Djezzy Deal Nears As Foreign Transfer Ban Rescinded
The Algerian government reportedly lifted a ban on fore ign exchange transfers imposed on market-leading mobile operator Djezzy . Ostensibly, the ban was employed to prevent Djezzy from buying essential equipment - such as SIM cards - from overseas suppliers. However, the state is accused of using its influence to prevent Djezzy repatriating profits to Egypt. The lifting of the ban suggests the government has wrested control of the company, or is at least close to closing an ownership transfer deal with current shareholder VimpelCom . BMI believes this sets the stage for aggressive repatriation of rival Nedjma in the near future.
Through carefully targeted price promotions and innovation in the development of value-added services , despite the technical limitations of its network, Djezzy managed to continue growing, despite the ban. It served 17.846mn subscribers at the end of 2012, up by 7.5% y-o-y and accounted for 47.6% of the Algerian mobile market. Its market share has grown steadily, from 44.7% in 2009, according to BMI 's M obile operator database .
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Djezzy was already under fire from the Algerian government for alleged underpayment of taxes when, in 2010, the Orascom Telecom business - including the stake in Djezzy - was acquired by Russia-based VimpelCom. The ban on foreign exchange transfers was applied at that time and, in the months that followed, the regulator continually denied Djezzy's requests to purchase new SIM cards from overseas vendors and to significantly alter its tariffs to remain competitive and profitable. The government also said the sale of Orascom to VimpelCom was undertaken without considering the state's right of first refusal on the outstanding shares in Djezzy and entered into negotiations to buy Djezzy outright.
The two sides were unable to agree on the valuation of the business and the deal remained in deadlock until December 2012, when it was reported that a new joint venture - Optimum Telecom - would be created to hold the two investors' stakes. It seemed the government was keen to avoid becoming embroiled in international arbitration as VimpelCom began to lose patience. Local reports now insist Optimum is a state investment vehicle that will take full control of Djezzy for between US$5-6bn.
VimpelCom - which is under pressure to boost its cashflow and reduce its debt by narrowing its focus on its core European businesses - appears ready to capitulate.
BMI believes gaining access to international markets will benefit Djezzy's subscribers in the short term as the company will now be able to press ahead with network upgrades and service improvements. However, it is difficult to see how the state will be able to maintain the company's competitive stance, given it already owns incumbent Mobilis and is also putting pressur e on Qatar-based Ooredoo to relinquish its stake in third-ranked Nedjma, after Ooredoo took control of Nedjma's Kuwait-based investor, Wataniya Telecom , in 2012.
Besides the inherent risks to competition posed by state-sponsored consolidation of the mobile market, we reiterate our view that the Algerian government remains innately hostile to foreign investment, or at best supportive only on the narrowest of terms . It is possible that, once consolidation is achieved, the government may sell stakes in the resulting entities to local or international players. Prospective investors should therefore approach these investment opportunities with caution and with clear indications from the government over how profits are to be distributed.