Egypt's telecom sector is buoyant despite the delay on a second fixed-line license and the on going Mobinil dispute.
One of the most prominent hiccups affecting the Egyptian telecoms sector of late was the decision by the National Telecommunications Regulatory Authority (NTRA) to postpone the sale of a second fixed-line operator license, citing turbulence in the global markets. The other major headline for the past few weeks is the two-year long dispute between the shareholders of Mobinil, which has grown more tense as France Telecom (FT) and Orascom Telecom (OT) jockey to retain shares of the company.
Numerous deadlines for resolution have already passed, and although investors seemed confident that the issue would be resolved by mid-May — to the extent that trading activity in telecoms shares prompted a 2% jump of the benchmark EGX30 — negotiations have stalled. A day after the boost the Capital Markets Authority (CMA) suspended Mobinil's trade on the exchange, stating that it would not be resumed until the market authorities reviewed the dispute. As of June 16, the shares had still not been put back on the market.
The effects of the suspension are evidence of the significant contribution of the sector to the economy. Mobinil is one of the most valuable companies in a highly profitable sector. The information and communications technology (ICT) sector was valued at LE 10.5 billion in 4Q2008, equivalent to 3.98% of GDP, up from 3.48%, or LE 7 billion, in 4Q2007. This revenue growth is matched by an increasing number of ICT companies, which in turn have expanded job opportunities in the sector. According to the Ministry of Communications and Information Technology's (MCIT) March Information and Communications Technology Indicators Bulletin, there are currently 2,938 ICT companies, representing an annual growth rate of 25.1%, with 7.8% more employees over 2008.
Penetration rates are also rising. The majority of recent growth comes from the mobile segment, although fixed-line subscribers did increase a modest 6.25% to 11.9 million. However, this number pales in comparison to mobile users, which increased to 41.3 million, an annual growth rate of 37.2%. Mobile penetration now stands at 54.8%.
The growth in penetration has been impressive over the past few years as Etisalat Misr joined Mobinil and Vodafone Egypt to compete for subscribers in 2006. At present Mobinil has 46% of the market share, while Vodafone has 41% and Etisalat 13%. Despite a late start, Etisalat is attracting more customers as a result of its focus on lower-income segments and its market share could increase to 22% in the long run, according to Marise Ananian, head of telecoms research at EFG-Hermes. Both Etisalat and Mobinil launched corporate campaigns this month to lure subscribers from Vodafone, which could also have an effect on market shares.
But it seems unlikely that growth will continue at the same rate in 2009. Indeed, Ananian predicts that a third fewer subscribers will sign up in 2009. While 8 million is still an impressive number, contraction is always a concern. And although she assumes the potential for future market saturation to be between 80% and 85% of the population, which means there is room for growth, the timeline is more long term, with increases expected in 2015 or 2016.
In addition to the natural ebb and flow of new subscribers, nervousness over market conditions may also affect the sector this year. Although Egypt has been following a gradual approach to liberalization for years, its recent postponement of the auction for its second fixed-line license is a concern. A competitor was due to join Telecom Egypt (TE) in 2008, but the process was postponed three times from the initial date of June 19, and the third postponement — only weeks before the auction was due to take place — resulted in an ambiguous end date. Despite a government announcement that 12 companies expressed an interest in the license, the NTRA told press that the auction would be postponed "for a year," adding that there would be a "re-examination of the offering again, to take place next year." The government cited continued turmoil in global markets as the cause for postponement, coupled with ongoing discussions with the various parties about interconnectivity. While competitors are lamenting the delay, TE is doing quite well. In 1Q2009, the company reported a 72% rise in net profit, which it plans to channel into expansion, although the TE chairman, Akil Beshir, told local media he was not ready to comment on specific plans.
Business may be booming at TE, but the other major Egyptian player, OT, has been grappling with the problem of its shares in Mobinil, which account for 19% of OT's revenue. After almost two years of court arbitration by the International Chamber of Commerce, OT was ordered to sell an almost 29% stake in Mobinil Telecommunications, a holding company that owns 51% of the Egyptian Company for Mobile Services (ECMS), which is Mobinil's operator. OT, whose chairman, Naguib Sawiris, has said he would prefer not to sell his company's stake in Mobinil at all, appealed to Egypt's Capital Market Authority (CMA). The CMA ruled that FT had to buy all of ECMS, including not only Mobinil Telecommunications, but also Orascom's 20% direct equity interest in ECMS and the 29 free float shares. Although FT initially rejected the decision, it subsequently agreed to buy ECMS, but offered a lower price than the LE 273.26 per share agreed upon for the sale of Mobinil Telecom. Several deadlines for payment have passed, but thus far the two sides have remained in deadlock and OT has launched legal action to nullify the mandatory sale of its shares, claiming that FT had not met the conditions for the sale.
In the most recent turn of events, FT announced in late May that it had secured commitments for more than 3% of the issued share capital of ECMS (more than 6% of the free float of ECMS) at the price of LE 230 per share and that it was in discussions with other possible sellers, assuming that arrangements are approved by the CMA. Two days later, however, the CMA stated that Egyptian law does not allow FT to buy more than 2% of the ECMS shares on the open market a year without prior clearance. For now, it seems to be something of a waiting game. The CMA has yet to announce its decision, but Jean-Yves Larrouturou, deputy chief executive at FT responsible for the company's Africa and Middle East operations, told local media that the company is prepared for a legal battle lasting five years to uphold the International Chamber of Commerce's ruling.
As adamant as Sawiris has been about holding out for a higher price, the influx of cash would help OT, as it works to maintain its large international networks with activities in Algeria, Pakistan, Tunisia, Bangladesh, Zimbabwe and North Korea, at the same time as scaling down capital expenditures by around 10% this year. Already operations in Pakistan and Bangladesh have been restructured in the face of more challenging market conditions.
Despite the hurdles of the immediate future, there is a lot of cautious optimism about the future of Egypt's telecoms sector. It is unlikely that the government will allow TE to keep its fixed-line monopoly for much longer and there are plenty of interested parties waiting to make an offer on a license. The Mobinil dispute may affect the stock in the short term, but the CMA will probably not suspend trading of one of its biggest listings for too long and the high demand for mobile telephony will continue to bolster the shares' value and buoy the sector
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