egypt telecom sector further tariff cuts are not welcome

telecom egypt (te) 03 June 2010telecommunications │ egyptI. INTEGRATED OPERATOR?Management seems to be quite keen on gaining exposure to the Egyptian mobile sector toallow them to provide integrated services, which management sees as a game changer for thecompany and something that would transform the company’s dividend play profile into agrowth story. Management seems rather open to a number of propositions including MVNOagreements (naturally with VFE), reselling minutes, a 3G license only and roaming on one ofthe existing 2G networks, and of course increasing its exposure to VFE. By the end of May2010, both TE and Vodafone Group (VG) entered into discussions concerning the sale of VG’s55% stake in VFE to TE. The discussions were concluded with the agreement of both parties tokeep the current shareholding structure of VFE unchanged (45% TE and 55% VG).We outline below our views with regards to the options that the company might choose toexplore, other than increasing its stake in VFE.Egypt’s Fourth Mobile Licence: Can it Add any Value?It is apparent that management does not have the intention to pay anywhere near the USD2.9billion paid by Etisalat for Egypt’s third license. Given that the terms of the license are yetunknown, it will all depend on what kind of return on investment the company can achieve.We believe this implies that TE is looking to pay a significantly low price for such a license. Asper Etisalat Misr license terms, the government can only award a new license before May 2011if it has exactly the same terms of Etisalat’s license. After that date, however, a license can beprovided with different terms. We also understood from our meeting with the managementteam that having a mobile operation will not legally force the company to sell its stake in VFE,which they intend to keep.Despite management being very positive about having a mobile operation and while wegenerally agree on the concept, we are not that optimistic about the idea of a fourth license aswe remain concerned about the value that could be driven from a fourth operator at this pointof time. The Egyptian mobile market is approaching saturation with a mobile penetration ofc70% which we forecast to grow to 90% in 2015, in addition to very aggressive competitionduring 2009 which led to a price war and very low tariff levels. We believe incremental ARPUsin the market will not support the case for a 4 th operator unless the start up cost (capex +license) is significantly low and below USD1.0 billion.We, however, believe that the government may provide TE with attractive payment terms thatcould make the return on investment look positive.MVNOBased on experiences of MVNOs in different markets, we reached the conclusion that the besttime for the introduction of MVNOs to a market is usually when it is close to reachingmaturity and saturation, as they can be effective in grasping the last bits of growth out of themarket. The MVNO will not have to incur all infrastructure costs to build a new network, it canalso be able to operate under lower margin which could give it room for decreasing tariffs. Webelieve this scenario could be marginally positive for TE but would have a negative impact onthe other mobile operators: competition in the mobile market was very aggressive in 2009which had put strong pressure on mobile tariffs, we therefore believe that more pressure ontariffs would have a negative impact on margins and ARPUs. Mobile penetration rate in Egyptis now c70% and we expect it to reach c90% by 2015e.7 / 26 pages