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by katherine green the little telco goes to market it’s an incontrovertible fact in the investment world: over the last decade, the technology, media and telecoms (tmt) sector has provided equity investors with unparalleled wealth-generating opportunities. tmt stocks made a more-than-significant contribution to the longest bull market in the united states’ equity history. locally, the soaring early fortunes of mobinil typified the late-1990s climate for telecom stocks. recently, however, a rather different picture has characterized the industry. now, many companies are barely keeping their heads above water. as credit suisse first boston put it in a telecoms report for 2000, "there are but three certainties in life: death, taxes and the long-term decline of the telecom sector." take the world’s most widely publicized initial public offering (ipo) this year. france telecom’s mobile-phone subsidiary, orange, is about to float 15 percent of its shares on the london and paris stock exchanges. orange has been valued at 55.2 billion to 64.8 billion euros ($51.6 billion to $60.5 billion), less than half the market capitalization originally forecast when the company published its ipo prospectus in may last year. since then, range values have plummeted still further. the sharp fall in orange’s value illustrates the extent to which enthusiasm has dwindled for telecom stocks over the last 12 months. the discount that has been necessary to ensure the success of the ipo will surely sound alarm bells for germany’s deutsche telekom, the netherlands’ kpn and british telecom, which are all planning to bring their wireless divisions to the market in the next year. the question now on investors’ lips is whether emerging markets will soak up the negative vibes, or whether their relative underdevelopment will actually serve to protect them from the global tide of pessimism. for telecom egypt, which had planned an offering to international as well as local markets, the knock-on effect was plain to see. late last year, the government put the promised offering of 20 percent of the national fixed-line telephony operator on a backburner after bookrunners deemed local and foreign market conditions unfavorable. according to the msci index series, world markets lost some 14 percent of their value in 2000, with a particular slump in telecoms and other "new-economy" stocks. such international currents can make or break an ipo. but a local listing, as opposed to a dual listing, would not necessarily have had any greater chance of success. as mohamed mostafa, an analyst at investia holdings, explained, "only months after the successful listing of orascom telecom [in july], the local market would certainly not have supported the telecom egypt share." hostile waters more often, however, internal conditions determine the rise or fall of middle eastern telecom stocks. in july 2000, when turkish cellular-phone operator turkcell hit the market with an offering, analysts expressed skepticism regarding the wisdom of its timing. summer historically sees the lowest trading volumes in turkey. "the weeks prior to turkcell’s first trading day were real sleepers," said matthew ferry, toprak securities’ director of international capital markets sales and trading for the united states and middle east. but the ipo turned the summer of 2000 into an exceptional season. "as investors anted up the primary capital, it was as if you could hear a giant sucking noise." turkcell was initially well received by investors, rising rapidly from its trl 44,000 ($0.07) per share opening price. the stock might have recorded greater gains had it not been for the 10 percent per session price-rise limit on the istanbul stock exchange. the momentum did not last, however, and turkcell soon fell victim to turkey’s slide into financial crisis. a $7.5 billion loan from the international monetary fund narrowly rescued the country from imminent calamity, but was conditional upon adherence to an austere program of disinflation and banking reform. "you’ll have to remember that in november and december 2000, no one knew if turkey could stick to its net asset corridor commitment," ferry said. "investors were shaken by the idea of turkey stepping off the imf stand-by track." a flood of foreign money left the benchmark ise national 100 as investors redirected funds to companies with less country risk, and turkcell’s price plummeted. meanwhile, a tender for a 20-percent stake in the state-owned turk telecom expired late last year without bidders. but now, with turkey climbing back out of the fissure created by last december’s financial quake, its prime ministry privatization administration is trying to instill new confidence for a larger, 33-percent float of turk telekom. the number of gsm subscribers in turkey has risen from 7.5 million in 1999 to 13 million in 2000 and is expected to reach 28 million by the end of 2003, according to the state institute for statistical data. yet despite this enormous market potential, investors are hardly queuing up for a slice of the turk telekom pie. turkey’s department of transportation, which also administers telecoms, strongly opposes the sale of a majority stake, and the government is proving unwilling to grant management rights to minority shareholders. "investors are just not willing to work with the government on this one," ferry said. logistics aside, the determining factor remains turkey’s ability to get back on track and assure investors that their trust in the country’s capital markets will pay off. this will be particularly tricky where foreign institutional investors are concerned. "overseas primary takers on the turkcell ipo were burned," ferry explained, "and their investments need to stabilize and appreciate before sufficient demand could be generated [for turk telecom]." israel has a similar story to tell. its telecommunications market was worth $4.3 billion in 1999, according to the israeli ministry of communications, with total cumulative growth of access lines at 23 percent and cellular market penetration at 54 percent. the national telecommunications firm, bezeq, has been planning the sale of a 50 to 53 percent stake to a controlling investor group, while 45 percent is already publicly traded on the tel aviv stock exchange. but since the outbreak of renewed israeli-palestinian violence, foreign investors in particular have deemed israel risky investment territory. as oren leider, bezeq’s chief financial officer, said at a november telecoms conference: "you cannot sell 900 million shekels of straight equity of bezeq in the israeli market right now. if we want to sell straight equity on such a scale, it will have to be out of israel. and presently that possibility is damaged." nor will privatization be at the top of the newly elected israeli government’s agenda. given the present state of emergency, "bezeq is yet again on hold," haaretz newspaper said on february 7. buoyant markets at least a few of the region’s markets are set to prove the skeptics wrong. morocco has been suffering since july 1999, when a capital gains tax was introduced for local retail investors. not that the scale of the tax, set at 10 percent, was exorbitant, but the timing coincided with the redeployment of foreign investment away from emerging markets in the wake of the asian crisis. without foreign confidence in the moroccan market, local investors remained indisposed. the casablanca stock exchange shed a massive 18 percent of its value during 2000, and daily turnover dwindled to $3-4 million, compared to $15-20 million in the market’s peak of 1997. but french conglomerate vivendi’s purchase of a 35-percent stake in maroc telecom at the end of december 2000 prompted renewed interest in the state-owned telecom firm. furthermore, the terms of sale require that a flotation of the remainder of maroc telecom – hitherto ridden with delays and withdrawals – would have to take place within 18 months. despite the government’s tardiness so far, there is renewed confidence in the government’s commitment to privatization. finance minister fathallah oualalou is expected to disclose a series of measures to bring fresh paper and investments to the bourse in the near future, making it all the more likely that an ipo of maroc telecom will be enthusiastically received. though concerns remain over subsequent purchasing rights, vivendi’s internet and multimedia strengths certainly bode well for maroc telecom’s future. egypt, meanwhile, is maturing into a sound financial and technological presence in the region. while the days of mobinil reaching heights of £e 190 are definitely over, local telecoms are proving their resilience, and now appear to be leading the way to a more fruitful 2001. since its launch in 1998, mobinil has more than doubled its subscribers, for a total of 1.21 million last year. its only domestic rival, click gsm, has another million customers. mobinil posted a 105-percent increase in unaudited net profits last year, with the final figure of £e 289.13 million ($74.89 million) surpassing analysts’ forecasts for net profits of £e 225-250 million. this success translated into a relatively high volume of transactions during the last week of january for the whole of egypt’s telecoms sector, including the recently listed orascom telecom (ot). despite unexpected net losses in its third-quarter results, amounting to £e 15.8 million for the period ending in september 2000, analysts are unanimous that ot is set for further successes. according to yasser abou-zeid, senior investment analyst at investia, ot "is a fundamentally strong share, and this year should see better performance than last – especially when it transfers its debt from us dollars to egyptian pounds," a move expected later this year. "this will have a positive impact on ot’s income statement. its present level of foreign debt is a bit risky these days – even after the new monetary regulatory impositions by the central bank." the company’s ipo was certainly a success, given a year in which emerging markets grouped together lost 30 percent and egypt lost 46 percent. moreover, its losses and foreign debt are hardly surprising given its aggressive expansion strategy, with ventures in africa, pakistan and the middle east. ot now has licenses and joint ventures in 20 countries and serves 1.7 million subscribers. now, click is planning an imminent ipo, under the guidance of efg-hermes’ investment banking division. while details of the float have yet to be disclosed, the management’s intention of coming to the market – against strong competition – indicates confidence that investors’ appetite for telecoms is returning. the national fixed-line monopoly cannot be left out of the equation either. the government recently announced that it wishes to sell a sizeable stake of telecom egypt to a strategic investor, in order that the company can be restructured and prepared for an offering to the public. telecom egypt was expected to float its shares last october, but is now determined to wait until a "fair market value" can be reached. still, that opportunity may not be far off, given the government’s confidence that egypt has overcome the economic difficulties of the past three years, which prime minister atef ebeid recently referred to as "merely a temporary crisis." lebanon, too, is making initial inroads to prepare its telecom sector for privatization. the government, in need of funds to counter its $23 billion in public debt, hopes that the time is approaching for a more enthusiastic reception for telecom paper. current draft legislation aims at liberalizing the state-owned sector, improving its competitiveness, and merging some ministry departments with the state-owned fixed-line operator, ogero, to create libnan telecom. libnan telecom has been slated for privatization next year. jordan is also likely to come to the market within two years, with a partial offering of jordan telecom. research published in january by the technology-oriented multinational siemens suggests that the number of new mobile-phone users in the gulf and levant will reach 1.4 million by the end of the year. according to the report, "the prospects for the middle east as a whole are phenomenal." penetration growth for mobile phones in the region stands at around 12 percent – leaving ample room for telecom companies to grow. submerged in 3g debt one of the main preoccupations for telecoms in europe and the united states is the debt burden of "third generation" (3g) mobile infrastructure and licenses. in january, france became the fourth country – after italy, austria and switzerland – in which interest in 3g licenses has stalled. wild bidding had driven prices for 3g licenses well beyond economic reality in britain and germany. but when bidding closed on january 31 for the four french licenses, only two firms had submitted offers. one contestant, bouygues telecom, had dropped out amid concerns about the high costs of licenses and infrastructure to support 3g mobile networks. the bank of england, meanwhile, announced an increasing risk of financial instability in credit markets as a result of telecom debt. the bank reported that one fifth of borrowing from the syndicated loans market – amounting to £96.5 billion ($139.9 billion) for the third quarter of 2000 – was attributable to telecom debt, against 6 percent over the previous four years. the arab world’s telecoms can therefore be thankful for their relative underdevelopment, and their consequent debtlessness. most emerging-market countries are still concentrating on land-line access, while stimulating infant cellular-phone sectors. the very potential of eastern european, middle eastern and african telecoms, arguably, lies in their rudimentary nature. poland provides perhaps the best illustration. previously hindered by cold war politics, poland is very much on a steady road to recovery. poland’s ministry of treasury, which began the privatization of telekomunikacja polska s.a. (tpsa) in 1998, has floated 15 percent of the company, given employees another 15 percent, and sold 35 percent to a consortium led by france telecom. while the consortium has an option to pick up another 10 percent, the third quarter of 2001 will likely see a secondary offering of a further 16 percent, according to tpsa’s director of investor relations, zenon komar. describing the company as "pretty steadfast," komar also appeared positive about prospects for the sector as a whole. "the climate for a telecommunications company [in poland] appears very nice," he told an international gathering of industry specialists. "[tpsa] is a bargain, with earnings growing at 22 percent and revenue growth of over 20 percent. it is not a value play, it is a growth story." the new great game international telecom giants were among the first to realize the potential of underdeveloped markets. with their home markets becoming saturated and overvalued, their attention is being diverted instead to the middle east, sub-saharan africa and latin america. france telecom has been the inaugural "telecom imperialist," with majority stakes in jordan telecom, mobinil and tpsa. telecom italia, too, has made forays into emerging markets. in december 2000, the company paid $820 million to take control of the chilean fixed-line operator, empresa nacional de telecommunicaciones. regional player orascom telecom has expanded its frontiers to include almost everywhere from chad to pakistan. ot recently won a syrian gsm mobile-phone license on a 15-year contract, and is intending to make further investments in sudan, cameroon and kenya. the strategy of investing in countries that stand out because of their weak economies can only be favorable for ot’s growth. "weak economies and low per capita incomes have in the past implied low teledensity – leaving ample opportunities for telecom companies," mostafa said. orascom has found gsm – which appears to be approaching obsolescence in western europe – a tremendous growth area in less developed economies. ot attracted around 300,000 subscribers in cote d’ivoire in the space of a year, according to manal abd el hameed, the company’s head of press relations. "how poor the fixed lines are in a country determines the potential for gsm," she explained. "wireless communication becomes the only way people have access to a line, which is why we are seeing so much demand." ot’s target markets are "in a different realm, at a different phase entirely" from those of developed countries, abd el hameed explained, adding that the company is optimistic about future growth. "being from the middle east and african region means we can understand the markets, putting us in a good position to capitalize on the potential." market-targeting aside, many analysts believe that consolidation will be the way forward for telecoms. eventually, they argue, only five or six giants will control the world telecom scene. the expansion by established players into less developed markets is part of that trend. "there is most definitely the appetite for telecoms, but globally the giants are digesting recent acquisitions." ferry said. before long, however, those giants are sure to be looking further afield for new market share. those countries that can resist the tempation of protectionist measures, then, can expect a flood of foreign investment. the author is an employee of investia holdings for financial investments. |
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