April has been a lively month for Middle East telecoms. A global system for mobiles (GSM) licence was sold for $2,525 million in Turkey, Saudi Arabia made radical changes to its phone tariff system, internet charges were slashed in Dubai, Egypt's most heavily traded stock - a mobile phone operator - plunged and Lebanon threatened to tear up its two GSM contracts.

The coming months are set to be just as busy as new deals and policy moves follow each other in quick succession.

Across the region, governments have woken up to the fact that they need to transform the telecoms business to keep pace with rapid global changes. The result has been a profusion of new GSM licences, preparations for at least five major privatisation deals involving state-run telephone companies, share offerings by private operators, new laws and new tariff systems for telephone and internet services.

Privatisation

This year started with the conclusion of the first privatisation of a telephone agency in the Arab world, involving the sale of a 40 per cent stake in Jordan Telecommunications Company to a group led by France Telecom for $508 million. By the end of the year, three more deals will be in the pipeline in the region - for Turk Telekom, Telecom Egypt and Maroc Telecom - and there is a good chance that stakes in Saudi Telecommunications Company (STC) and Oman Telecommunications Company (Omantel) will have been sold as well.

The Jordanian deal took several years to put together, and was regarded as somewhat lacking in transparency. Analysts say the prospects for the new deals look healthier.

This is partly because of the close involvement of investment banks in the process.

Analysts give Saudi authorities high marks for the vigour with which they are approaching the STC sale, with JP Morgan playing a very hands-on role as adviser. It is understood that the government was originally inclined to start the process with advice of JP Morgan, is now planning to start with the sale of a strategic stake. The price is expected to be relatively high because of the major investments STC has continued to make in expanding its network with top-of-the-range equipment.

Saudi Arabia's acting Posts, Telegraphs & Telephones Minister Khalid al-Gosaibi was quoted as saying on 18 April that STC is on the point of issuing its first balance sheet, and that a new legal framework for the telecoms system and the creation of a regulatory authority will be complete in the next few months.

Omantel is pursuing a similar path to that of its Saudi neighbour, but with Merrill Lynch working as adviser. Analysts say the legal process in Oman tends to be faster-moving than in Saudi Arabia, and there is a good prospect of a strategic sale going ahead in the autumn.

JP Morgan is advising the Moroccan government on the sale of Maroc Telecom, which, like the two Gulf states, has opted for a strategic sale to precede an IPO. Expressions of interest are due to be submitted by 2 May; the invitation to bid will go out in August. 'The Moroccans have prepared very professionally for this, ' says one adviser pursuing the deal. 'They have a good up-to-date legal environment and a very enthusiastic, young team in the regulatory agency who are eager and quick to learn.' He adds that the sale of a second GSM licence to the Spanish-led Medi Telecom consortium last year provides a big incentive for Maroc Telecom to move fast so it can maintain its edge in the mobiles market.

Egypt is also well advanced in its plans for the privatisation of Telecom Egypt, for which ABN AMRO Rothschild and Commercial International Bank (Egypt) are the financial advisers. However, Egypt has decided to start with an IPO, which will include global depositary receipts (GDRs). The company has a nominal valuation of just over $5,000 million. Analysts say they do not expect to see a significant 20 per cent stake. There is some concern about the lack of any reference to bringing in a strategic partner.

'Why should investors subscribe when the company will have the same management and be lumbered with old equipment and second-grade technology, ' says one Egyptian investment analyst. 'The government has allocated the third GSM licence to Telecom Egypt because it knew that the deal would not fly without it.'

There are no such constraints in Turkey, where a 20 per cent strategic stake in Turk Telekom is going up for sale in June or July. The high price paid for Turkey's third GSM licence is expected to put a premium on the sale of the stake in Turk Telekom, which has a 'sleeping' cellular licence.

Analysts predict the sale could net up to $3,000 million.

Private IPOs

As the big battalions of privatisation are being manoeuvred into place, investors will also have the opportunity this summer to take part in two IPOs being launched by Turkcell, the leading GSM operator in Turkey, and by Egypt's Orascom Telecom, which aspires to become a leading player in the African, Middle East and Asian GSM markets.

The price paid for the third Turkish GSM licence gives a good indication of the value investors place on that market. The winner of (Isbank) and Telecom Italia - quoted more than double the average price of its four competitors, who bid between $1,017 million1,350 million. This had the effect of deterring the four groups from bidding for a fourth licence, as the terms of the sale required bidding to start at the level set for the third licence. The 17 April auction for the fourth licence flopped, after all four bidders withdrew. A fresh auction is now set to be held on 2 May, but it is not clear whether anyone will come up with the required price. Most of the bidders are now expected to turn their attention to the Turk Telekom offering.

Turkcell, owned partly by Finland's Sonera, is planning to offer 15 per cent of its equity in the IPO. Turkcell has a dominant position in the market, with about 70 per cent of the 7 million subscribers. The only concern is that Turkcell's earnings will come under pressure as the Isbank/Telecom Italia group will be forced to adopt highly aggressive tactics to secure the market share needed to justify the high price it paid for its licence.

The IPO for Egypt's Orascom Telecom is due to be launched in the second half of May, with the aim of closing the deal by mid-June. The company is seeking to raise $400 million500 million to help finance its regional expansion. The company's largest asset is its 27 per cent stake in Egyptian Company for Mobile emphasise its broader horizons. 'Orascom Telecom is a regional story, ' says Hassan Heikal of EFG-Hermes, one of the three joint arrangers of the deal. 'The company is involved in 16 GSM operations ranging from Cote d'Ivoire to Pakistan.'

Sherine Moussa of Fleming CIIC strikes a more cautious note. 'The fact remains that more than 50 per cent of Orascom Telecom's value is in MobiNil, and our message to investors is that if they are looking to get into MobiNil it is better to do this directly than going via the Orascom Telecom offering.'

Regulatory risk

In an industry growing and changing as fast as telecoms in the Middle East, there will always be risks for investors. The moves being taken by the Lebanese government against the country's two GSM operators illustrate the dangers.

'Strategic investors are not going to pour in billions of dollars for a stake in a telecoms firm where the main asset is its operating licences if these licences may be taken away on a whim, ' says a lawyer working on a number of deals in the region. 'Investors want to see very detailed licences drawn up, covered by clear and comprehensive laws. The problem in many Middle East countries is that the primary legislation tends to be very short, with the 'meat' contained in the by-laws, which are subject to change.'

FLAG wraps cable around the globe

The explosion of internet use in the Middle East has created huge new opportunities for providers of telecoms services. One company that is already cashing in is FLAG Telecom, which has built a fibre optic cable link between the UK and China, via the Middle East, is nearing completion of an Atlantic link and has just started work on a Pacific cable system.

Set up in the early 1990s by a group of international investors including the Jeddah-based Dallah Albaraka Group, FLAG has just signed the largest single capacity purchase to date on any cable landing in the Middle East. This entailed the midFebruary purchase by Saudi Telecommunications Company of 620 megabits a second (Mbit/s) of capacity between Jeddah and New York. It will run to the UK on the FLAG Europe-Asia link, which started up in November 1997, and then on to the US on leased capacity until the FLAG Atlantic-1 cable enters service in March 2001.

'The Saudi deal is an illustration of how massive the increase in demand from the Middle East has been, almost entirely driven by the internet, ' says FLAG chief operating officer Ed McCormack.

'Over the past two years, the average customer in the region was buying 2 Mbit/s - now that has skyrocketed.' Besides Saudi Arabia, FLAG has regional landings in Egypt, Jordan and the UAE (at Fujairah). Following the Saudi deal, Telecom Egypt signed up for 45 Mbit/s on the cable link to the US. The Egyptian operator is looking to increase this capacity later in the year.

FLAG launched a successful initial public offering (IPO) in January/February, raising $637 million to help finance its ongoing project activity. The sum included $193 million in shares sold by existing shareholders. Bell Atlantic and Dallah Albaraka are still the largest individual shareholders following the IPO. Part of the proceeds were used to repay bank debt being used for the Atlantic project, which is being carried out in joint venture with Global Telesystems Group (GTS), which operates the largest broadband fibre optic network across Europe.

McCormack says the success of the IPO was a simple reflection of the company's success in meeting its financial targets. The company says that in 1999, cumulative sales on the network were over $1,500 million, of which total revenues of $162 million accrued to FLAG. It recorded a net loss of $14.6 million, but reported earnings before interest, taxation, depreciation and amortisation (EBITDA) of $128 million.

FLAG has since announced plans to start construction of the $2,100 million FLAG Pacific-1 cable that will loop 64,500 kilometres round the ocean linking Japan, the west coast of the US and SouthEast Asia. For completion in two years, it will have a protected capacity of 5.1 terabits a second, which McCormack says is nine times that available on the largest existing trans-Pacific cable.

'Once the Pacific cable is finished, Middle East users will have direct access to the east or the west coast of the US, ' says McCormack. 'That will give us much more flexibility in the event of congestion or repairs.'