Mergers, Acquisitions and Financial Results

After multiple postponements and much last-minute deal making, Vodafone Egypt, the country’s second mobile operator, has listed on the Cairo and Alexandria Stock Exchange (CASE). Meanwhile, news that the company had struck an agreement with Telecom Egypt (TE) seems to give the mobile operator the distinct edge in Egypt’s growing telecoms market. Vodafone Egypt shares reached a price of LE41 on the first day - well above a fair trade price estimated at LE34. The listing was a long-awaited move for one of Egypt’s better-known and more dynamic companies, but had been postponed several times over the past week as the various parties hammered out agreements. At the same time, telecoms sector analysts were hedging their bets as to the outcome of what is probably one of the most important corporate and stock market stories to come out of Egypt this year. This was because the listing was accompanied by several other deals that will change the landscape of Egypt’s telecoms sector. Most important among these was that with TE, the country’s historic operator, which has now become Vodafone Egypt’s second-largest investor - and seems to have abandoned plans to start its own network with a recently purchased license. Under the deal, the Vodafone Group - the world’s largest mobile operator, operating in 28 countries, and owner of 67% of Vodafone Egypt - sold 16.9% of its stake to TE at LE20 per share. This was accompanied by Vodafone Egypt’s minority shareholders selling an 8.6% stake of the company to TE at LE32.5, considered a fair rate, although analysts point out that the actual price of the minority shareholders’ shares is closer to LE30, as Vodafone Egypt had announced its intention to issue a LE2.5 dividend per share earlier this month. This represents a significant dividend windfall that TE will now benefit from.

The deal brought TE’s stake in Vodafone Egypt to 25.5% - a stake that will form half of a new consortium, Wataniya, in partnership with the Vodafone Group.

Wataniya will be split 50-50 between the two companies and hold a 51% stake in Vodafone Egypt, making it the single largest shareholder. However, the Vodafone Group - which will retain a 25.5% stake outside of Wataniya - stressed in a statement marking the deal that it "has stated its strategic intentions to remain as a long-term investor with a controlling economic interest in Vodafone Egypt".

The Vodafone Egypt-TE deal is expected to give Vodafone a slight advantage over its rival MobiNil, analysts say, because TE controls all fixed line telephony in Egypt and thus could give preferential treatment to a company it has invested in. However, any preferential treatment will have to come under the scrutiny of the National Telecommunications Regulatory Authority (NTRA), which sets tariffs on interconnection fees - the agreements on how to share revenues for calls made across different networks. In the longer term, some analysts expect that the deal could offer Vodafone Egypt an advantage when targeting the public sector, since TE, while theoretically a private company, is 100% government owned. For several years, TE has been looking for a foreign strategic investor to at least partially privatise the company. However, despite TE’s attractive profile, the company missed the flurry of telecoms investments that preceded the end of the boom in 2001. Its search for an investor can now be considered over, analysts say, as it is giving up the license for a third mobile network it acquired in December 2002. The LE1.9bn license will be sold back to the NTRA for its original price.

TE had previously wavered back and forth on seeking a foreign partner to operate the third license, with the Ministry of Communications and Information Technology (MCIT) announcing as recently as November 29 that it was in discussions with a foreign mobile operator.

Even earlier in the year, TE and the MCIT wavered back and forth on the launch of the third operator - originally named Masreya. The minister of the MCIT, Ahmed Nazif, and TE’s chairman, Aqil Beshir, believed that a third operator would take a long time to become profitable because the rate of growth of mobile users was slowing down and the existing operators had already grabbed the best share of the market. However, President Hosni Mubarak was committed to starting a third network and had to be convinced that such a thing would not be financially interesting.

In May 2003, Mubarak scuttled a LE2bn deal between TE, Vodafone Egypt and MobiNil to delay the entry of a third mobile network. According to press reports at the time, Mubarak had demanded that a new feasibility study be carried out to see if a third network was viable.

Having divested itself of the third mobile license, MobiNil and Vodafone Egypt will now be signing a deal with the NTRA to access the 1800 Mhz spectrum covered by the third license. Currently, both existing operators are using the 900 Mhz GSM license, which restricted future growth as both companies are now operating at the theoretical maximum for coverage density on that frequency. The two companies were especially interested in accessing the better quality 1800 Mhz frequency in crowded areas such as Cairo and Alexandria, where "network busy" signals would have become increasingly frequent using the 900 Mhz frequency.

The deal between the mobile operators and the NTRA, therefore, not only postpones the entry of third operator that would eat into the sales of existing operators, but also provides a much-needed technological advantage. Each existing mobile operator will be paying LE1.24bn to the NTRA for access to the 1800 Mhz spectrum.

The week prior to the listing, CASE had expected a boost from the listing of Vodafone Egypt, but the repeated postponement meant the market remained stable. At the end of the week, Vodafone shares were selling as high as LE41 per share, a few pounds higher than the LE34 analysts had predicted. Vodafone’s listing will add another major telecoms stock to CASE, alongside Orascom Telecom and MobiNil, with the former buoyant ever since it acquired the license to operate a mobile network in central Iraq. With analysts expecting that the Vodafone Egypt listing will bring more attention to Egypt’s telecoms sector, and perhaps CASE as a whole, the local telecoms sector is left with its existing companies strengthened and no new entrant in the medium term.