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August 2006 

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By Mohamed Allouba
Left to right: Minister of Finance and Insurance Youssef Boutros-Ghali, Minister of Communication and IT Tarek Kamel, Prime Minister Ahmed Nazif, NTRA Chairman Amr Badawy and Minister of Investment Mahmoud Mohieldin.
News Focus

A Booster Shot
With a new chairman on board, can Vacsera put a recent corruption scandal behind it and move forward with new production plans that could make it the top supplier of vaccines to the Middle East?

Towards an Informed Society
The NTRA cuts ADSL prices in a bid to meet its ambitious targetof getting more than 500,000 users on high-speed access by 2007

On the Wire
As Egypt continues to roll out the new one-pound coins, some are thinking to the next step: an economy with almost no cash at all

Never Fear a Bear Market
The CASE is about to get bigger with the upcoming introduction of short selling and margin trading

Everyone is a Winner
As SIFE settles into Egypt’s business schools,students are going beyond the classroom to promote entrepreneurship

Sir DigbyJones onWhy theBrits areBuying In
Egypt has pyramids, beautiful beaches and a unique history, but Britain is buying into Egypt for another reason – business

By Mohamed Allouba
Minister of Communication and Information Technology Tarek Kamel

August 2006
Etisalat Wins Third License
After a much anticipated bidding war,Etisalat’s consortium came out ahead — at an unprecedented cost

By Fatima El Saadani

Hania Moheeb

While Americans and VIP Egyptian guests were getting ready for last month’s American independence day celebration in Downtown Cairo on July 4, a celebration of another sort erupted at Smart Village. At 3:15pm, after two hours of heavy bidding, senior government officials told dozens of waiting reporters at the National Telecommunication Regulatory Authority (NTRA) building that they had declared a winner in the race for the highly coveted license to operate the nation’s third mobile network.

Having made the top bid at each of the auction’s three rounds, a consortium led by the UAE’s Etisalat bid a record LE 16.7 billion to compete for a share of the Middle East’s largest mobile market. Analysts say the winning bid is the highest fee paid to date for a third license in the Middle East.

Etisalat’s offer was 17.6% higher than the second-place bid of LE 14.2 billion from Kuwait’s Mobile Telecommunications Co. (MTC).

In fact, Etisalat’s final offer was so unexpectedly high that Prime Minister Ahmed Nazif himself decided to announce the winner — and summoned members of his Cabinet’s Economic Team to join him.

The results, Nazif said, “reflect great confidence in the Egyptian economy.”

In addition to the LE 16.7 billion cash payment, after opening bidding at LE 10.9 billion (the minimum bid was LE 2.5 billion), Etisalat also offered to pay a 6% share of revenues to the state, double the 3% minimum specified in the tender documents.

Etisalat shares closed up nearly 1% as the announcement was made just before the market’s close; the operator’s shares went on to gain 3.8% in the week after the deal was made public. Shares in existing Egyptian operators Mobinil (bt100 number 6, a subsidiary of Orascom Telecom, bt100 number 1) and Vodafone Egypt (bt100 number 5) also climbed in the wake of the auction as investors welcomed the endorsement of Egypt’s economic fundamentals.

Analysts claimed Etisalat had overpaid, leaving its newest subsidiary more financial ground to make up as it prepares to launch operations here next spring, but company officials said they were pleased with their purchase even as word leaked that they were considering selling a stake in the venture to another party.

Maturing mobile market

Etisalat led one of nine consortia bidding for the license after two others were disqualified in pre-auction technical qualifications. The consortium — 66% owned by Etisalat, 20% by Egypt Post, 10% by the National Bank of Egypt and 4% by Commercial International Bank (bt100 number 13) — will build and operate both a GSM/GPRS network and a state-of-the-art 3G high-speed wireless service.

(See sidebars for a list of other consortia and results from the three-stage auction.)

Although Etisalat will likely enjoy a first-to-market advantage with its 3G network, Vodafone has previously said that the new carrier would not be alone in Egypt for long, with its local chairman noting that his group is the largest provider of 3G services in the world. To build a 3G system here, Vodafone and Mobinil would each have to pay an estimated LE 3.34 billion under a formula set by the NTRA based on Etisalat’s payment for its license.

After thanking his partners in the consortium, Etisalat Chairman Mohammad Hassan Omran said, “We are very confident that Egypt is a sound investment, and that the process of licensing and deciding was in favor of the offer that best serves the Egyptian consumer.”

“Etisalat is focused on its expansion goals,” he added, “and on being in a position to pave the way for the new dynamism in the region’s telecommunications industry well into the twenty-first century.” In a later statement, Omran also said that Etisalat remained “open to avenues for cooperation with [losing bidder] Telecom Egypt for opportunities locally, regionally and internationally.”

Etisalat is a growing emerging-markets telecom player with 4.76 million subscribers in more than a dozen markets, including the UAE, Saudi Arabia, Sudan, Pakistan, Tanzania, Benin, Burkina Faso, Gabon, Niger, Togo, Central African Republic, Ivory Coast and Afghanistan.

Etisalat has already arranged financing for its payment through a $3-billion credit facility renewable for one year, Omran said late last month in an interview with Al-Ahram daily. Omran was adamant that he had not overpaid for the license, saying the operator would “keep its prices very competitive and capitalize on Egyptian technical expertise.”

He declined to say how much Etisalat planned to invest in the network, but NTRA Chairman Amr Badawy has previously told bt he estimated that the winner would have to spend at least $200-300 million in its first year of operations.

Price-tag puzzlement

Minister of Communication and Information Technology Tarek Kamel says Etisalat has until August 4 to pay for its license and finalize the paperwork. The launch of the service, which will run on the 011 prefix, “is scheduled for six months later, which means in February 2007,” he adds.

Egyptian industry analysts and partisans from Mobinil and Vodafone have consistently claimed that Etisalat overpaid and that it will take years before it starts seeing profits. Others went so far as to say that it will have to compromise the quality of its network, effectively cutting corners to keep costs low.

But at least one regional telecom analyst disagrees. Andawes Snobar, a senior research analyst with Jordan’s Arab Advisors, told Dow Jones Newswires that, “Egypt is a very fresh market with a 17.5% penetration level. Etisalat’s entrance into this market will drastically raise the bar of competition and, accordingly, competition levels.

“This is a high-standard company that knows how to win its market share, and they know what kind of offers can get them that share. Mobinil and Vodafone should brace themselves for fierce competition.”

Neither of the incumbent operators seems terribly concerned, though — at least not in public. In interviews throughout the fight for the third license, Vodafone Egypt boss Ian Gray has consistently told bt the new operator will “not find either ourselves or Mobinil to be easy competitors.”

Gray and Mobinil chief Alex Shalaby have both said they will compete primarily on service and customer support, not price.

Etisalat’s primary competitive advantages will come from the massive retail presence it now has through partners Egypt Post and National Bank of Egypt, which together have thousands of branches across the nation, giving them a distribution network that compares favorably with Mobinil and Vodafone’s right out of the gate.

With more than 140 years of retail experience, Egypt Post has a network of more than 3,500 branches across the country. “We are delighted to have won the license,” says Egypt Post Chairman Alaa Fahmy, who was the past head of the NTRA. “This is an important investment for Egypt Post and we are confident that with our country-wide experience serving customers, and Etisalat’s state-of-the-art technologies we and our partners will deliver the Egyptian consumer a true value-added service.”

The new operator will also get a boost from regulatory changes the NTRA is about to implement.

“After a lot of research and consultation, we found that some regulations should be introduced to facilitate three basic practices to level the playing field,” says the NTRA’s Badawy. “First, there’s domestic roaming, which will allow the third operator to use the other two networks inside Egypt in locations it does not cover and, as a result, allowing it to attract subscribers from the first day of operations.”

“Secondly, we will allow the sharing of equipment locations with the existing operators, and that should save on the cost of the new network,” Badawy says.

Number portability — the ability to switch carriers without changing your mobile phone number — is also coming, Badawy confirms, but will take some time to implement because “doing so will mean we’ll need a coordinating body or company to manage account switches between the three operators.”

And while the incumbents have all warned against a price war, Badawy says as long as it’s based on free and fair competition — and that no operator begins cross-subsidizing, the practice of selling below cost to gain market share while making up for the difference with profits from abroad — he has no problems with prices going down.

In fact, he says, “we sensed that the prices should be going down, but they were not, so we had to introduce further competition” in the form of a third operator.

The biggest loser?

As the Ministry of Communication and Information Technology prepared to start the race for the third license, Telecom Egypt’s (TE, bt100 number 3) victory seemed a fait accompli to many observers, particularly as the process was delayed at least twice last year to allow the national fixed-line giant to complete its listing on the Cairo and Alexandria Stock Exchange.

TE, which owns a 25.5% stake in Vodafone Egypt, was looking to open new revenue streams after losing its legal monopoly on both fixed-line calls and Egypt’s international-calls gateway. It dropped out at the close of the second round of bidding with a final offer of LE 12.2 billion.

The day after the auction, TE Chairman Akil Beshir held a press conference to reassure investors that he is entirely confident in his company’s growth prospects.

“It is unquestionable that the mobile phone market in Egypt is growing significantly, but it has to make financial sense for us to enter the market as an operator [as opposed to as an equity investor]. We made the right decision by sticking to the price we offered for the license. Doing so was in the best interest of our shareholders.”

Prime Minister Nazif made similar comments when asked whether he was disappointed TE had dropped out.

“Telecom Egypt is a very strong company that can generate solid revenues,” Nazif says. “It can grow on its own, so there’s no real reason to worry about the company. Moreover, Telecom Egypt is already a stakeholder in one of the mobile companies, which means it already exists in the mobile market, and even if it doesn’t expand in that direction, I believe it still has plans for growth in both the landline and wireless markets.”

Beshir says TE is already profiting from its stake in Vodafone and said he will be “negotiating with Vodafone to extend our strategic partnership to a number of services.”

The company, the sole landline operator in Egypt since 1854, is also looking for growth opportunities outside Egypt, particularly in Saudi Arabia. It already has investments in Jordan and operates Algeria’s second fixed-line network in a partnership with Orascom Telecom.

TE shareholders, already battered by the company’s plunging share price, bemoaned the loss. Telecoms analyst Hossam Abu Shamla says TE needs to quickly move past its failed bid and focus on how to face deregulation of the market.

At press time, a spokesman for Etisalat confirmed the company was considering offers to sell somewhere between 10% and 15% of its Egyptian operation, saying a number of firms had shown interest.

“We see it as an opportunity,” spokesman Jaber Al-Janahi told the Khaleej Times. “We are in talks with several bidders, but have not yet chalked out the details of the sale. It’s too early to put a price. We are currently evaluating the capabilities of the bidders.”

The Nine Bidders

Of the nine bidders, four were reportedly disqualified before bidding began for reasons neither the Ministry of Communication and Information Technology nor the National Telecommunication Regulatory Authority had made clear at press time.

Those disqualified included consortia led by TurkCell, TeleNor, Wataniya and MTS. TurkCell later released a statement to the Istanbul Stock Exchange that said, “We joined the auction, but then decided to withdraw from it after we reviewed our business plans.”

Results from the three stages of bidding:

Etisalat: LE 10.9 billion
Telecom Egypt: LE 7.3 billion
MTC: LE 7.2 billion
Qtel: LE 6.9 billion
MTN: LE 6.5 billion
Etisalat: LE 13.9 billion
Qtel: LE 12.8 billion
Telecom Egypt: LE 12.2 billion
Etisalat: LE 16.7 billion
MTC: LE 14.2 billion
The 11 Hopefuls

Eleven consortia bid to enter the race to become Egypt’s third mobile telephone network operator, with nine of them passing the technical qualifying round. The qualifying consortia, in descending order of their final technical scores, included:

The UAE’s Etisalat (bidding with the Egyptian National Postal Authority, the National Bank of Egypt and Commercial International Bank)

Kuwait’s MTC (bidding with EFG-Hermes (bt100 number 26) and Bahgat Group)

Russia’s MTS (bidding with Egypt’s TeleTech)

Turkey’s TurkCell (bidding with Banque Misr and Amwal)

Norway’s TeleNor (bidding with Egypt’s National Telecom Company)

Kuwait’s Wataniya Telecom (bidding with Univest, National Bank for Development of Egypt and Aman Trading)

Qatar’s Qtel (bidding with Naaem Group and Singapore Tech Telemedia)

Telecom Egypt (bidding with Telecom Italia)

South Africa’s MTN (bidding with Egypt’s Raya Holding (bt100 number 17) and GPP)

Failing to pass the first technical round: EMAC Information Systems (Kharafi Group bidding with India’s Reliance) and Saudi Telecom (bidding with Telekom Malaysia and Pico Telecom) bt

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