Debt on the Nile

A string of license acquisitions has stretched Orascom Telecom Holding (OTH) to the limit. The company is trying to enhance its resilience through refinancing, divestments and streamlining operations. But the challenge will be great.

In 2001, OTH posted a net loss of 435 million Egyptian pounds ($94 million), including a write-off of 204 million pounds for its investment in African mobile services provider Telecel. Having won the second Tunisian GSM license in March, OTH struggled to come up with the necessary cash for the license, nearly losing it and drawing attention to underlying financial difficulties. "OTH is overloaded with debt," says Hussein Abdel-Halim, head of research at Sigma Securities.

Orascom Telecom, one of the many Orascom companies, is 60 percent owned by Egypt's Sawiris family. Remaining OTH shares are publicly traded on the Cairo and Alexandria bourses and on the London Stock Exchange. The five key Orascom companies are OTH, Orascom Construction Industries, Orascom Projects & Tourism Developments, Orascom Hotel Holdings and Orascom Technology Systems.

OTH is the largest GSM network operator in the Middle East, Africa and the Indian subcontinent, with 18 licenses covering the region, including Algeria, Egypt, Jordan, Pakistan, Syria, Tunisia and Yemen. The group has other subsidiaries in the areas of Internet and satellite technologies.

For OTH, expensive license acquisitions - including $737 million for Algeria and $454 million for Tunisia - have contributed to a ballooning debt balance. These licenses are paid in two installments. The first Algerian payment was made in February this year and the second is payable at the end of 2003. "They clearly spent too much on the license fees for Algeria and Tunisia," says Abdel-Halim. OTH also has heavy foreign currency exposure because of license fee debts, particularly with its Egyptian mobile service provider, MobiNil. "The devaluation of the Egyptian pound against the dollar has hit OTH hard," says Abdel-Halim. "It is exposed because a lot of its subsidiaries are dealing in local currencies."

OTH gained initial financial clout with the oversubscribed IPO in London and Cairo in July 2000, and a syndicated loan arranged with Citibank and Chase Manhattan. OTH has slowed down a little in 2002. "During the year 2002, OT has only acquired the Tunisian license with a limited equity stake of 35 percent," says Jean Baptiste de Boissière, OTH's chief executive. "In the past, we funded our licenses through debt, an approach which was prevalent throughout the telecom sector."

That's a fair reflection on the global telecom sector; however, operators in developed countries that have accumulated debt arguably have more assured revenue streams and less currency exposure.

De Boissière says measures have been taken to restructure the balance sheet and decrease debt levels. This includes preparing for a capital increase and the divestiture of Telecel. OTH's Telecel debt alone is close to $300 million. "We are also addressing the need to restructure our short-term loans," says de Boissière, "by reaching agreements with our main suppliers to roll over our liabilities."

The divestiture of Telecel was a significant first step. OTH acquired 80 percent of Telecel in early 2000 in a deal that valued the African operator at about $520 million. The fact that it hived off a chunk of Telecel after just two years indicates the severity of OTH's financial squeeze. Abdel-Halim reckons the price OTH got for Telecel is fair.

"Our first and most important challenge is to increase the level of profitability in all our operations," says de Boissière. The group aims to increase its earnings margin from 40 percent to 45 percent. OTH is also looking to reinforce synergies and economies of scale in the region. It has had some success, implementing a consistent purchasing policy for network equipment for the whole group.

"We have also succeeded in developing an inter-service company policy, whereby the operations can benefit from each other's areas of expertise and strengths," says de Boissière. "The third challenge is to prepare ourselves for new business development opportunities without having at this stage to draw on the company's financial resources. This can be achieved through management agreements with investors' consortia."

Dealing with foreign currency exposure is problematic. "It is very difficult to cope with currency devaluation, because there are no hedging mechanisms for the Egyptian pound," says de Boissière. OTH has taken some steps to compensate. In 2001, it reimbursed its syndication loan from Citibank and Chase Manhattan and replaced it with bilateral Egyptian pound-denominated loans.

Outside Egypt, the currency situation is better. "Our other subsidiaries in the [Middle East and North Africa] and Pakistan regions have strong currencies. Thus, this problem only prevails in Egypt," says de Boissière. In Jordan (Fastlink) and Pakistan (MobiLink), the debt is in local currency. In Algeria, the debt is in local currency for the moment. In Egypt, MobiNil's debt is mostly dollar-denominated.

Debt aside, OTH is poised to take a commanding regional position. There is no other Arab regional operator, and foreign players like France Telecom, Orange and Telefónica have not yet picked up enough licenses to be considered regional players. Other OTH strengths included a seasoned multicultural management team, and strong interaction between the holding and subsidiary companies.

The group also enjoys more debt maneuverability than others on account of the support of the Orascom group. "Although Orascom companies are totally separate entities, the Sawiris brothers back each other up. Even though OTH is stretched financially, there is no doubt it is capable of honoring its financial obligations," says Sameh Banany, a vice president at Arab Banking Corporation Egypt. "Because of the shareholder structure, from a credit point of view some banks deal with the Orascom companies and Sawiris family as one group."

GSM license operators need to be considered in the context of the timeframes of their respective agreements; Orascom's Tunisian license, for example, is for 15 years. OTH must weather the economic storm that is battering all companies in the region, particularly in Egypt, and also bear the burden of debt. But in the medium-term, OTH is in a favorable position.

In a recent interview, Naguib Sawiris said that, following the success of MobiNil, "I decided the timing was correct to go and conquer this part of the world before the multinationals and international operators think of doing the same." De Boissière says this regional focus is a great strength: "We are expecting many opportunities to arise in this region within the relatively near future."

According to the standard formula for success, emerging market investors balance emerging market risk with stable operations in developed markets. OTH is exclusively an emerging market operator. The upside is that OTH has turned itself into an emerging market specialist that can successfully exploit opportunities others would shy away from.

Despite problems on its doorsteps in Afghanistan and Kashmir, Orascom's MobiLink operation in Pakistan puts that risk into context. "The operation is doing very well; they have reached around 700,000 subscribers," says Manal Abdel Hamid, OTH's public relations manager. The group recently increased its stake in MobiLink from 69 percent to 89 percent.

Syria demonstrates the downside of emerging market risk. "They gained regional presence from investing in Syria, but otherwise it is a dubious investment climate," says Abdel-Halim of the OTH stake in SyriaTel. OTH took a 25 percent stake in SyriaTel, which launched in February 2001. The concession was awarded to the consortium (Drex/OT) on the basis of a build-operate-transfer contract, where the Syrian government is entitled to receive a percentage of revenues. OTH shared an agreement with a Syrian partner for joint management.

In April, OTH said the Syrian partner tried to take full control of SyriaTel, beginning with a bid to assume sole control of the company's bank accounts - in violation of the partnership agreement. OTH representative Imad Farid left SyriaTel in April after two judges were appointed to run the company as the dispute was heating up. OTH decided to pull out and sell 690,000 of its 720,000 shares in SyriaTel to Cylotel. Given that the SyriaTel investment represents less than 1.2 percent of OTH total investments, the loss of the Syrian market is no big deal.

Financial difficulties almost cost OTH its Tunisian license. OTH requested delays on a number of occasions, saying it needed more time in which to raise the necessary funds. The tender agreement, meanwhile, stipulated that the license fee was to be paid in two tranches, one upon the signing of the deal, initially set for April 27th, and the second some time before the end of 2002.

Almost two weeks past the deadline for the first installment, OTH received an ultimatum to pay up in three days or lose the license. The first installment of $227 million was duly deposited on May 12th. Despite these jitters, de Boissière says that OTH is on target to begin GSM services in Tunisia. But the incident indicates the extent to which OTH is treading a fine line in the country.

At $1,700 in 2000, Algeria has lower GDP per capita than Tunisia, but a huge population of more than 30 million. According to OTH, the waiting list for mobile services was estimated to be above 500,000, and the number of Algerian subscribers is forecast to reach over 10 million by 2015. Both Tunisia and Algeria look to be capable of delivering rapid growth for OTH in the coming few years.

The cell phone has arguably shaken up the region's markets far more than in developed countries. Landlines are scarce and mobile phone subscriptions eat into modest budgets. Egypt's economic woes are often blamed on the mobile telephone - heads of family sacrifice precious household income on the status symbol. But there are a string of arguments in support of the positive economic impact of mobile telephones.

In February, the Egyptian ambassador to Algeria, Abdel Moneim A. Seoudi, said, "the contribution of [Orascom's Algerian mobile network operation] Djezzy GSM to Algeria can be measured in terms of jobs creation, foreign direct investment and indirect job development by the enterprises that support the operation."
The Orascom group returned to profitability in the first quarter of 2002, posting a net profit of 3.1 million Egyptian pounds. Total subscribers reached 4.41 million, a nine percent increase on the last quarter of 2001. The increase in subscribers was reflected in an increase in turnover: from 757 million pounds to 1.15 billion pounds, a 52 percent increase.

From 2001 to 2002, earnings growth has been the strongest on record with group earnings jumping from 236 million Egyptian pounds in the first quarter of 2001 to 467 million pounds in the first quarter of 2002, a 98 percent increase.

But the good news is tinged with bad. OTH has reportedly failed to pay the first installment to Motorola for the acquisition of Motorola's 29 percent share in Egyptian cellular operator MobiNil. The $101 million deal was completed in January 2001, and the first payment was due in January 2002. The companies are reportedly negotiating to reschedule the payment terms.
"The road to becoming a regional operator is not an easy one," admits Jean Baptiste de Boissière.

"Access to financing has become extremely difficult because of the crisis of telecoms worldwide, and sometimes we operate in markets, like Syria, where our rights as international and Arab investors have been disregarded. Yet we are confident that these difficulties will be overcome, and that the extremely attractive prospects of the GSM business in the region will become reality."