THE ACQUISITION IN August of Italy’s Wind Telecom by Weather Investments, a consortium led by Egypt’s Sawiris family, is groundbreaking. The €12.1 billion deal is not only Europe’s biggest-ever leveraged buyout but also the largest-ever acquisition in Europe by a Middle Eastern concern.
The Wind bid was the brainchild of Naguib Sawiris, chairman, CEO and controlling stakeholder of Orascom Telecom Holding. OTH was created in 1998 as a partner in Egypt’s first mobile-phone operator, MobiNil, and is just one part of the Orascom commercial empire built up by patriarch Onsi Sawiris over a period of 50 years. Today his three sons run and hold majority stakes in OTH, Orascom Construction Industries (OCI) and Orascom Hotels and Development (OHD). The firms account for about 40% of the market capitalization of the Cairo and Alexandria Stock Exchange.
Explaining the background to the Wind acquisition, Sawiris says: “We formed Weather Investments, and Weather Investments took control of 50% plus one share of OTH.” The Sawiris family owns 72% of Weather Investments, 2% is owned by financial investors, and the rest is owned by Enel, the Italian electricity provider that previously controlled Wind.
The first step of the acquisition was completed in August, with Weather taking control of Enel’s 62.75% stake in Wind, for which it paid €2.99 billion. Enel also deconsolidated €7 billion of debt. Sawiris says that the deal will be finalized by February. “The acquisition of Wind is a two-step process, and at the end of the second closing Weather Investments will own 50% plus one share of OTH and 100% of Wind.” He adds that the leveraged buyout involved Weather providing the capital while ABN Amro, SanPaolo IMI and Deutsche Bank provided €9 billion in loans. Sawiris is now Wind’s chairman.
Some of the deal’s finer details remain unclear. Wael Ziada, a telecoms analyst at Egyptian investment bank EFG-Hermes, stresses that the acquisition “was done on the capacity of Naguib Sawiris. It was not a public deal, but a very private, personal investment.”
Sawiris’s aims for the two companies have generated a lot of interest. Discussing his plans for OTH and what he refers to as “Wind-Weather” (a rebranding decision has not yet been made), he confirms that “ultimately, we’ll definitely put the two companies together, but the timing and the details are currently being discussed. The first thing is to finalize the acquisition and bolster our footprint.”
Although Sawiris’s plans are not yet finalized, he is confident about the venture’s prospects. “The purchase of Wind was purely capitalistic,” he says. “I smelled money. Wind has been owned by a semi-public company, Enel, …[and] the company has not been managed in a capitalistic way. We already operate in nine countries, and we think we can create a lot of value by using the synergies within our group, and our buying power, to make Wind more profitable.”
“The acquisition grows the size of our group in the telecoms sector,” he adds. “The group has become bigger, we have more subscribers, and are more powerful.” Financial benefits have already emerged from the purchase, he says. “We’ve saved around €75 million from existing Wind contacts, and we saved another $10 million by adding Wind volume to OTH’s volume.”
With the two companies apparently set to remain separate entities until at least 2007, Ziada believes that in the short term OTH’s main gain from the Wind acquisition will be via purchasing advantages stemming from greater buying power. “There will be a lot of benefits in research and development and technology which can be brought to OTH subsidiaries,” he says.
Ziada believes that the new owners of Wind can ultimately improve the company’s performance. “If they can bring the debt level down, this could lead to exponential growth in equity, because the financial risk is dissipated. In addition to increased cashflow via restructuring, Wind could generate growth, but from within, not from the market.”
Knocking on Europe’s door Sawiris has no doubts that expansion into Europe was the right move. “My theory is very simple,” he says. “Telecoms operations will consolidate. Either companies will merge or acquisitions will happen, to make them more competitive. The bigger you are, the better buying power you have, and better cross-country experience.” Nor does he envisage any potential cultural difficulties resulting from integrating Wind and OTH. “Don’t you think that Egyptians are closer in culture to Italians and Greeks than Danes and Swedes are?” he asks.
Lucy Norton, senior telecoms analyst with corporate research consultancy Global Insight, also stresses the long-term gains to be made from the acquisition of a company that is Italy’s third largest mobile-phone service and has 12 million subscribers – assuming a merger occurs. “From a strategic perspective, it’s an entry point into southern Europe for OTH, which has developed a strong presence in north Africa and is looking to complete its foothold in the Mediterranean basin with Wind,” she says.
“Wind owns a stake in Greek alternative fixed-line operator Tellas,” she continues. “Furthermore, the acquisition allows OTH to take full advantage of strong ties between Italy and markets such as Tunisia. A foothold in Italy and Greece could also see Orascom extend its deployment of a submarine cable, due to link Algeria with France, to other Mediterranean markets.”
Change of strategy A move into Europe would be something of a change of strategy for OTH. The company expanded rapidly after its 1998 establishment, buying licences across the Middle East and Africa and setting up operations in 22 countries, before being forced to sell non-core investments after the 2001 telecoms slump to reduce exposure and debt. With those painful cuts behind it, the firm is today a leading international holding company in telecommunications, GSM operations, internet services, and satellite and related communication services.
OTH’s presence in countries with low telecoms penetration, such as Pakistan, Algeria and Egypt (its core markets) has allowed it to capitalize on massive increases in subscriber numbers in emerging markets. It now operates in nine emerging markets in the Middle East, Africa and south Asia, with a total population covered by telecoms licences of 450 million but with an average penetration of mobile telephony rate across all markets of just 9.7%.
OTH’s own subscriber base reached more than 21 million as of June 2005 – a 128% year-on-year increase – from its GSM networks in Algeria, Bangladesh, Congo-Brazzaville, Democratic Republic of Congo, Egypt, Iraq, Pakistan, Tunisia and Zimbabwe. First-half 2005 results showed total revenues of $1.576 billion, up 69% on the first half of 2004 and 22% up on the previous quarter.
Recent expansion efforts include Iraq, where in July the company paid $60 million for the 37% of mobile network Iraqna that it did not already own. The deal was funded through a combination of debt and internal cashflow, and led Sawiris to declare to the press: “We are committed to our strategy of focusing on existing core operations by increasing our ownership in these proven markets and sustaining our market position at the same time.”
With an OTH-Wind merger in mind, however, Sawiris’s long-term game plan is different. “We need to balance our portfolio, and be present in advanced markets,” he says. “There are no more greenfield, under-served markets… Our acquisition strategy is to look at the few remaining opportunities in emerging markets but opportunities are fading fast. We’ll continue our strategy of [expanding into] low-served markets, with high populations, while through Wind-Weather we’ll look at advanced markets.”
He adds: “OTH is the vehicle for emerging-market expansion, and Wind-Weather will be the vehicle for advanced markets.” Acquisitions will be funded via a combination of internal cashflow and debt.
Global Insight’s Norton cautions, however, that it won’t all be plain sailing. “Competition is tougher in advanced markets, with subscriber acquisition and retentions higher than in more embryonic markets, where Orascom has launched aggressive pricing strategies to win and retain market share and has had little trouble with churn. Perhaps the biggest threat to the success of the Wind-OTH tie up is Telecom Italia, which is gunning for the same Mediterranean opportunities, most prominently Turkey.”
Sawiris looks ready to face such challenges with equanimity, and sees the acquisition of Wind as part of a wider trend. “I think given the level of oil prices and oil money going to the Gulf, and with globalization, the coming years will see more emerging-market companies making strategic acquisitions in developed markets,” he says.
Yet it is an unusual situation, notes Ziada. The standard is for advanced-market companies, with steady cashflows and low growth at home, to look for higher rates of growth in emerging markets; the Wind acquisition turns this standard on its head.
So what’s next for OTH and Wind-Weather? “We’re considering bidding [for a licence] in Nigeria, and we’re looking seriously at Uzbekistan – the tender has been announced, and we’re in the phase of due diligence,” says Sawiris. “In terms of advanced markets, he stresses that he’s looking only at Europe, not North America, and that potential markets include Greece, Spain and Turkey. Ziada stresses, however, that “Sawiris has to first bring Wind’s debt level down, before considering further acquisitions”.
