Telecom Egypt wants all of Vodafone unit

Market says yes with share price leap on news of discussions

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Investors in Telecom Egypt are giving an enthusiastic thumbs-up to reports that the company is looking to bolster its presence in the Egyptian mobile market. Telecom Egypt's stock rose by 4.5 per cent after several media reports that the operator was looking to buy the 55 per cent stake in Vodafone Egypt it does not own.

The Egyptian government maintains an 80 per cent stake in Telecom Egypt with the rest floated on the Egyptian Exchange. There are no apparent plans to dilute the government's stake. Controlling Vodafone's Egyptian operations would be a coup for Telecom Egypt. It would provide a profitable venture to offset the sagging growth of its broadband internet business, while throwing a spanner into Vodafone's plans to expand its business across Africa.

Vodafone Egypt is the second-largest mobile operator in Egypt, with 24.6 million subscribers and a 43 per cent market share. The company is also highly profitable and generated £488 million of operating cash flow last year. But Vodafone will want to be handsomely compensated. Mohammed Hamdy, a telecoms analyst with CI Capital Holdings in Cairo, estimates the 55 per cent stake in Vodafone Egypt is worth £3bn and says it would include a significant amount of debt.

That valuation takes into account a 50 per cent premium to Vodafone Egypt's fair value and 7.5 times trailing earnings before interest, taxes, depreciation and amortisation. The price may be right for Telecom Egypt, which would be likely to have to resort to debt financing to secure the acquisition, Mr Hamdy said in a report to clients. He called a possible purchase "a good move, but long overdue" as an acquisition represents the company's best option for regional growth.

Although it is too early to tell, the acquisition could also be viewed as positive for Etisalat Misr, the Egyptian subsidiary of the UAE's largest telecoms operator, as well as Mobinil, which is a joint venture between Orascom Telecom and France Telecom. If Vodafone withdraws from the Egyptian market, the absence of an experienced operator could ultimately be an opportunity for rivals of Vodafone Egypt.