The Middle East: Where Western Telcos Fear To Tread

Egypt's Orascom is building an empire by making risky bets all over the Mideast-and beyond

Naguib Sawiris likes to travel into Baghdad incognito. The chairman and CEO of Orascom Telecom Holding, the Mideast's most successful cellular-service provider, has visited Iraq's war-torn capital four times since Saddam Hussein was toppled in 2003. On these trips, Sawiris behaves like a low-level salesman. "I take a small car from the airport. I sit next to the driver. I choose a hotel at random. And I try not to stay more than one or two days," he says.

Risky? Sure. But the 50-year-old, Egyptian businessman has built up a telecom empire by taking gambles. Sawiris' $160 million investment in Iraqna, Iraq's top cellular network, is already throwing off profits of $30 million to $40 million a year, according to estimates, despite some $2 million a month in security costs. The Iraq operation is just a tiny piece of Orascom, whose networks serve close to 14 million subscribers spanning 9 countries, from Tunisia to Egypt and on to Bangladesh and Pakistan -- one of just a handful of Arab companies with an international reach. Cairo-based Orascom is expected to report this month that 2004 net operating profit more than tripled, to $843 million on revenues of $2.2 billion, estimates Cairo investment bank EFG-Hermes Holding Co. No wonder the company's London-traded global depositary receipts have nearly quintupled in the past year, to around $40. "[Sawiris] dared to do a lot of things and actually succeeded," says Serge Tchuruk, CEO of French telecom-equipment maker Alcatel (ALA ), a key Orascom supplier.

SHEER AUDACITY

A few years ago, the Western world was full of tales of fast-growing cell-phone companies. Vodafone Group PLC (VOD ) transformed itself from a regional operator to a global giant. Verizon Wireless Inc. (VZ ) leveraged its strength in the northeast U.S. into a national network reaching nearly 38 million customers. But for sheer audacity and superheated growth, it's hard to rival Orascom. Sawiris' outfit is one of the biggest companies in the Middle East outside the oil sector. The founder, son of an Egyptian construction magnate, has used his political savvy to get his networks built -- sometimes tangling with well-connected figures when needed. His success and guts have turned him into an outspoken advocate for political and economic liberalization.

From his perch on the 26th floor of his family's gold-domed Cairo office tower, Sawiris scours the developing world for investment opportunities. He favors markets with a combination of large populations and low telephone penetration rates. That's what Egypt was back in 1997, the year Sawiris launched his carreer in telecom by bidding about $500 million for one of two mobile licenses. Orascom's French-born chief financial officer, Aldo Mareuse, compares the action in the company's main markets to the mobile boom that occurred in Europe in the late 1990s. "We are still in the middle of it," says the former Credit Suisse First Boston (CSR ) banker.

Sawiris has pretty much had his pick of properties in this corner of the world, where low incomes and difficult-to-navigate politics have discouraged big Western operators. But Sawiris now faces growing competition from regional players such as Kuwait's Mobile Telecom Co. and Turkey's Turkcell, as well as the likes of Vodafone and France Telecom's mobile unit, Orange. Still, Orascom -- which is 57% controlled by the Sawiris family -- has the advantage of being able to move fast, while Westerners take their time hashing out deals. "You will find that I make decisions very quickly," he says, while discussing a potential deal in Asia on his mobile. Currently, Sawiris is checking out possible buys in Burma, India, Indonesia, and Vietnam. Although he operates in markets not known for transparency, Sawiris says he won't resort to bribes to clinch a deal. But he is open to paying consultant fees on successful transactions "if I can get an invoice."

These countries' low per-capita incomes present no obstacle to Sawiris, who tries to price his service low enough to appeal to the working class. Orascom recently paid $60 million for the fourth-largest mobile network in Bangladesh, one of the poorest nations on earth. The payoff is a rapidly growing customer base. Investment bank EFG-Hermes figures that Orascom's subscriber numbers will continue to grow at a compound annual rate of 34% through 2008. By comparison, growth rates in mature markets like Europe have leveled off at around 4%. And because Orascom keeps a tight rein on costs and employs locals, its margins before interest, taxes, and depreciation hover around 50%. Western operators typically make around 30%.

In Egypt, Orascom affiliate and market leader MobiNil is pitching its service at customers with incomes as low as $50 per month. The key is making it affordable. MobiNil CEO Osman Sultan says users typically pay an up-front fee of $60 for a phone, and stay connected for as little as $2 per month using phone cards. MobiNil's average monthly revenues per user hover at around $17, compared with an average of $40 in Europe. To keep a lid on charges, many Egyptians use their cell phones as pagers, making calls and then rapidly cutting them off. Texting is also popular: Users type out their messages in phonetic Arabic using an English keyboard. MobiNil, which is partly controlled by Orange, also offers higher-end services such as e-mail and picture transmission for the elite, but all but a tiny fraction of its revenues are from voice. MobiNil has even become a part of Egyptian culture. The song from its TV ads for its "Alo" phone cards became a national hit, spawning a CD and music video.

Thanks to his success, Sawiris wields considerable political clout in the Middle East. At home in Egypt, he has become an outspoken advocate of political and economic reform to a degree that makes people close to him, including his father, Onsi, nervous. Sawiris has helped bankroll Al-Mousry Al-Youm, a liberal pro-business newspaper. And unlike many people in the Arab world, Orascom's chief supported the overthrow of Hussein in Iraq. He thought that making "an example of one who had abused his authority" would send a powerful message to other backward regimes in the region, including the Syrians. But he is also bitterly disappointed by what he considers mistakes made by the U.S. in the postwar period -- notably the dissolution of the Iraqi army, a move that he thinks created thousands of potential insurgents.

Iraq has plenty of potential. Orascom affiliate Iraqna has signed up 700,000 subscribers since it launched operations in December, 2003. While bandits and insurgents have blown up Iraqna's equipment and kidnapped employees, the company's chief executive, Alain Sainte Marie, remains optimistic. "There are less and less problems," he says, in a phone interview from Baghdad. And though Sawiris says there is a risk that the Iraqi government may not renew Iraqna's license, which expires at yearend, such a move would be self-destructive for the Iraqis.

BUMPY ROAD

It wouldn't be the first time the Egyptian saw one of his investments go up in smoke, though. Three years ago, Sawiris tangled with Rami Makhlouf, a Damascus businessman and first cousin of Syria's President Bashar al-Assad. When Syria opened up to mobile telephony five years ago, Sawiris entered into a joint venture with Makhlouf. Once the business was up and running, Makhlouf took control, and a legal battle ensued. In 2003, Makhlouf paid Orascom $20 million to settle. Efforts to reach Makhlouf were unsuccessful.

There have been other bumps along the way. A few years back, a spate of deals almost brought Orascom to its knees. In 2001, Sawiris executed the most ambitious deal of his career, bidding $737 million for a mobile license in Algeria -- a $300 million premium over rival France Telecom (FTE ). Nowadays, Algeria provides about 40% of Orascom's profits. A year later, Orascom led a consortium that paid $450 million for a license in Tunisia. By November, 2002, concerns over Orascom's ballooning short-term debt had hammered its London-traded shares to a low of 66 cents.

To relieve pressure on the balance sheet, Sawiris raised about $250 million from two Palestinian investment funds controlled by Yassir Arafat. But he was still forced to sell one of his best properties, Jordan's market-leading Fastlink, a transaction that raised $423 million. Sawiris also unloaded all but three of his 22 Sub-Saharan Africa subsidiaries, whose small subscriber bases were sucking up too much management time. Sawiris recently paid an estimated $360 million to buy back big stakes in his Algerian and Tunisian businesses from the Palestinians, who have made an estimated $1 billion by investing with the Egyptian.

Sawiris says he gained much of his business savvy from his father, Onsi Sawiris, who founded a construction company in Egypt in 1950 only to have it nationalized a decade later by the regime of Gamal Abdel Nasser. The elder Sawiris moved to Libya, where he minted a new fortune building water works and other infrastructure projects for the government.

Nowadays the 74-year-old patriarch keeps tabs on his three sons from an office on a floor below Naguib. Nassef runs Orascom Construction Industries, while Samih heads a tourism venture with some 18 hotels. Onsi says that unlike the heads of other Egyptian dynasties, he gave his sons long leashes when they were young entrepreneurs. But he confesses that some of their forays make him anxious. "I am old; I don't want to go through adventures," he says.

Too bad for Dad that his eldest son is a relentless dealmaker -- always looking for something new and bristling when he encounters a meddling bureaucrat. In February, Orascom's MobiNil had a run-in with Egypt's National Telecommunications Regulatory Authority. Osman wanted to launch a new, dirt-cheap, pay-as-you-go phone card, but the regulator was slow to sign off on the proposal. So MobiNil went ahead and took out full-page ads in the Cairo dailies heralding the new offer. "We are fed up with waiting for months for replies when we are trying to provide a service for low-income people," says Sawiris.

Some investors wonder if Sawiris is building his empire just to sell it. "People think I would like to be acquired by one of the Vodafones of this world," he says. "But my ambition is to be one of the Vodafones." Given Sawiris' track record so far, that notion doesn't seem far-fetched.

By Stanley Reed in Cairo

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