The Saudi Telecom Company (STC) signed an initial agreement last Wednesday with Vodafone to buy its 55 per cent stake in Vodafone Egypt for $2.39 billion.
Vodafone Egypt is the country’s largest among the country’s three mobile operators with a market share of more than 40 per cent translating to 44 million subscribers. STC is also Saudi Arabia’s biggest mobile operator, with about 45 per cent market share.
Vodafone International owns 55 per cent of Vodafone Egypt, while the remaining 45 per cent stake is owned by the government’s Telecom Egypt (TE).
The transaction is expected to be closed by June 2020, Vodafone said in a press statement. STC said the non-binding agreement will be valid for 75 days starting last Wednesday and could be extended until a final agreement is reached between the two parties.
Pulling out of Egypt “is consistent with Vodafone International’s efforts to focus on two geographic regions, Europe and Sub-Saharan Africa,” Nick Read, chief executive of Vodafone International, said in a press statement.
“The potential acquisition of Vodafone Egypt is in line with our expansion strategy in the Middle East and North Africa [MENA] region,” said Nasser Al-Nasser, CEO of STC, adding that Vodafone Egypt was the leading player in the Egyptian mobile market and STC looked forward to contributing further to its success.
Experts believe the move has many advantages for the Egyptian telecommunications market. “This is a very good deal mainly because of the price offered by STC,” said Allen Sandeep, director of research at Naeem Holding.
It was one of the biggest business transactions to have happened in the Egyptian market for a long time, he added. “It indicates that the telecommunication sector is still growing and has a positive outlook for future growth,” Sandeep said.
Vodafone has a global strategy to manage its balance sheet by selling shares in emerging markets, Sandeep pointed out, and it did the same in Qatar two years ago. It had received a very good offer from STC for Vodafone Egypt.
Mariam Wael, an equity financial analyst at Pharos Holding, agreed that the entrance of a new investor to the telecommunications market in Egypt would have a positive effect on the sector. She said the deal was almost double the value of Vodafone Egypt, as estimated by market experts including at Pharos Holding.
Wael added that the evaluation of the 55 per cent stake owned by Vodafone International in Vodafone Egypt at $2.39 billion made the total value of Vodafone Egypt stand at $4.3 billion (LE68 billion), about double the estimation Pharos Holding had set on the telecommunication giant in Egypt.
“Before the STC deal, we estimated Vodafone Egypt to be worth LE35 to LE37 billion,” she added.
“What made the deal significantly higher, in my opinion, is that the STC deal includes a commercial agreement that allows STC to keep the Vodafone brand,” she stated, adding that the brand name and consumer perception could have contributed to the higher-than-expected value of the company.
Customer loyalty, in addition to the brand name of Vodafone in the Egyptian market, may have led STC to pay more in order to keep the same name after the acquisition, at least before thinking about changing it, she said.
Sandeep said that Vodafone Egypt did not have any debt, and it generated more annual EBITDA than any other operator at about $600 million per year.
STC is looking at the steady growth in mobile data and Internet usage in the Egyptian market. There are currently more than 30 million users of the mobile Internet in Egypt, according to Sandeep, with more than two million expected to be added to that number per year. The number was only about five million 10 years ago, he pointed out.
Data and the Internet are growing fast, and they drive most of the growth in the sector, especially for Vodafone Egypt which has the biggest market share of users and subscribers to data and the Internet from a mobile operator, Sandeep said.
The challenge for STC, according to Sandeep, will be to maintain that momentum and to maintain Vodafone’s market share because competitors might see the deal as an opportunity to try to increase their market share and attract more users.
The fate of Telecom Egypt’s stake in Vodafone after the deal is not clear, but it has the option to keep it as it is, sell it, or even offer to buy Vodafone’s stake before the deal is sealed with STC. The last scenario is unlikely, according to Sandeep.
TE spent a lot of money entering the mobile business, and it would not be the right thing to do to buy the remaining Vodafone stake, he said. “They could have done that before, instead of spending a huge amount of money to enter the mobile business themselves,” Sandeep said.
“I also don’t think the government would be willing to spend that much money, because it will put pressure on the country’s reserves of foreign currency,” he added. “Strategically, the right move by Telecom Egypt would be to sell its stake in Vodafone Egypt, especially after the attractive offer from STC.”
The question remains whether STC will be interested in buying TE’s stake, especially since there has been no official approach to TE.
Wael believes it is important to think about how much STC could offer to buy TE’s share in Vodafone Egypt if the latter decided to offer it for sale. If that happened, she added, STC could offer less value since the huge deal with Vodafone includes a commercial agreement to use the brand name.
“We expect Telecom Egypt to use the money from such a deal to pay off debt and finance network expansion, as well as to finance its early retirement programme, which was introduced in 2019 to reduce employee costs,” she said, adding that the programme’s cost was estimated at LE1.5 billion.
The investment income from Vodafone Egypt to TE from the latter’s 45 per cent share represents about 60 to 70 per cent of TE’s annual bottom line, Wael said.
*A version of this article appears in print in the 6 February, 2020 edition of Al-Ahram Weekly under the title: Saudis buy stake in Vodafone Egypt