Debt on the Nile (page 1 of 4)

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.