Company snapshot

• Date established: 1998

• Main business sectors: Telecommunications

• Main business regions: Algeria, Egypt, Iraq and Tunisia

• Market capitalisation: $13.4bn

• CEO: Naguib Sawiris

The mobile phone operator of choice for 33.4 million people has faced remarkably little competition from the Middle East’s three largest telecommunications operators: Saudi Telecom, the UAE’s Etisalat and Kuwait’s Zain. Orascom Telecom has shared its largest market, Egypt, with only one other operator, Vodafone Egypt, since 1998, when both companies paid $516m to operate mobile phone networks using second-generation (2G) technology.

Orascom’s other major market, Algeria, is shared with state-owned operator Algerie Telecom and a subsidiary of Wataniya, one of the region’s smaller operators. In Tunisia, Orascom’s only competition comes from the state.

But the lack of competition will soon come to an end. Etisalat, the UAE-based operator, has already entered the Egyptian market. Although it only launched in May, Etisalat Misr has already signed up 3 million customers. Orascom’s Egyptian subsidiary, Mobinil, has responded by slashing prices, causing massive growth in the number of customers. At the end of September, Mobinil had 13.7 million customers, 69 per cent more than a year ago.

Orascom’s Iraqi subsidiary is now in direct competition with Zain and Qatar’s Qtel, and its Algerian business could also soon face greater competition. The Algerian government plans to sell off a strategic stake in Algerie Telecom by the end of 2008. Etisalat, Zain and Qtel have all expressed an interest.

Structure

Orascom Telecom is controlled by the Sawiris family through a 51 per cent controlling stake held by the family’s investment arm, Weather Investments. Naguib Sawiris, the figurehead of Weather, is chief executive officer and chairman of Orascom Telecom, where he ensures that the family retains direct control over the business.

Sawiris uses Orascom Telecom to hold some of the family’s telecommunications assets in emerging markets. It owns operators in Bangladesh, Pakistan and Zimbabwe, as well as its four Arab markets. He has also been buying operators in developed markets through Weather Investments.

The company owns Wind Telecommunicazioni, Italy’s third-largest mobile phone operator, and Wind Hellas, a Greek mobile operator.

The family has yet to use Weather to create synergies between its assets, but that too could change. In October, Sawiris revealed he was in talks with two private equity companies that want to buy a 12 per cent stake in Weather. The US’ Blackstone and Apax Partners from the UK are thought to be willing to pay $1.7bn in total for the stake. The private equity groups would need to meet a high internal rate of return to justify their investment in Weather.

Operations

Orascom’s business model is different to those of the big Gulf operators. Saudi Telecom, Etisalat, Zain, Qtel, and even Wataniya, all have one or more operations in mature markets where the operators have to grow their businesses by offering extra services to existing customers.

In markets such as Kuwait, Qatar and the UAE, increasing the average revenue per customer through services such as mobile broadband, email and video messaging is the greatest challenge. Orascom has avoided these markets. Although it was prequalified for the auction of Qatar’s second mobile phone licence, it failed to submit a bid before the September deadline. The company has yet to explain why it pulled out (MEED 18.9.07).

The Egyptian telecommunications company is willing to invest in some of the Middle East’s most challenging markets. Iraq has obvious security problems, but Algeria, Egypt and Tunisia are difficult markets for other reasons. Any operator in the three North African markets has to provide mobile services at low minimum charges. And the operator has to hope that these low charges will attract a large enough number of customers to enable it to make substantial profits in the long term.

"Orascom Telecom enters countries to win new business," says Wael Ziada, telecommunications analyst at an Egyptian bank EFG-Hermes. "It is not interested in piling up cash."

Ambitions

Orascom Telecom wants to be the largest operator in all its markets - just like its competitors - but currently, it only leads in Algeria and Egypt. Its Tunisian subsidiary, Tunisiana, has been second best to Tunisie Telecom since it launched in 2002. Although the gap has narrowed, Tunisie Telecom is still the clear market leader, with 4.2 million customers, or 55 per cent of the market, compared with Tunisiana’s 3.4 million customers. Orascom’s Iraqi subsidiary, Iraqna, is in third place in a market with three licence holders and two smaller operators that have both been trading without licences.

MEED assessment

Since it started expanding in North Africa, Orascom Telecom has pursued a recognisable strategy. In a market with just one other competitor, Orascom gradually builds up its market share. It relies on rising mobile phone penetration to expand its business, profits and revenues.

Once a third operator enters the market, Orascom’s strategy changes. It slashes the price of its tariffs in an attempt to secure its market share before its new competitor can establish a foothold. The Orascom strategy has been most successful in Algeria, where its Djezzy subsidiary is market leader, with 12.5 million customers and a 51 per cent market share.

Mobilis, the mobile brand of Algerie Telecom, has 8.7 million customers and Nedjma, Wataniya’s trading name in Algeria, has just 3.5 million. The strategy has worked so well the Algerian telecommunications regulator has told Djezzy to increase its tariffs to make it easier for the other two operators. Djezzy is contesting the regulator’s decision in the State Supreme Court.

Orascom will have to work harder to make its strategy work as it increasingly competes with the big Gulf operators. Etisalat and Zain have much stronger balance sheets than Wataniya and experience of expanding into other Arab countries despite intense competition.

Iraq: Kurdish partner holds the key

If all was going well, Orascom’s Iraqi business would be a thriving operation with 3.8 million customers and geographical coverage from the Kurdish North to Basra in the south. However, it is not clear whether Orascom has any control over the business.

Naguib Sawiris, chief executive officer and chairman of Orascom Telecom, has a joint venture on paper, with Kurdish business Korek Telecom. The venture was announced shortly after Korek won one of three 15-year licences in August. Orascom Telecom says it will combine its Iraqna business, which covers the central and southern areas of Iraq, with Korek’s operation, which is restricted to the Kurdish north. The joint venture makes geographic sense and provides Orascom with a way back into the market.

Orascom pulled out of bidding for the Iraqi licences when the eventual winners forced up the price of an individual licence to $1.25bn during the auction. Wael Ziada, telecommunications analyst at Egyptian bank EFG-Hermes, argues that the cost of a licence would have climbed higher had Orascom not withdrawn.

"When they went into bidding for the licence, Sawiris said the Gulf operators were extremely aggressive and that is why he thought he would back out,” says Ziada. “He thought the process would go on until licences reached astronomical levels."

According to Ziada, Orascom Telecom’s business model for Iraq would not work if it had to invest $1.25bn in a licence. The joint venture with Korek, however, enables Orascom to cut costs. It plans to close Iraqna’s headquarters in the south of the country and operate out of Korek’s existing headquarters in the north. Korek has a private military force that Orascom can use to reduce its considerable security bill. “One of the reasons why Orascom pulled out of the bidding round was that, at $1.25bn, the licence would never have given the required return on investment,” says Ziada. “With the cost savings, Orascom will meet its criteria.”

That is where the good news ends. It is difficult to tell whether the joint venture, which Ziada says “is still only on paper”, will ever happen. Korek bid for the Iraqi licence in August even though it had far less than $1.25bn to spend on a licence. Unlike most Middle East licence auctions, the process of bidding did not require the companies to prove they had access to sufficient funds to support their bids. Korek took part in the auction knowing that it needed a partner or external financing to pay for its licence. According to Orascom, it will own 70 per cent of the joint venture, with Korek holding the remaining 30 per cent.

Orascom has a clause preventing its share of the company from falling below 51 per cent. The operators are required to pool their assets in the joint venture.

Korek was founded while Saddam Hussein was still in power and the US was policing a no-fly zone in the skies above the Kurdish north.

When the US-led Coalition Provisional Authority awarded three telecommunications licences to Arab operators in 2003, the Kurdish Regional Government (KRG) ignored the central government’s decision and allowed Korek to continue operating. The KRG even prevented Zain (then known as MTC) and Orascom from entering the north by asking them to pay a second licence fee. Both companies refused.

Since the Iraq war, Zain has been the only company to work successfully in partnership with local investors. The other operator to partner with Kurdish investors, Wataniya, was forced out of the country at the end of 2006.

Orascom will need better fortune if it is to succeed with its latest venture.