Sawiris Pushes VimpelCom Deal as Debt Mounts

Orascom Telecom Chairman Naguib Sawiris
Orascom Telecom Chairman Naguib Sawiris is in talks to merge his phone business with Russia's OAO VimpelCom, two people familiar with the matter said on Aug. 20. Photographer: Giuseppe Cacace/AFP/Getty Images

Egyptian billionaire Naguib Sawiris, chairman of the Middle East’s biggest mobile-phone operator Orascom Telecom Holding SAE, says nothing drives him more than being told something’s impossible.

“When I go anywhere and someone says ‘impossible,’ I laugh,” he told a gathering of young businessmen in Cairo last month. “In 90 percent of the cases, the impossible happens. A key feature in an entrepreneur is self-confidence. He must believe he’s Superman.”

The 56-year-old is trying to practice what he preaches. Undaunted by his failure to forge a deal with South Africa’s MTN Group Ltd. in June, Sawiris is now in talks to merge his phone business with Russia’s OAO VimpelCom, two people familiar with the matter said on Aug. 20. The transaction would create an entity valued at more than $25 billion, the people said.

Finding a partner is critical for Sawiris’s ambition of building an emerging markets telecoms behemoth, while at the same time shrinking about $15 billion in debt. The VimpelCom transaction would form a company with more than 200 million mobile-phone subscribers in Africa, the Middle East and the former republics of the Soviet Union.

“He has always wanted to grow, regardless of the leverage,” said Amr Elalfy, a director at CI Capital Research in Cairo. His company also needs “cash to pay a big chunk of debt maturing in 2013,” he said, adding that “Sawiris wants to capitalize on his assets now before he reaches a situation where he must sell.”

Near Collapse

Sawiris’s expansion in the past decade has taken him to Robert Mugabe’s Zimbabwe, Kim Jong-Il’s North Korea, and post- Saddam Hussein Iraq. Naguib, the oldest of three brothers who control some of Egypt’s biggest companies, made forays into markets shunned by others. Sawiris has said his goal is to make Orascom one of the biggest telecoms companies in the world.

His appetite for risk pushed him close to collapse in 2002 after his buying spree the previous year boosted debt to $2.2 billion. Sawiris paid $737 million in 2001 for an Algerian license, $315 million more than his closest rival. He then paid $454 million for a license in Tunisia.

Investors began to question whether he might default, said CI Capital’s Elalfy. Sawiris survived by selling his Jordanian unit that year and several of his sub-Saharan units. He also sold half of his Tunisian unit to Kuwait’s National Mobile Telecommunication Co.

VimpelCom Talks

Sawiris has largely proved his skeptics wrong. Orascom Telecom’s net income almost tripled to $2.02 billion in 2007 from 2006, according to Bloomberg data. Profit fell 23 percent to $332.4 million in 2009, hurt by a tax dispute with Algeria. Shares of Orascom Telecom more than tripled in value from 2005 until the start of the financial crisis in 2008. In the past year, the shares have gained 8.2 percent.

A deal with VimpelCom would allow Sawiris to prevent forced asset sales. He would become a significant minority investor in the new company, which would include his Weather Investments SpA’s 51 percent stake in Orascom Telecom and Italian mobile operator Wind Telecomunicazioni SpA, said the people familiar with the talks, declining to be identified because the discussions are private. The structure of a deal hasn’t been decided and an agreement may not be reached, the people said.

Lazard Ltd. and EFG-Hermes Holding SAE are advising Sawiris, while VimpelCom is being advised by UBS AG.

Sawiris didn’t respond to calls seeking comment. Orascom Telecom said in a statement this month it wasn’t party to any discussions with the Russian company.

Debt Burden

Among the hurdles would be the increased indebtedness at New York-listed VimpelCom, Russia’s No. 2 mobile-phone operator. Debt at VimpelCom and its units would rise to 2.5 times earnings before interest, taxes, depreciation and amortization, said Maxim Raskosnov, a banking analyst at Moscow-based Renaissance Capital. That’s up from 1.45 times Ebitda in 2009.

Sawiris’s Wind had net debt of 8.29 billion euros ($10.5 billion) as of June 30, while Orascom Telecom had $4.61 billion in borrowings. About $1.8 billion of Orascom’s debt matures in 2013, said Sally Gerges, an analyst at Cairo-based investment bank Beltone Financial.

“Orascom has tried all these different things to cope with its leverage and talked to strategic counterparts,” said Dalibor Vavruska, an analyst at ING Groep NV. “Given the specifics of Orascom, not every company would look at it, and the ones who would, have already spoken to them.”

Algerian Obstacle

Sawiris’s efforts to dispose of some of his African assets to MTN in a transaction that analysts and bankers had valued at $10 billion were halted after Algeria blocked the sale of a local unit.

Algeria, which said it would buy the unit, known as Djezzy, has yet to act on its pledge, prompting some analysts to question how Sawiris is going to extricate himself from the situation. Algeria has also handed Orascom a $596.6 million tax bill that the company is contesting.

The dispute with Algeria pits Sawiris against a government emboldened by coffers enriched on high oil prices, said Edward Bell, a London-based analyst at the Economist Intelligence Unit.

Aborting MTN’s purchase of Djezzy was probably because the government felt that it was not “getting a fair deal from Orascom. That said, there has been a fair bit of cooperation between Algeria and the Russians, particularly in defense.”

A solution for the Algerian unit, Orascom’s biggest by revenue, is key, said Marise Ananian, a Cairo-based analyst at Egyptian investment bank EFG-Hermes Holding SAE.

Sawiris Empire

“Algeria is Orascom’s biggest challenge,” she said. “If the Algerian government doesn’t buy Djezzy or doesn’t allow any other party to buy it, Orascom will have to sort out their regulatory and tax issues.”

Born in 1954 into a family of Egyptian Coptic Christians, Naguib started Orascom Telecom in 1997 with $60 million from the family. He teamed up with France Telecom SA to set up the Egyptian Co. for Mobile Services, or Mobinil.

His brother Nassef heads Orascom Construction Industries, Egypt’s largest publicly traded builder, and Samih chairs Orascom Development Holding AG, which develops resorts and real estate projects in Egypt, Europe and the Middle East.

The Sawiris empire was built in the 1950s, when their father, Onsi, worked for Egypt’s Irrigation Ministry, building canals and ditches that collected overflow from the Nile River.

Orascom’s operations now span from Canada to North Korea. At the end of the first half this year, its subscribers exceeded 99 million compared with 4.3 million in 2002.

Sawiris, a devout Coptic Christian, says faith that God is on his side keeps him optimistic in the face of challenges.

“To believe in God is to have courage,” he said in his speech last month. “It gives you an extraordinary power that, pardon my language, an atheist won’t have.”

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