDA multiple of 11.7, versus the average of 7 for EM tower companies, 21 for European tower companies and roughly 3.5 for VEON itself. Based on attributable EBITDA, we see the implied return on investment for the buyer at 7.0-8.5%, which is not high, close to the ruble risk-free rate. This is positive for VEON, as it got a rather high valuation, while its lease/service payments for the towers will not be all that high. Meanwhile, the economics for the buyer could turn out far better if it manages to substantially increase the tenancy ratio for the towers (the buyer would receive incremental revenues from other operators placing their equipment on the same towers).> ... and speed up deleveraging... The current deal size represents 11% of VEON's net debt, so it could allow the company to decrease its net debt/EBITDA from 2.4 as of end-2Q21 to 2.2. Moreover, applying the same $63k/tower valuation to the rest of VEON's tower assets (this could be a very rough estimate given the differing costs of capital and the differing levels of interest of major tower players toward different markets), one could expect up to $2 bln in additional cash to come from further tower monetization, representing another 25% of VEON's current net debt.> ... and improve the dividend outlook. VEON's dividend policy is still to pay out 50% of free cash flow after license payments. In 1H21, EFCF was positive at $63 mln, versus negative $36 mln in 1H20. Given that 2H21 capex is guided to be roughly flat H-o-H, free cash flow should not be lower than in 1H21 (subject to spectrum auctions), so dividend payments could resume next year. The lower leverage is likely to be taken into consideration during the 2021 dividend decision as well.> Stock now UNDER REVIEW. We see the news as important for the investment case of VEON. We plan to incorporate the deal, as well as some recent developments surrounding the company, into our model. We put our target price and recommendation for VEON UNDER REVIEW.