The countdown for the much awaited privatisation of Telecom Egypt has begun, writes Niveen Wahish Preparations for the imminent partial privatisation of Telecom Egypt, scheduled before the end of the year, are already underway. This week a consortium led by Credit Suisse First Boston (CSFB) including EFG-Hermes and Commercial International Bank (CIB) has already started its work as financial adviser for enlarging the ownership base of Telecom Egypt (TE). Among the primary tasks of the consortium is the valuation, the development of potential privatisation options and the promotion of the company. The consortium was awarded the job earlier this week following a three-month neck-to-neck competition with nine other investment banks. The consortium will be in charge of the sale of a minority stake in the company. According to the Telecom Act, and the law that transformed what was formerly known as the National Telecommunications Authority into a company, the majority of the company's ownership has to remain in government hands. Only up to 49 per cent can be put up for sale. "This being the case," an informed source told Al-Ahram Weekly, "selling to a strategic investor would not be feasible because a strategic investor would want a majority holding of the company, or at least management control." However, he stated that the latter option was not being considered "since the current management took over in 2000, there has been a remarkable improvement in the performance of the company." The sales revenue of TE in 2004 was LE7.749 million, up from LE3.1 million in 2000. And net profits went from LE885,000 to LE1 million during the same period. The management was also able to double the number of subscribers from around five million to 10 million. Within the framework of only a minority stake up for sale, an Initial Public Offering (IPO) is the most likely scenario. According to Amr Badawi, adviser to the minister of telecommunications and information technology, an IPO would involve the sale of between 10- 20 per cent of the company's shares. After the consortium completes its work, its assessment will be presented to the Egyptian cabinet for the final decision. Within the portion of shares that will be slated for an IPO, some may be targeted at a financial investor, but only a small percentage, said the informed source, so as not to affect the liquidity of the share in the market. A portion of the offering will also be made available for employees. The advantage of an IPO, according to the source is twofold, the proceeds of the sale and the fact that with its shares traded, the company can use the unfloated shares as collateral to borrow from banks should it need to. Moreover, this IPO will boost interest in the Egyptian stock market as well as foreign direct investments. With the minority stake being the final goal, the consortium has a lot to do to meet a targeted sale date before the end of the year. According to Badawi, from now until the time of flotation, the chosen consortium will have to carry out the due diligence and valuation of the company, as well as check business and growth prospects and assets. Informed sources told the Weekly that initial presentations by investment banks placed the value of the company between $4.5 billion (LE27 billion) to $6 billion (LE36 billion). "After the investment bank makes its valuation, it will then determine if their valuation is suitable or not according to the reactions from the road show," he said adding that a government committee will review the valuation process and come up with their own valuation. "Should the investment bank's valuation be lower than that of the government, then only the minister's authorisation will allow for the sale," the informed source said. The consortium will also carry out a stock market analysis so as to be able to decide the correct timing for the IPO and where the flotation should take place, whether in the Egyptian Stock Market alone or in regional and international stock markets as well. And they also have to prepare the documentation that goes out to potential investors informing them about the company. The consortium will also carry out the road show wherein company management, MCIT officials and Ministry of Investment officials visit potential investors and investment banks to make presentations about the company. A similar drill was carried out in 2000, when the government initially planned to privatise the company, but at that time, the investment bank advised the company not to sell due to the downturn telecommunications stocks were witnessing worldwide. At that time the valuation TE was estimated at LE19 billion. This time around, local and international stock markets look more receptive. According to one financial analyst who preferred to remain anonymous, the Egyptian stock market is more liquid and its volume has quadrupled as investors are hungry for IPO's such as that of TE. He added that what makes TE an attractive buy is not only the fact that it is an incumbent operator, but also prospects for the telecom sector are high. "This is one industry that has not been affected by the political tensions in the world. For example, despite the war in Iraq, subscribers in the mobile company are increasing." The status of the company has also come a long way since 2000. Today the company has a 25.5 per cent stake in Vodafone Egypt, worth some LE5 billion alone, representing a significant portion of the company's value. In the meantime, the liberalisation of telecommunications services within the framework of the World Trade Organisation's Basic Telecommunications Agreement, has meant liberalisation of all services by the end of 2006. The last of these services is that of international calls. Next month, the National Telecommunications Authority is due to announce the call for bids for two licences for operators of international calls services. That would mean entry of competitors with TE over international calls fees which currently account for a quarter of its revenue. However, experts note that TE would still be at an advantage seeing that it already has the infrastructure and that it has been clever enough to come down with its rates to discourage users from switching to the new operators. What could dampen company prospects, said the anonymous source is if it considers setting up its own mobile network. "As a second generation provider it will not be able to compete. While operating a third generation network provider will cost the company huge amounts of money that it would not be able to recover." He pointed out that studies have estimated that the cost for a 40 million population are approximately $1-$1.5 billion. Moreover, he added, 3G would only be targeted at a certain niche which is not expected to be very big considering that 78 per cent of current subscribers to mobile phones are prepaid. The choice of the winning consortium is a process that took almost four months, beginning with the advertisement that was published late last April. Interested companies first presented technical offers according to how they were graded. Among the criteria for technical offers was expertise with IPOs of telecommunications companies, as well as experience in the region and in the Arab world. But with their qualifications being close, the financial offers were the deciding factor. The winning consortium made the lowest offer. It will charge 0.95 per cent of the proceeds of the share sold.
