The figures from the Investcom IPO were truly phenomenal, making it the biggest international share sale by a Middle East company. Some 59.9 million Global Depositary Shares (GDS) with a value of $12.35 each were sold, totaling $741 million. Representing 22.6% of the company, the share sale – which was eight times oversubscribed – created a $3.3 billion market capitalization for the company. It may sound similar to many offerings in today’s booming Gulf, but this one was special: it was homegrown in Lebanon, compliments of the Mikati family. But what made Investcom Holding so attractive to investors? How does the company operate and how does it differ from its competitors, the giant Orascom Telecom and the market thirsty MTC Group?
History of the company
Since its conception, Investcom Holding has transformed itself from solely offering telecommunications engineering services to managing one of the largest mobile telecommunications empires in the region with licenses in 10 countries.
The story began in 1984, during the height of the Lebanese civil war, when Taha Mikati, scion of a respectable Sunni family from Tripoli, founded the Investcom Group to provide telecommunications engineering services in Lebanon via Inteltec (the group had been offering similar services since 1982, before the company was officially founded as a corporate entity). After entering into the field of radio communications and the operation of private satellite terminals, Investcom constructed, implemented and launched Lebanon’s first Advanced Mobile Phone System (AMPS) mobile network in 1991. It was the first such privately owned and operated network in the Middle East. The network gave the group its first real exposure to the management and operation of mobile telephony. However, the AMPS network provides for analog cellulars operating in the 800 MHz band, compared to GSM, which usually operates in the 900 and 1800 MHz band. Considered a first generation technology – it was susceptible to static and interference and lacked adequate voice quality, privacy and service requirements – the rudimentary network was quickly replaced worldwide by the more advanced and popular digital service.
Investcom followed suite and in 1994, the company acquired its first GSM license when it won – along with France Telecom – a BOT contract put forward by the Hariri government, allowing it to operate the France Telecom Mobile Liban (FTML) network – more commonly known as Cellis. FTML, a joint venture between France Telecom Mobile International (66.7%) and the Mikati Group (33.3%), was Investcom’s first venture into the GSM field and its springboard for successful expansion within the region. Through the operation of this state-of-the-art network – which recorded unparalleled growth levels – Investcom was able to amass the expertise required to become a major regional player, especially since France Telecom was able to transfer its years of know-how on through constant vocational and technical training. During this period, Investcom also began weaving tight-knit relationships with strategic firms such as Ericsson, Siemens and Nexans – all of which now play important roles in the company’s expansion strategy.
Diversification has been key
While Investcom did stumble and lose its 350,000 subscriber-strong FTML network due to tedious Lebanese political infighting – especially between President Emile Lahoud and the late premier Rafik Hariri – the company was able to plant enough seeds in other countries and secure enough financing from Lebanese banks to minimize the impact of the loss.
As early as 1996, Investcom had moved into Ghana, a country with a population of over 21 million that coincidentally, also boasts a powerful Lebanese community. This move not only showcased the company’s intent to expand but also highlighted its strategy to enter under-developed markets. In 2000, Investcom took over a license in Benin and in 2001 it was able to enter the cellular markets of Liberia, Syria and Yemen. By the time the Lebanese government revoked the BOT contract awarded to the FTML joint venture, Investcom already had a solid presence in five countries with a total population of some 70 million. And by the time Investcom offered its GDS shares, it was also operating in Guinea Bissau (2004), Cyprus (2004) and Sudan (2005) – effectively increasing the population it covers to 107 million. Additionally, the company has recently won licenses in Guinea (2005) and Afghanistan (2005) where it still is in the process of installing the necessary infrastructure before officially launching operations. Investcom Holding currently boasts a total subscriber base of some 3.3 million customers in countries with low mobile penetration rates and even lower fixed line penetration rates.
The numbers are impressive, but questions remain over the company’s decision to operate in such poor markets. With the exception of Cyprus, with its population of 700,000 and a GDP per capita of $22,000, all of Investcom’s operations are located in under-developed economies (see box). Yet under-developed economies have come to mean one thing to Investcom: emerging economies with under-penetrated cellular markets and high growth rates. And Investcom truly believes that it has enough expertise to turn these highly under-penetrated markets into profitable operations, no doubt a talent acquired from operating the first GSM network in the Middle East.
Fixed-line telephone penetration in most of the countries Investcom operates in is below 10% – with the exception of 13.6% in Syria and 60.6% in Cyprus – while mobile telephony penetration is below 15% – with the exception of 109% in Cyprus.
In comparison, fixed-line and mobile penetration rates stands at 56% and 95% in Western Europe. And it is these low-penetration rates that Investcom is seeking since the growth of its business largely depends on the continued development of the mobile telecommunications market it operates in. All of its markets recorded high year-on-year mobile growth rates, ranging from 124% in Liberia to 30.8% in Benin during 2003/2004 (the more developed Cyprus recorded a 19.3% increase, still much higher than the increases in Western Europe). And to the advantage of Investcom, studies suggest that in a typical developing country, a rise of ten mobile phones per 100 people boosts GDP growth by 0.6%, thus creating a much favorable domino effect.
Moreover, the company seems to have well understood the dynamics and the shortfalls of operating in these mostly cash-based economies, explaining why it has focused selling its services via the easily accessible pre-paid cards instead of the more binding post-paid subscriptions – a rate which currently stands at over 83% of its total customer base, compared to 80% in 2004, 69% in 2003 and 65% in 2002. And such a focus – as volatile as it might be – seems to be paying off since Investcom’s number of subscribers increased from 1.9 million during the first half of 2004 to the current 3.3 million – representing an impressive 72% growth – while directly competing in its markets against famed rivals such as Norway-based Telenor (which has management control of One Touch in Ghana), Luxembourg-based Millicom (Ghana), Hong-Kong based Hutchison Telecom (Ghana), UAE-based Etisalat (through Telecel-Benin), Kuwait-based MTC (through Celtel in Sudan) and Cytamobile-Vodafone (Cyprus). Even more impressive, Investcom was able to increase its consolidated revenues from $408 million in 2003 to $633 million in 2004 – a 55% growth.
“We operate in eight countries and have two more licenses under our belt. We have increased our customer base by 72% and our revenues by 55% in one year and we operate in high growth markets,” you might expect a PR manager at the firm to say. However, nice as it might sound, there is one major soft spot in this chef d’oeuvre.
Investcom’s revenues originate from three different sources: mobile telephony, international (through its Monaco-based Mednet) and fixed-line telephony and other services such as the provision of engineering and consulting services to third parties. Standing at $551 million in 2004, mobile telephony alone represented a large 87.2% of the company’s consolidated revenues, compared to 83% in 2003 and 73% in 2002. And out of the total of $551 million, Syria and Ghana contributed the largest amount to Investcom’s gross operating revenues from mobile telephony, standing at 53% and 22% for 2004 respectively.
Additionally, out of the total customer base of 3.3 million in June 2005, 70% (or 2,317,453) were located in these two countries alone. These unbalanced ratios showcase the company’s current weaknesses to external factors, such as international sanctions or a complete change in government that seems to be looming, especially in Syria.
Another negative scenario could emerge from a deteriorating relationship with powerful economic personalities. Analysts say that no foreign company can operate in Syria, without the consent of Rami Makhlouf, the first cousin of Bashar al-Assad and an unforgiving businessman. One example of this occurred– which could occur in any country with an autocratic government – when Orascom Telecom was suddenly kicked out from SyriaTel over a brawl for management control after being awarded a BOT contract. “The court ordered to revoke the registration of the 720,000 SyriaTel shares from the name of Orascom Telecom and to re-register them in the name of Rami Makhlouf,” said a statement from SyriaTel. “The court further ordered Orascom Telecom to pay Makhlouf compensation of 1.062 billion Syrian pounds,” (about $20 million) continued the statement issued in 2002. If Investcom’s operation in Syria or Ghana is adversely affected one way or the other, then the company’s total operating revenue could take a hard, and potentially fatal, blow.
To avoid this, Investcom is currently working quickly to spread the contribution from its mobile telephony operations over four main countries – Syria, Ghana, Sudan and Yemen, and to a lesser extent Afghanistan. By focusing on these five main countries, which have a total population of 124.6 million, Investcom hopes to reduce the contribution of Syria and Ghana to around 50% during the next two years – to make it less vulnerable to these external factors.
This is expected to easily take place since Investcom just acquired an additional 40% interest in Spacetel Yemen from Al Bashair Telecom, increasing its shareholding to 82.8%, which will effectively allow Investcom to consolidate revenues from Spacetel Yemen in its accounts (Investcom was previously operating under a management contract). Additionally, with its operations in Sudan just off the ground, Investcom is expecting to see revenues from this country grow considerably in the coming months.
However, the real spread in mobile telephony contribution will occur by penetrating further markets. There is speculation that Investcom Holding is seriously looking to acquire the third mobile license in Saudi Arabia scheduled to be awarded in 2006 – a country which fits the Investcom profile of having a low-penetration rate and high growth potential. But Saudi Arabia, with its GDP per capita of $12,000 and population of 26 million, might prove to be too tough a target to acquire for the time being.
Etisalat, which won the second mobile phone license in Saudi Arabia in August of last year, had to pay a hefty $3.25 billion with the help of six heavyweight Saudi partners to overcome the tough competition coming from Spain’s Telefonica, Kuwait’s MTC, South Africa’s MTN Group, Egypt’s Orascom Telecom and Italy’s Telecom Italia Mobile.
In comparison, Investcom’s most expensive license fee was Sudan’s, at 150 million euro, while Afghanistan’s license cost a sizeable $40.1 million. Guinea’s cost 30 million euro, Ghana’s $22.5, Cyprus’s $28.5 million, Benin’s $9.6 million and 2.2 million euro for Guinea-Bissau. Investcom operates in Syria under a 15-year BOT contract that requires it to share its revenues incrementally throughout the years, from 30% during the first three years to 50% during last nine years.
Another possible operating environment said to attract Investcom’s attention is Iraq – a country that not only fits the company’s profile, but is also undergoing many security challenges that could put the big international telecom players’ bids on hold. Investcom, on the other hand, is known not to blanche at security issues and merely sees them as a 10% increase in operation costs.
Regional competition and the future
So is Investcom picking up the scraps of the major regional telecom players such as Orascom Telecom and the MTC Group, or is it emerging as a serious player?
In terms of its subscriber base, Investcom – with its 3.3 million customers – still trails behind MTC and Orascom. The MTC Group boasts a subscriber base of some 10.55 million customers in 18 countries – 6.55 million customers in 13 sub-Saharan countries were added in March 2005 when the group acquired Celtel and its various operations – while Orascom Telecom has a proportionate subscriber base of 14.8 million in six countries. This represents a current subscriber base one-third the size of the MTC Group and one fourth of Orascom Telecom.
Additionally, both companies enjoy enviable features that Investcom evidently lacks: strong financial backing and a good distribution of revenues. The MTC Group, with its sound financial support, is looking at exceeding 20 million subscribers by 2011, and is currently on the fast track of achieving this goal, while Orascom Telecom benefits from a comfortable spread in its revenue distribution (40% from Algeria, 25.3% from Pakistan, 15% from Egypt; 12% from Iraq, 5.4% from Tunisia and 0.8% from Bangladesh). Both companies are also located in strategic countries with high growth potential.
However, comparing the financials of all three companies through their services, to quote business portal Zawya.com, gives a clearer insight. For the year ending December 2004, Investcom Holding had a total of $824 million in assets – a fifth of that of Orascom Telecom and nearly one third of the MTC Group. Additionally, Investcom’s gross revenue for the same period reached $632 million – a third of Orascom and over half of that of the MTC Group. Operating profit was recorded at $219.6 million – more than half of the MTC Group and one third of Orascom. Finally, Investcom achieved a net profit of $148 million – over one third of that of the MTC Group and surprisingly, nearly half (44%) of Orascom Telecom. It is important to note that Investcom’s net profits for the first half of 2005 grew to $100.6 million from $73.7 million in the same period of 2004.
In any case, the recently successful IPO has equipped the company with enough ammunition to acquire other similar telecom licenses in Investcom-friendly markets, which in turn will allow it to better withstand the competition. As of October 24, 2005, Investcom’s market capitalization is $3.67 billion. It has caught the eye and faith of many, who are eagerly waiting to see what the Mikatis have up their well-tailored sleeve.