By Mariya Petkova
It’s six months into 2010, and already Orascom Telecom has wracked up a year’s worth of banner headlines. Ramadan musalsalat (series) don’t have as much drama as the Sawiris family’s top company.
First, there was the well-publicized feud with the Algerian government that saw Orascom slapped with an almost $600 million (LE 3.3 billion) bill for back taxes.
Then there was, finally, an end to the company’s epic three-year dispute with France Telecom over the firms’ joint ownership of Mobinil.
And now, there is a conflict that is perhaps the juiciest of all.
As May came to a close, Orascom was reportedly in talks to sell off some of its assets — or possibly merge with — South Africa’s MTN, the biggest telecom company on the continent.
Analysts though, are divided about the prospects for a deal, which is facing several hurdles, not the least of which is a threat by Algiers to nationalize Orascom’s highly profitable Algerian arm, considered a key to the deal.
“If the complications in Algeria [] escalate further, we believe it is possible that MTN could withdraw from the deal altogether,” says Sally Gerges, an analyst at Beltone Financial.
On April 28, days after rumors of a potential deal began swirling, Orascom announced that it was holding talks with MTN over some of its operations. However, the company was silent when it came to discussing exactly which assets were on the table.
A shortage of cash could be pushing Orascom towards a deal, say analysts. The company’s first-quarter profits were down 32%, significantly below projections.
Its most profitable performer, Algeria-based Djezzy, posted $412.5 million (LE 3.2 billion) in revenues, $50 million (LE 275 million) lower than 1Q2009. Djezzy was also handed a $597 million (LE 3.3 billion) fine for back taxes from 2005 through 2007, a bill that Orascom has paid but is disputing in Algerian courts.
Analysts point out that in 2002 overwhelming debt from license acquisitions prompted Orascom to sell its operations in Jordan and Yemen and some of its assets in sub-Saharan Africa.
“We think all African operations [], with the exception of the Egyptian Company for Mobile Services (ECMS, known as Mobinil), are probably on MTN’s wish list,” says Amr Hussein Elalfy, director of research at CI Capital Holding. (He said it was unlikely Orascom would give up Mobinil, in which it owns as 34% stake, after fending off a takeover effort by partner France Telecom.)
But whether Orascom can actually mount an asset sale is in doubt.
As rumors about the Orascom-MTN deal spread at the end of April, the Algerian government was quick to announce its opposition, claiming the first right of refusal and threatening to withdraw Djezzy’s license.
The maneuver has been largely perceived as politically motivated; it followed rising nationalist sentiments stoked by a pair of World Cup qualifying matches between Egypt and Algeria.
Observers say Algiers sees the situation as an opportunity to buy out that country’s biggest mobile operator.
According to Gerges, Djezzy is a key element in the MTN-Orascom negotiations, since it accounts for as much as 37% of Orascom’s total revenues, and any potential deal would most likely include a sale of Djezzy.
Beltone’s prognosis is that a possible acquisition of Djezzy by the Algerian government would be at the lower end of the unit’s valuation.
Orascom might be able to circumvent the Algerian government by putting together a deal through the different holdings that control Djezzy, Mike Millar, head of research at Naeem Brokerage, told Reuters.
But NematAllah Choucri, vice president of research at HC Brokerage, sees another potential, albeit improbable, scenario: “OT could overcome the difficulties in Algeria if MTN acquires OT and not just the African assets.”
Analysts agree that this option, acquiring Orascom Telecom Holdings (OTH), is unlikely.
“If MTN acquires OTH, it may have to bid for minority shareholders’ shares which could imply the delisting of OTH, one the market’s blue chips,” says Choucri. “OTH has a big market cap so this could influence the market’s daily turnover.”
New Horizons
MTN’s interest in buying out OT’s African assets comes from concerns that its own African assets may be maturing.
“MTN is trying to secure growth for the long-run,” says Kaplan, explaining MTN’s motivation to seek a deal with Orascom.
The biggest three MTN operations are in South Africa, Nigeria and Iran. “South Africa is slowing down; it’s quite a saturated and mature market,” says Kaplan. “Nigeria is still growing but the growth is slowing down, so give it two years and Nigeria will become a lot more mature.”
MTN has operations in 21 countries around the world stretching over Africa and Asia.
Although MTN and Orascom share a similar geographical focus, none of their markets overlap, which favors a merger-acquisition deal.
To offset this sluggish growth, the South African telecom is searching for markets with long-term potential.
“MTN is looking at Orascom because Orascom’s got a couple of good markets in it,” says Irnest Kaplan, managing director of Kaplan Equity Analysts in South Africa
“It’s a good company and it’s got a lot of potential.”
Having already gone through one failed merger with Bharti Airtel, India’s biggest mobile operator, MTN might be willing to broker a deal even without Djezzy.
“If Algeria is excluded from this deal [] MTN will re-evaluate and look at the other businesses inside Orascom, and perhaps they’ll be able to get a deal on some of the others,” says Kaplan. “It doesn’t necessarily mean that if Algeria is not in, MTN will walk away.”
Although speculation is rampant, one thing that is certain is that observers are keenly watching what the future will hold for Orascom, which claims 7% of the Egyptian stock exchange market capitalization.
The Egyptian government has not taken any action or issued any statement on the subject. When approached for comment, both the Ministry of Communications and Information Technology and the National Telecom Regulatory Authority refused to discuss the matter. bt
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