Heavy Lies the Crown

Orascom Telecom, led by CEO Khaled Bichara, tops the bt100 once again. But the coming year is shaping up as a major test for the country’smost resilient company.

By Nadine El Sayed

Since the dawn of the bt100, Orascom Telecom (OT) has reigned supreme atop our list, deftly navigating obstacles like fierce local competition, hostile foreign regulators and a massive debt load.

But the last year has been an especially tumultuous one for the telecom giant. Profits fell by a quarter. Growth in the domestic mobile market slowed. And the company became locked in a bitter dispute with the Algerian government over the future of Djezzy, its prized foreign unit.

For the first time in nearly a decade, industry analysts aren’t quite sure what the future holds for OT. With rampant speculation of asset sales, some say the company could look dramatically different in the next year.

But one thing is for certain: You should never underestimate OT. Last year, it managed to bury the hatchet on a three-year dispute with France Telecom (FT) over Mobinil, expanded into Canada and pushed even deeper into perhaps the least business friendly-country in the world, North Korea.

Those are some of the reasons CEO Khaled Bichara says he isn’t overly worried about the tempest in Algiers.

“Our strategy isn’t geographically bound,” he said during an exclusive interview with Business Today. “We are a global operator. So any opportunity, anywhere — we will look at it.”

Red Card

Still, the Problem in Algeria remains a major sticking point, and something that even the most perceptive analysts couldn’t see coming. Violence that erupted in November surrounding an Egypt-Algeria World Cup qualifying match damaged relations between the two countries. Ambassadors were recalled, individuals injured and businesses ransacked. Amidst the mounting tensions, OT’s Algerian branch Djezzy posted a net loss of $46 million (LE 253 million) for 4Q2009, plus an additional $41 million (LE 225.5 million) it claimed in property damages from football rioting.

Shortly after the match, the Algerian government fined OT’s highest earning subsidiary $597 million (LE 3.28 billion) in back taxes for the years 2005-2007, a claim which OT disputes but was forced to pay in full this April.

Then came rumors that OT was in talks with South African operator MTN to sell its African assets, including Djezzy. On June 2, OT Chairman Naguib Sawiris confirmed a $7.8 billion (LE 42.9 billion) offer from MTN for the Algerian unit. But citing a 2009 law, Algerian Trade Minister Hachemi Djaboub said “the Algerian state holds to its right of pre-emption over the sale of Djezzy [...] and will not allow its purchase by the South African firm MTN.”

Taking Djezzy off the table makes African asset sales far less appealing to potential buyers. In a June 9 press release, OT announced the dissolution of talks with MTN. Additionally, OT CEO Khaled Bichara confirmed that the company is no longer searching for a buyer for operations in African markets.

But the antagonism surrounding OT’s Algerian operation has made for an untenable business environment. OT’s net profits fell 25% in 2009 compared to the previous year, weighed down by a sub-par performance from Djezzy. Investors too are becoming anxious over the fate of the Algerian unit; OT share prices fell almost 18% during 2009.

There appear to be two options for OT: Sell Djezzy to Algiers or continue operating it. It’s highly unlikely that the Algerian government will be willing to pay a premium for the unit, but if the situation deteriorates further, the crown jewel of OT operations is likely to be tarnished.

Industry analysts have come out in favor of a sale. “Given the unfriendly investment environment in Algeria, it doesn’t look like it is a good option for OT to stay. It won’t be value accretive under the current circumstances,” says Sally Gerges, telecoms analyst at Beltone Financial.

But accepting a low offer from Algiers is hardly an ideal situation. If reconciliation is possible, it may be the best way forward. “If we are welcomed, we are willing to stay. If not, then we will sell because it is a big business and we can’t be there unless we are welcomed,” Bichara says.

One of the few things that is certain is that OT needs a new Algerian strategy, and soon. News from the collapse of the MTN deal set off a wave of profit taking and sent OT stocks down nearly 7% in a single day.

“OT’s key trigger is Algeria. Once that is solved, OT will see a boost in performance and stock price,” says Walaa Hazem, HC Securities’ vice president of asset management.

Mobinil Reunion

Another major development of 2010 was the resolution of a three-year dispute with FT over jointly-held Mobinil.

The two shareholders became embroiled in a lengthy buyout row that stemmed from strategic differences concerning the direction of Egypt’s largest mobile operator.

“We are a communication company, but we weren’t communicating enough,” says Bichara of the dispute. The negative impact resulting from the highly publicized conflict provided a catalyst for a new round of negotiations, he says.

“Those dynamics helped us decide that this was the time to fix it.”

Under the guidance of the Egyptian government, FT and OT came to an agreement this April. While no major structural changes are slated to take place within the company, OT agreed to sell its internet service provider LinkDotNet, which, according to company figures, controls a 32% market share, to Mobinil.

Following a global trend of integrated ISP mobile services, the move is intended to expand Mobinil’s penetration in a competitive marketplace. “Mobinil has to have an internet provider, all it’s competitors have one,” says Hazem.

It’s a natural move for a company that has been on a campaign to liquidate non-core assets in recent years. In November 2008, OT announced the sale of its service company OrasInvest to Abu Dhabi Investment for $180 million (LE 990 million), and in January 2009 OT confirmed the $77 million (LE 423.5 million) sale of long-distance carrier M-Link to the Italian group TLC Servizi.

Broad Horizons

With renewed stability in the Egyptian market and a sale likely in Algeria, 2010 may be the year for OT to focus on expanding its global market share. The company has operations spread over four continents, with strongholds in markets as diverse as Canada, North Korea, Greece and Iraq.

It’s also looking at opportunities in Eastern Europe, South America, Asia and Europe, says Bichara.

Analysts have speculated that OT may be poised to make similar moves on Poland’s Polkomtel and Serb