Vodafone squeezed in Egypt as partner turns rival

Reuters

Vodafone Group Plc is getting squeezed in Egypt as its state-backed partner embarks on a solo push into wireless services — crowding the market with a fourth provider while potentially leaving its U.K.-based ally to fend for itself.
To finance its own network, Telecom Egypt may sell its 45 percent stake in an existing venture with Vodafone, according to two analysts who have been briefed by the company. The options range from an initial public offering of the stake, transferring it elsewhere in the government or finding a private buyer.
Whatever the outcome, Vodafone’s position won’t be the same. The venture, Vodafone Egypt, is now the country’s biggest wireless provider with a 41 percent market share.
Telecom Egypt, which won its own 4G licenses this month, will be a fourth competitor working with the latest technology. In the best-case result Vodafone Egypt will find a new government partner or IPO the stake. A private buyer would want control, so Vodafone might have to decide whether to buy the stake or sell out and exit the country.
“Vodafone likes having Telecom Egypt as a partner because it gives them a tie to the government,” said James Ratzer, an analyst at New Street Research LLP. “They are likely to want to recreate this situation” with a new partner, he said.
Vodafone Group’s spokesman Ben Padovan declined to comment on his company’s plans, as did Telecom Egypt’s Mohamed Kamal.
The emergence of a government-controlled rival and the entry of a fourth market competitor limits Vodafone’s prospects for long-term growth after nearly two decades in Egypt. Vodafone Egypt also faces a deadline to decide whether to also seek a 4G license — without knowing what Telecom Egypt wants to do with the Vodafone Egypt stake, which was valued at about $1.7 billion in June by Cairo-based investment bank Naeem Holding.
Telecom Egypt, 80 percent owned by the government, has said it is studying what to do with its stake in Vodafone Egypt. Telecom Egypt management has said it won’t maintain the Vodafone stake and “won’t duplicate investments in mobile,” said Ahmed Adel, lead telecom analyst at Beltone Financial. Both companies are expected to reach an agreement by which Telecom Egypt would surrender its representation on Vodafone Egypt’s board, he said. “I think they are just waiting for the proper offer,” Adel said.
Meanwhile, Vodafone and others in the market, Orange SA and Emirates Telecommunications Corp., or Etisalat, have until Thursday to accept offers from Egypt for 4G licenses after Telecom Egypt paid a total of 7.08 billion Egyptian pounds ($800 million) to secure its 4G license and spectrum. All three are likely to participate, said Radwa El-Swaify, head of research at Pharos Holding. Vodafone, Orange and Etisalat all declined to comment on their 4G plans.
“The current situation is worse for Vodafone as compared to before the 4G offerings because of the new competition, but it is now a reality,” said Radwa El-Swaify, head of research at Pharos Holding. With regard to the Vodafone Egypt stake, she said Vodafone will probably wait to see what the government does before making decisions.
Vodafone has some say in determining a new partner. The company has a first-refusal agreement on a sale of the minority holding, and it controls Vodafone Egypt’s board, where any IPO decision would be taken.
For Vodafone to consider exiting Egypt, the company would have to get a generous offer with a compelling valuation, said Omar Maher, an EFG-Hermes Telecom analyst.
“They are sitting on cash they need to invest and they were looking at Egypt as one of the options where they can expand,” Maher said.
Telecom Egypt’s entrance won’t have a severe impact on its rivals’ margins until it secures significant market share, which will take a few years to happen, Beltone’s Adel said. “It will take double efforts to acquire new subscribers, then introduce 4G services to them,” Adel said.