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TE still waiting on market conditions

te still waiting on “market conditions”

as the government continues to come up with new formulae for unloading sixty-odd public sector loss makers, it also holds stubbornly onto one of its few remaining jewels, national phone company telecom egypt (te).

over the past decade, as the global trend away from state ownership towards private sector oriented economies has gathered momentum, telecoms have consistently been regarded as the el dorados of privatization. “a telecom sell-off would be a milestone in the privatization process of any country,” said mohamed hassouna, financial analysis and donor agencies specialist at the public enterprise office (peo), which spearheads egypt’s privatization process under the auspices of the ministry of public enterprise. “they’re considered highly attractive to both investors and investment banks,” he said.

according to niveen shaheen, head of the technical office in the ministry of industry’s economic unit, “public sector companies are all funded by the ministry of finance to cover operating expenses. but telecoms are different.” how? “te generates money – the company pays for itself. it’s not overburdened with debts, like so many other government companies.”

of all the public sector’s traditional areas of control, the telecom industry probably best illustrates the disadvantages of continued state ownership, as well as the benefits of privatization and deregulation. while the government can get a large infusion of hard currency or debt forgiveness for divesting itself of a guaranteed money maker, the sector as a whole benefits from an infusion of investment into the latest technologies and managerial practices.

the new owners, meanwhile, can look forward to all the revenue accruing from a country’s main communications network. in a word, according to the privatizers, everybody wins.
but telecoms are often at the heart of privatization debates, as opponents to sell-offs are particularly averse to the sale of a national heirloom like a phone network.

delaying the inevitable

so it comes as no surprise that the government has been fighting a rearguard battle for the retention of egypt’s primo telecom ever since 1998, when it converted – as a supposed “first step towards privatization” – the state-owned arento (arab republic of egypt national telecommunications organization) into the joint-stock company telecom egypt.

two years later, in september 2000, the cabinet approved the sale of 20 percent of te via an initial public offering (ipo), with 10 percent of the company offered on the local stock exchange and another 10 percent on international markets. a further 5-percent stake in the company was to be offered to its employees. at the time, information minister safwat sherif declared that the ipo was expected to generate between $1.2 billion and $1.4 billion. the shares were supposed to be offered before the end of the year.

but the government soon did a u-turn, with minister of communications & it ahmed nazif suddenly announcing in november 2000 that the government was “in no hurry to make the offering, as the company is one of [egypt’s] state-owned gems.”

the minister was not without credible reasons for the delay, which he attributed to negative movements of telecom stock prices on international markets (the nasdaq had crashed in march) and regional political uncertainty (the second intifada had erupted in september).

as other sources in the ministry revealed, the government feared that the ipo might fail as spectacularly as the much-heralded turk telecom ipo of september 2000.

whatever the reason, nazif offered no date for the offering. he did, however, mention that his ministry – still, at that point, in its infancy – had set up a three-year, $3 billion plan to upgrade the nation’s telecom infrastructure. in the meantime, he added, te had engaged merrill lynch to help find a suitable western telecom company that would eventually buy up to 34 percent of te’s stock and inject the latest operational expertise.

te’s identity crisis

yet today, the company remains completely in the hands of the government – although you wouldn’t know it to talk to te officials. “te is a private company,” explained company vice president ali salama, adding that “the shareholder is the government, which owns 100 percent.”

to explain the paradox, he clarified: “a difference must be noted between the ownership of a company – which is in government hands – and the company itself, the management.” he went on to explain that the management makes decisions “as if it were a private company,” and that ultimately, te is “working for maximization of shareholder wealth.”

salama illustrated his point with an example: “someone owns a taxi, but hires someone else to drive it. while the taxi owner has the right to sell his taxi or get a partner, the management – the taxi driver – will still try to generate revenue.”

shaheen put it this way: “te is 100 percent government owned, but people working inside the institution have a private sector mentality. but it is a public sector company.”

she went on to explain that, shortly after the ipo delay, the company began to restructure – by improving its technology and providing more services – with eventual privatization in mind.

according to te chairman akil beshir, the company has completed the first phase of its restructuring plan, which included technical upgrades as well as an “adjustment” in its human resources.

firstly, te concluded deals with major international equipment providers, including an agreement with france’s alcatel for upgrading infrastructure and one with siemens of germany to supply te with fixed-line network equipment. september 2002 saw agreements with 12 other international telcos to build a new submarine cable linking southeast asia, the middle east and western europe, in the hope of easing an anticipated bandwidth bottleneck between the three regions.

secondly, in terms of human resources, beshir said, “we’ve adjusted our mix of skills.” to shed some excess labor, he said, the company offered an early retirement plan, which 5,000 employees took up. “meanwhile, we also hired others with skills that the company had been lacking.”

the number of employees fell from 55,000 two years ago to 51,000 currently, which resulted in a doubling of productivity, beshir said. “we’ve also enhanced our marketing – which didn’t exist before – as well as our investor relations,” he said. “we’ve taken those actions that are necessary if you want to go public,” he added, implying that te is still shooting for an ipo.

when can we expect the privatization of a leaner, new-and-improved te? “there’s nothing new to report,” beshir said. “we will do it the moment we find the market conditions are convenient.”

timing’s everything

some observers say te missed its opportunity to launch its ipo back in 2000, when conditions were much better, and that current circumstances offer little hope for an ipo any time soon. “that’s very obvious,” said wael ziada, a telecom analyst at local brokerage house efg-hermes, adding that stock prices and company fundamentals were generally much better in 2000 than they are now. “but they didn’t expect the global equity market to collapse like it did. now, the generous assessment of telecom stocks is no more. they’ve become much riskier.”

te’s salama expressed exasperation with distant and uncontrollable events on the world political stage. “it’s difficult to set a date [for a sale] when the external conditions are beyond your control,” he said.

the problem isn’t merely regional. “market conditions have gotten worse, but it’s a hit the telecom industry worldwide has taken,” he said. “there have been lots of bankruptcies; companies have had to forge several mergers and acquisitions simply in order to survive. all market indicators – both international and regional – are not in good shape.” ultimately, he said, “there’s no reason to sell something that you think is worth a thousand pounds when you can only get 10 pounds for it.”

the jordan-based arab advisors group, a consulting company with a focus on arab telecoms, released a report in september predicting that, given the sad state of the global telecom market, international telecom firms would be unlikely to bid for licenses in the arab world. telecom giants, the report said, would most likely focus on strengthening their financials – by reducing debts and cutting capital expenditure – rather than look at new markets. “i think we are now witnessing a new phase in the arab telecom markets, where global players can no longer afford to penetrate new markets,” said jawad abassi, president of arab advisors.

some stock market players are still hoping for an ipo, if only to re-activate the flagging bourse. but analysts say any such market stimulation would depend largely on the dimensions of the offering.

“generally, an ipo would help the stock market. it would add some volume and probably make money for some investors,” said ziada, pointing to the recent sale by orascom telecom (ot) of its jordanian subsidiary, fastlink (see box). “when ot sold fastlink, the market was activated – things changed overnight.” still, he added, “it would depend on the size of te’s ipo, and the portion to be held by local investors.”

saudi, jordan just do it

despite the oft-cited bad market conditions, two of egypt’s neighbors have recently dared to float shares of their respective state telecoms – saudi telecommunication company (stc) and jordan telecom (jt) – in the rough seas of regional instability and global recession.

on september 9, the saudi cabinet offered 30 percent of stc, which currently enjoys a monopoly on the kingdom’s telephone, mobile and internet services. under the plan, 20 percent was offered to saudi citizens, while another 10 percent was made available to two public pension funds.

the offer closed on january 6, and was more than three times oversubscribed, according to the saudi finance minister, who added that he had received offers totaling 36 billion riyals ($9.6 billion).

with the shares due to be listed on the saudi stock market in february, stc will become the second largest listed company in terms of capitalization, after market leader sabic (saudi basic industries corp.).

while it will not sell further shares immediately, the government announced that it “remains committed to the continued privatization” of the company.

on september 28, three weeks after the announcement of the saudi ipo, jordan’s principle phone provider jt followed suit, with the government offering a 15-percent stake to local and international investors. after the sale, the government’s stake would fall from 52 to 37 percent (making france telecom jt’s largest shareholder).

shares were listed on the amman stock exchange (ase) on november 4 and are expected to raise between $120 million and $150 million. after its listing, jt became the country’s second largest company in terms of market capitalization, after arab bank.

if the saudis and jordanians did it, then, why can’t egypt?

according to ziada, the saudi market is inherently different from the egyptian one. “it’s not correlated to the other markets, because no foreigners are allowed to invest in the saudi market,” he explained. the timing of the saudi ipo, too, was a smart play, he said. “it came at a time when saudis were starting to pull their money out of the us market” due to political friction between the two countries.

jordan’s decision to sell, ziada added, was probably born of desperation. “it’s possible that the government sold jt in order to compensate for a dollar shortfall after a steep drop in tourism,” he said.

and then there were three

another important aspect of te’s future is the fate of its long-promised cellular network, which is expected to eventually compete with egypt’s two existing gsm networks, mobinil and vodafone, perhaps sometime before 2004.

in december, beshir was quoted as saying that the launch of te’s gsm network was proceeding on schedule, and that te was in negotiations with potential partners for the project. the same month saw the end of the moratorium on new entrants to the telecom market, which had protected the two established networks from new entrants.

originally, the government had said that te would not have to pay the approximately £e 1.9 billion for a new gsm operating license – which the state had supposedly retained from when it sold its nascent mobile operations to the egyptian company for mobile services – better known as mobinil – in 1997. but mobinil and click (now vodafone), both of whom had paid for their licenses, objected, insisting that te pay for a license like its competitors.

according to olfat abdel monsef, the director for policies & licensing at the telecoms regulatory authority (tra), the government, after studying the issue, agreed that charging two private entities for the license, while sparing te, could hardly be seen as healthy competition.

so te will pay for its license after all. as it stands now, the sale of the license “has been approved by the [tra’s] board of directors, but hasn’t yet been signed by the concerned parties,” explained abdel monsef. “but,” she added, “it’s in the process. there are still a few things that have to be discussed.”

te’s chief technical officer for gsm, tamer al mahdi, said that the company, “at this stage, is only searching for a strategic partner” for its mobile operation – not an outright buyer. “we are in negotiation with a number of international operators, whose names can’t be revealed at this stage,” he said.

one rumor, put forward in the october 25 edition of the middle east economic digest, contends that mobilkom of austria is being seriously considered. other observers have mentioned the spanish telefonica as a possible candidate.

as for network suppliers, al mahdi said, “we have received proposals... from alcatel, ericsson, motorola, nortel and siemens, which we will select from based on the set technical and commercial criteria.” he reiterated that “the network is not expected to work before the second half of 2003.”

don’t hold your breath

ultimately, investors are left wondering if te will ever be sold off, and if it will ever launch its mobile service. if market conditions were described as “poor” before september 11, 2001 – and before the bush administration’s saddam obsession – how would one describe them now?
shaheen, while insisting that an ipo can still be expected, added that it most probably wouldn’t happen in the foreseeable future. “with the war in iraq,” she said, “nobody knows what’s going to happen.”

adam morrow

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