TE seeks strategic other

Telecom Egypt is seriously looking for a strategic partner, but will it succeed in making a suitable match? Niveen Wahish investigates
Telecom Egypt (TE) announced this week that it has chosen a consortium, including Merrill Lynch, the Commercial International Bank (CIB), KPMG, and Baker and McKenzie, to serve as advisers on divesting some 20 to 34 per cent of its stock to a strategic investor.
The wholly government-owned company, which holds a monopoly over the operation of fixed telephones lines, is hoping to join forces with a Western telecommunications firm that will provide much-needed technology transfer and capital.
"In less than three months we will know who we will be negotiating with and we hope to conclude the negotiations in six months." Akil Beshir, TE chairman, told Al-Ahram Weekly. However, if TE does not find a suitable international partner, who offers both expertise and a good price, it will focus on the alternative of choosing an operator for its GSM network, set to start in 2002 when the exclusivity period for the current two GSM operators expires. According to Beshir, "there is a huge interest in operating TE's GSM network."
The move comes around seven months after TE's plans for an Initial Public Offering (IPO) were suspended because market conditions were not propitious.
"It was the beginning of a bear market," Sherine Moussa, charted financial analyst at the Commercial International Investment Company (CIIC), the investment banking arm of CIB, explained. "Market conditions in Egypt and telecom sentiment worldwide were not encouraging."
While those reasons were enough to justify a postponement of the IPO, a number of other factors suggest that TE's problems are far from exogenous. Moussa pointed out that during the road show for the IPO, investors expressed a preference to see a strategic investor involved in restructuring the company. "They failed to see the company's potential and believed that a strategic partner would represent a confidence vote, since the relatively new management did not have a proven track record yet."
Finding a strategic investor to partner with TE is no easy task, especially at a time when telecom sentiment is still down and most telecom companies are heavily indebted for having spent billions in auctions for third-generation (3G) licenses. "There may be someone who is interested but cannot afford it," Beshir said.
But TE is giving it its best shot. The company's management team has been hard at work to change the company's image from a state-owned to an efficient, market-oriented enterprise. TE's headquarters on Ramses Street has undergone a facelift, the company has adopted a new logo and established a new marketing department.
But the improvement in the quality of services and image alone are insufficient to sell the company. What is more important, according to Beshir, is the valuation of the company's potential growth and penetration, as well as its profitability. Although Egypt's teledensity -- the number of telephone lines per 100 people -- has risen from 1.2 in 1981 to around 10 last year, it still lags far behind some other developing countries. By adding one million lines annually, TE is working hard to achieve the targeted goal of bringing teledensity up to 14 per cent by 2010. Coupled with Beshir's announcement of the intention to modify tariffs, this would give new partners plenty of scope to operate.
But even without tariff reforms, the company has posted enormous profits. In fiscal year 1999/2000, TE recorded revenues of some LE6 billion and around LE1.6 billion in net profits.
Experts believe that in order to tempt investors, the number of shares on sale will have to be sizeable. Mohamed Omran, chairman of Misr Information Services and Trading, a private sector company, believes that negotiators will find it difficult to sell a prospective buyer a stake of less than 51 per cent. "Investors want to hold a majority stake to ensure that the government does not go back on its word in giving them the management of the network and the business," Omran said. TE officials had announced that the strategic partner will be offered a stake ranging between 20 and 34 per cent.
Nonetheless, Omran, whose company works closely with TE, hopes that the company will succeed in securing a partner. "Any addition that will improve TE will reflect on the services we extend to our customers," he said. "A partner with a proven track record will boost both the value and profitability of the company, which will in turn benefit both the government and individual and institutional shareholders."
While hoping to take on a strategic partner, TE has not scrapped its plans for an IPO. A consortium led by ABN AMRO and CIB was chosen as lead managers of the offering's valuation and preparation.
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