Feature

The New Lira

by Michael Karam
written by Michael Karam

Have you ever been annoyed when your old LL100,000 note wont fit snugly into your wallet? But are you also put off by the toy money appearance of Lebanon’s new look paper money? If the answer to both questions is yes, it is worth reminding you that the latter is a solution to the former and part of Lebanon’s drive to be in monetary harmony with Europe and the US.

Abdo Ayoub, Lebanon’s leading bank note collector (or notaphilist) and author of Lebanon: paper money and coins, stands up and pulls out his wallet. He folds a crisp new LL50,000 and slips it inside. “You see? It fits,” he explains flashing the wallet from side to side like a conjurer.  “Wallets are smaller because notes are smaller. Our notes are now too big, so we have to be in step with today’s trends.”

So for all of you who thought this was example of legendary Lebanese wastage – another case of “it isn’t broke and yet we are still fixing it with money we can’t afford” – it is in fact one of the rare instances when the public sector (in this case the central bank) is actually doing its job.

So sadly no conspiracy theory. “It was the natural time to print new money and it offered the central bank a window of opportunity to make new, user-friendly notes. They are not changing all at once but waiting till each note runs out of stock before they print new ones,” explains Ayoub.

The first three new notes appeared in June (LL5,000) and mid-July (LL50,000 and LL100,000). It is totally dependent on what is in circulation and what is demanded by the central bank. “There is no need to renew for the sake of it,” explains Ayoub, who cites the LL1,000 as a case in point. “It will probably only appear in 2007 as there are possibly as much as 200 million old notes still in their packet.” This extraordinary surplus is a hangover from the heady days of inflation when the government went bonkers and printed 960 million LL1,000 notes. “It was too much for one country,” says Ayoub. “It means that everyone can have in his pocket 250,000 in single notes. It will take time to use up. They are of a highest quality because they were printed by Thomas de la Rue, arguably the best quality notes in the world.”

Ayoub is sitting in his vast library cum office at his home in Bhannes. On the floor are notes and coins and bits of old notes. Albums full of series of Lebanese banks notes line the shelves, a testament to his hobby and passion of the past 15 years.  He claims he has always been a habitual collector. “If you don’t leave your country during war, you need something to do.”

Back to the new money. “We needed a model. It was either the Euro or the [US] Dollar. There are 400 million people using the Euro. That is a lot of people. Money is used less and credit cards more. Therefore the money that is used should be more practical. Governor Salameh is a cosmopolitan man and he must have spotted this trend.” According to Ayoub, the Central Bank did consider making its new notes according to the same dimensions as the Dollar with all denominations the same size. “It just wasn’t practical, especially for old people who might get confused or make mistakes.”

So they went with the Euro model. The new notes have been shrunk to a similar, but not exact, size to the Euro, what Ayoub calls “the same spirit of the euro”. The idea was to correspond Lebanon’s six notes to the closet Euro denomination. Thus the LL1,000 (the only note that will receive a totally new design) is sized according to the current  5 euro; the LL5,000 with the 10 euro; the LL10,000 with the 20 euro, the LL20,000 with the 50 euro, the LL50,000 with the 100 euro and the LL100,000 with the 200 euro. There is no Lebanese equivalent to the either 500 euro note or the 1 and 2 euro coins. “The cost was negligible,” explains Ayoub. “We are constantly reprinting, so it would just be [the cost of] the design, which is not much if you divide it by the number of notes.”

So why does a government decide to renew it’s money? According to Ayoub, the lifespan of a particular design is about 15 years. Since 1920 till today Lebanon has had six different designs, the longest lasting being the 1964-to 88, which depicted Lebanon’s, historical and tourist sights and which was virtually worthless by wartime inflation. “It is now considered among the most beautiful series in the world, but you would need 1000 of these,” he opens an album of LL1 notes, “to buy a manouche today.”

In, 1988 the LL1,000 (printed again in 1991 and 1992) was introduced as was the single-issue LL500. Further inflation made the LL1,000 increasingly cumbersome (remember having to pay for dinner with big wads of bills?) and so between 1993 and 1994 the LL5,000, LL10,000, LL20,000, LL50,000 and LL100,000 notes appeared.

“That series is now roughly ten years old. These new notes are not strictly a new design, but they should be around until 2020, although who knows, we might have a new governor who decides to change everything and say ‘I don’t like this’ and he can do it because provided he does it at the right time, it doesn’t cost anything.”

And the paper is better too by all accounts. “With the first new notes, we were coming out of war and we did not have the money to spend like we did before, when we would go to Thomas de la Rue & Co in London or Banque de France,” remembers Ayoub. “In 1992, it was a case of just do it they put out the tender and got the cheapest price from the Canadian printer B.A.Banknote.”

This time the government has gone to German company Giesecke & Devrient (LL1,000, LL5,000 and the LL10,000 and the Austrian Œbs (LL20,000, LL50,000 and LL100,000). And how long will the notes last in circulation last? “The cheapest notes, say from India or Pakistan, last about six months in circulation while the best can survive for around ten years,” explains Ayoub. “In my opinion, ours will probably last somewhere in between.”

Ayoub wanders off and comes back with a ultraviolet light. It puts a new LL50,000 note under its beams. It lights up like a Christmas tree. “You see we have a lot more security features. Printing has become more advanced. A new printer costs $10 million.”

According to Ayoub, both old and new notes will be in circulation for the next two of three years and even when the old are withdrawn, the central bank is still obliged to exchange it. “You can take any more from any period, even this,” he says holding up a LL250 note, “and they will give you a coin.” He pulls an album off the shelf and flick through the pages. “In fact you can do more. You can do this.” He opens an album and shows me a beautiful 250 lira note from (year?)XXXX.  “If you take it to the central bank they will give you a coin but to collectors it is worth $10-12,000.”

Lebanon: paper money and coins is available from XXXX

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State department

Those crazy days of summer

by Washington Correspondent
written by Washington Correspondent

As the center of the universe, politically speaking of course, the pace in Washington never abates, despite the harsh summer heat beating down on the banks of the Potomac. Now, not only Democrats, but former government officials, mothers and rock stars are going after President Bush’s Mideast politics.
 
Paul Craig Roberts, who served as assistant secretary of the Treasury in the Reagan administration, wrote in Counterpunch an article assailing the president. Roberts blames Bush for making America less safe by attacking Iraq. “Now,” he writes, “the White House moron proposes to start another war by attacking Iran.”

Indeed, there have been several media reports alleging that Vice President Dick Cheney has ordered the U.S. Strategic Command to prepare plans to strike Iran with tactical nuclear weapons if Iran does not renege on its nuclear policy, or if the U.S. is the target of another major terrorist attack.

Roberts claims that Bush’s policy is leaving the United States without allies, or practically none. “Likudnik Israel is Bush’s last remaining ally, or egger-on, in his war against “Islamic terrorism.”

 Meanwhile, as the president is spending a “working vacation” on his ranch in Crawford, Texas, he continues to refuse to meet with Cindy Sheenan, a young mother of a slain U.S. soldier in Iraq. The woman who remains encamped in a ditch near the presidential ranch, in temperatures close to 45 degrees Centigrade, has become the focus of the international media. Cindy Sheehan has a simple question for Bush: What noble cause is being served by all this suffering and destruction? But Bush is adamant; he will not talk to Sheenan. As Roberts points out, the president “(is) using his vacation time at the Crawford ranch to talk war with Israeli television. In a recent interview with Israeli TV, Bush said regarding Iran: “All options are on the table.”

Roberts blames the Democratic Party, which he says has “completely collapsed as an opposition party,” which is why Bush “can ignore the American public.” The only thing holding back Bush from declaring total war on everything and everyone he dislikes is “the lack of U.S. troops.

 “Gentle reader,” writes the former Reagan associate, “do you realize the danger of having a president so disconnected from reality that he plots to attack Iran — a country three times the size of Iraq — when he lacks sufficient forces to occupy Baghdad and to protect the road from Baghdad to the airport?”

Roberts continues: “The Bush administration is insane. If the American people do not decapitate it by demanding Bush’s impeachment, the Bush administration will bring about Armageddon. This may please some Christian evangelicals conned by Rapture predictions, but World War III will please no one else.”
 
Them are fighting words…
 
And if that was not enough trouble for the president, here comes the Rolling Stones, that eternal rock band, with their new album. How does that concern the president, you may ask? Ah.
 
“A Bigger Bang” due to be released Sept. 6, includes a song called “My Sweet Neo Con,” in which the British band chides Washington’s foreign policy gurus, accusing them of getting it all wrong on Iraq. Makes you wonder that despite decades of drugs and alcohol abuse, the Stones somehow still managed to have kept a few grey cells in good working order.
 
The controversial track seems to target Bush and Cheney in particular, as well as the group of neo-conservative advisers and architects of the Iraq war.
 
But Jagger, the Stones’ lead singer, denies his new song is directed at the president. “It is not really aimed at anyone,” Jagger said on a TV show. “It’s not aimed, personally aimed, at President Bush. It wouldn’t be called Sweet Neo Con if it was,” he added.
 
In fact, the song makes no mention of Bush or Iraq, though it does mention Halliburton, the Texas-based corporation previously run by Cheney.
 
“How come you’re so wrong? My sweet neo-con, where’s the money gone, in the Pentagon,” goes one line from the song.
 
“It’s liberty for all, democracy’s our style, unless you are against us, then it’s prison without trial,” goes another line.
 
“You call yourself a Christian, I call you a hypocrite,” Jagger rebukes members of the Bush administration in the title track to his new album. He admits his song is critical of the Bush administration, but waves it off as “so what!”
 
“Lots of people are critical,” of the administration, Jagger said. A representative of the British rock band said the group had no further comment about the song. The Rolling Stones U.S. tour kicked off in Boston Aug. 21. It will no doubt be controversial as Sir Mick and the Stones tour the heartland.

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Economics & Policy

Andy Kemp talks oil

by Thomas Schellen
written by Thomas Schellen

 

 

Levant Oil, incorporated in Lebanon, has been trading, importing and storing oil derivatives since it opened a storage terminal in Jiyeh in 2001. This year, the company is launching a chain of “LEO” gas stations across Lebanon. The Levant Oil Group comprises three companies: Levant Oil International, which started up in February 2005, and specializes in general oil trading and business development; Levant Oil, which specializes in storage and distribution within Lebanon; and LEO, which started up a few months ago and specializes in lubricant blending and station development. Andy Kemp heads Levant Oil International’s import operations. He has also worked for Shell Oil, Goldman Sachs and Salomon Smith Barney. Executive asked him about Levant Oil’s new chain of service stations and Lebanon’s oil sector in general.

E What is the rationale behind opening the new service station chain now?

I think it’s an effort to provide a more integrated, stable company system. If you import into Lebanon you are to some extent restricted as to how much market share you have, and to some extent to wholesalers and intermediaries and so on. So if you have your own chain you have a slightly more stable system. Levant Oil is also an attempt to build a brand and one of the most important ways to build a brand is to have retail networks.

 

E How important are the plans to build the LEO station network in the revenue projections at Levant Oil?

It will help stabilize your revenues by having your fixed off-take systems. But it’s a bit of a double-edged sword of course, because when we live in a posted-price environment here, there are times when it’s actually a disadvantage because you are obliged to be supplying your own terminals, your own retail network when realistically you don’t want to do that. So it’s a double-edged sword. On the one hand you have a consistency of off-take and you have some margin income that’s fixed from that off-take. But at the same time it’s an obligation. So my own personal view is that it’s part of the brand-building exercise. It’s part of an integration exercise. There is some value in it but you have to be particularly cautious and not make it too large.

E How much of your income do you plan to derive from secondary business, i.e. sales of side items, car washes, mechanical or maintenance services?

I’m a firm believer in that. The retail network is extremely well established. There are far too many retail stations. Everybody has too much choice. There seems to be quite an obsession with having retail networks. It’s fairly expensive to set up a new petrol station. There are an enormous number of them here. I’m a little surprised at how many retail stations there are. It can’t be particularly efficient, and people are building new ones. Perhaps it’s a characteristic of local business. So I think you have to go into some kind of added value element. You compare it to ones in the UK. They have supermarkets and they have just about everything in them that you can imagine. There has to be some extra value to having a retail station.

E Consumers have been shielded from strong oil price increases over the past year by a government cap on prices at the pump. How does this affect the margins of traders?

It doesn’t, because inside the government formula are a bunch of add-ons. In fact, you net back to an element of price which reflects the international market. What varies seems to be the amount of tax that is taken by the government. They have had the chance, in the last few months, to raise retail prices slightly and perhaps should have taken that opportunity when the time was there. But to us it doesn’t make an enormous amount of difference. It does, of course, if there’s no money left for tax, which has been the case lately.

E Would an end to government caps on fuel prices affect the consumption of your products?

I think so. I think there is an elasticity of demand here. I think it’s probably more pronounced in this country than in stronger Western economies. You’ll have an effect on demand with higher prices, that’s for sure.

E As traders, you import oil derivatives. Where do you get your best deals these days?

Most come from places like Italy, Greece, France, Romania, sometimes from other locations, but the bulk comes from those kinds of areas. There are only a certain number of refineries in Europe and that’s where the refineries are situated.

E Where can you make profits in the import and distribution of oil derivatives?

There are margins, obviously, between the importation price and wholesale prices. There are margins in the wholesale chain. The system that’s executed here does provide some protections for the importers, but with the market movements that you’ve seen lately it’s not a great deal of protection. If you get it wrong, you get it very wildly wrong.

E Is the quality of oil derivates imported to Lebanon better today than five or ten years ago?

Yes. For the most part, the qualities imported here are pretty similar to European norms. Some of the specifications like for example, gasoline have been improved; diesel’s been improved again in Europe. We’re not like them at the moment. But mainly it’s pretty similar. In Europe in particular the sulphur specifications are tighter. Diesels, for example, are now more commonly 10 parts per million (ppm) diesel in Europe. We are largely importing 50 ppm but we can import much much higher levels of sulphur in the diesel if we wish. So, there are some improvements going on but in the main it’s pretty good diesel and pretty good gasoline that’s being imported here for the moment. Where there are probably large differences is with the power stations. There are power stations on gas oil, which is a form of diesel and has a very high sulphur specification. When you compare it with 50 ppm, and you’re talking about half a percent, it’s more like 5,000 ppm. That is an anomaly.

E Are the current industry structures good for the consumer or could you envision improvements through more competition, new regulations, or other changes?

It’s a very strange system here in Lebanon. A large number of oil terminals – I think I once counted up 24 oil terminals – are all lots of little oil terminals distributed up the coast. So ships will come and go to three locations, which is not a particularly economic thing to do. The feudal system in Lebanon is really the way things work and the system as it stands at the moment is a workable system. The infrastructure here though is a little bit anomalous. Government oil storage installations are severely underutilized. Look at Zahrani for example. A terminal in Europe is expected to turn over more than one times its capacity in a month. Here in Lebanon I’d be surprised if the turnover in the private storage locations for the imports of gasoline and diesel is much over 0.3 [of their capactiy] a month and that’s really underutilizing the terminal capacity. In addition, the valuation of assets is too high. If you compare it to other examples internationally these are not assets that would be valued at the rates they are here. Partially it’s done on land costs, partially on cash flow for margins. There are so many people who have invested money over the years at times when the situation was different. They have legacies. They have asset investments that they have to maintain at value. That’s the barrier now to a more efficient infrastructure here in the country, these legacies.

E There have been many allegations of cartel structures in Lebanon’s energy industry. Do such structures exist in the private sector importation and distribution business or only in other parts of the energy sector?

Perhaps what you’re referring to is for example the pool system with importation for the private sector, which is effectively cooperation between groups for imports. But there is actually a logic to this. It’s back to the feudal structure. It partly works because people can combine to import these cargos themselves so if you want to call it a cartel you probably could, but it’s not for anti-consumer purposes. Quite the reverse. It actually allows people to bring in bigger shipments that are more economic to bring in. For example, all the people in the pool, which we’re not a member of – we came and we left – will provide a sealed tender for their importation and the best price wins, so effectively it’s not really a cartel in that sense. It’s actually for the consumer benefit because they will get the best prices for the importations that way. By cooperating, they can bring in 30,000 ton cargos when some terminals will only take a few thousand.

E Why did you leave the pool?

We preferred to have our own flexibility. The pool works for the people in it due to their locations. We’re probably a number too many. We have the capacity to bring in our own 30,000 ton ships without the pool. The problem for us was that we would end up taking small pieces off a number of different ships that came in. It’s not particularly economic. If you say that a ship will cost you about $20,000 to $25,000 each port it goes to, if you’re going for just a few thousand tons or for 30,000 tons it makes quite a substantial difference to your economics.

E Where do you expect our energy costs to go over the long term, and how do you plan your business strategy in response to potential ‘energy wars’ or consistent high costs?

If there was an energy war I think we would be in particularly good shape because we have a terminal that has a reasonable size to it. We have the capacity to bring in ships ourselves. We have an efficient system. We have a relatively low cost base. We don’t have historical debts. It would just crush margins in the short run and I don’t fear for that. I would have thought that the government would need to consider – and I obviously don’t want to say anything that would upset the consumer – reflecting the new reality of world oil prices some time and to do it gradually so that people can absorb it and adjust to it. They really need to not avoid the situation that’s out there. They need to deal with it.

E How much of your revenue do you reinvest in environmental safety measures?

The oil terminal is currently being ISO-approved. It has the requisite systems on it, to, for example, stop evaporation losses and cooling systems to minimize any kind of airborne losses. Our terminal is well looked after in that respect and the ISO qualifications should endorse that.

E What effect does the ongoing instability in Lebanon have on your strategy and projections?

On a general level I think that the Lebanese have a business spirit that stands them in extremely good stead. Effectively, the issues that we see around us can prevent investment and the creation of a more organizational structure. We have a lot of individual small companies that are ruled as fiefdoms. At some point Lebanon needs to evolve to where companies actually run themselves. And those structures could, with the Lebanese spirit, become very powerful in the region. The factors that we’ve seen lately don’t help the Lebanese situation of development and growth, despite the fact that it is well placed to do so. And it’s missing out on the growth that you see in Amman and other places nearby.

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Economics & Policy

Open for trading: The DIFX takes off

by Nicolas Photiades
written by Nicolas Photiades

Since the fateful events of 9/11 in New York, the phenomenon of investment repatriation by Gulf Arabs has accelerated significantly. Indeed, since 2002, Saudi investors are believed to have withdrawn more than $300 billion of investments from the US, while other Gulf countries are also said to have reeled-in roughly the same amount, if not more.

The record high price of oil has also contributed significantly towards this new prosperity and high level of liquidity in the Middle East. However, this liquidity has flooded a region that has been stagnating for the last decade in terms of investments, and has not been matched by a similar number of placement opportunities … until now that is.

Three years ago the return of Arab money prompted the launch of plans for a regional, modern and efficient financial exchange in Dubai. The result, rather predictably, is the Dubai International Financial Exchange (DIFX), which opened for business in September 2005, and which now gives international investors full access to Middle East companies.

It is part of the legally autonomous Dubai International Financial Centre (DIFC), a 110-acre “mini state,” which was also inaugurated in September, and which has, with the help of British and Australian regulators, established the Dubai Financial Services Authority (DFSA), a special capital markets authority to regulate the exchange and ensure it complies with international regulatory standards whilst supervising all capital market transactions that go through the DIFX. All successful exchanges traditionally set up a rigorously run capital markets authority to supervise capital markets transactions, and it is up to the DFSA to ensure that transparency is kept high at all times, and only suitable companies that fulfill investors’ needs get their securities listed on the exchange.

Taking it international

Thus the DIFX is unique, even by world standards, as it is a new financial exchange with a primarily international outlook. Most are usually set up as national exchanges, which become tied to the domestic economy for long periods of time. Some national exchanges, such as those in London or New York, have gradually developed into international exchanges, welcoming companies wishing to be listed from all over the world. However, the process is usually slow and it is clear that with the significant amount of liquidity available in the Gulf region, the DIFC felt it had no time to waste in making the DIFX into both a regional and international exchange from the beginning. While the old Dubai Stock Exchange has been kept operational by the Dubai government, the DIFX has been created and set up separately to cater for regional companies and to complement markets in the rest of the Middle East.

Until now, the various local exchanges of the Middle East have had limited success, as they all operate along national lines, with their potential being highly dependent on the way their national economies develop and prosper (the Beirut Stock Exchange (BSE) for example, doesn’t even have a capital markets authority in place). The exchanges stand out by their lack of attractiveness, given the dire state of their domestic economies, and a consequent lack of liquidity in secondary markets.

Another issue is that Middle Eastern equity markets have, for very long periods, been closed to foreigners, and have been operating under different rules from those established in other regions. While international investors have been limited in what regional securities they can buy and how they can buy them (settlements, currency, etc.), regional investors have been restricted as to where they can buy securities emanating from different parts of their own region. Most of the exchanges in the Gulf have, until now, been dependent on demand from oil-rich institutions and individuals, while exchanges in Lebanon, Egypt, Jordan and other non-oil Arab countries, have been relying on retail investors with traditionally limited capabilities.

Today, investors throughout the Middle East, particularly the cash-rich nations of the Gulf, are keen to diversify their investment interests beyond oil-related stocks and local real estate companies. Such desires for diversification and strong demand for securities issued regionally can only be met by international exchanges such as the DIFX. The latter is aiming to trade in US dollars and to place no limits on foreign ownership. The minimum listing requirements are expected to attract companies from throughout the region, as well as companies from Africa (demand from South African mining companies has been registered), Turkey, India and China (which interestingly are starting to use the DIFX option, even though they can use the Hong Kong and Singapore markets). According to the exchange’s officials, Egyptian and Lebanese companies have also shown interest in the DIFX, with the latest example being a potential listing of the recently much publicized and significantly over-subscribed IPO (Initial Public Offering) of Investcom, a telecommunications company owned and controlled by the Lebanese Mikati family (see pages 48 to 70).

The DIFX is ambitious. It is aiming for at least 15 IPOs and as many secondary listings in the next 18 months. This is more than just mere hype, as the recent IPOs that have already taken place and which got listed on the DIFX, such as ADDAR Real Estate ($225 million), the Saudi consumer dairy company Almarai, and the Saudi Dairy and Foodstuff Company (SADAFCO), were heavily over-subscribed. ADDAR was impressively 450 times covered, while Almarai and SADAFCO were respectively 3.5 times and 6.5 times oversubscribed. This severe over-subscription is a reflection of the heavy demand for too few investment opportunities, and the future looks bright for this new exchange, which is relying on its light but solid regulations and international outlook to attract companies from Asian and African markets.

Pre-placing IPOs

Demand for newly issued regional securities is such that even the usual process of underwriting is often unnecessary. The high demand emanating from Gulf individual and institutional investors, as well as from Islamic banks – which are the fastest growing type of financial institution in the world (annual growth in both profits and assets is estimated to range between 10% to 15%) and which focus solely on placing cheap funding into non-interest paying assets such as shares – is such that all IPOs are pre-placed before the official date of their issue.

The DIFX is also looking to see listings across sectors, despite initial concerns that securities issued by the oil and gas sector would dominate. Currently, the DIFX includes companies with market capitalizations ranging from $100 million to $1.5 billion, reflecting the accessibility of this exchange. All kinds of securities are expected to be listed, including traditional equities, bonds, sukuks (Islamic bonds) and even Global Depositary Receipts, particularly those issued by Indian companies. Expansion of the exchange over time should add derivatives to this diversified pot of securities, as the high accessibility of capital through the DIFX is recognized in the medium-term.

The DIFX is also the first vehicle through which demand for capital would be optimized. No wonder Chinese, Indian and South African companies are feeling the necessity to launch their IPOs through this exchange, which finally offers our own Lebanese companies a real opportunity to go global, diversify funding and revenues, and gain substantially in terms of reputation. The massive success of the Investcom IPO (through both London and the DIFX) and the significant over-subscription (believed to have exceeded 10 times) is proof of the strong demand for Lebanese shares and securities that awaits any visionary Lebanon-based company in need of capital boosting.

With the Lebanese government planning to resume a much-awaited and overdue privatization program, the launch of the DIFX could not have been timelier. Before the opening of the DIFX, it was not clear whether Lebanese privatization would have been successful. However, the recent IPOs of Gulf companies, as well as Investcom, have proved many skeptics wrong, including this writer.

Although strategic institutional investors are still needed in the privatization of Lebanese public institutions (particularly the utilities such as EDL and water), the Lebanese government now has the added comfort of raising capital and urgent cash out of listing on the DIFX. Sadly, this could be bad news for the BSE, as Gulf and Lebanese investors find it more practical and transparent to buy Lebanese privatization shares directly through the DIFX.

Although some issues of corporate governance and interference from the DIFC’s top bosses remain, it is obvious that the creation of the DIFC and the DIFX is the step that will propel the Arab financial world forward into the 21st century. With such a tool paving the way for an explosion in Arab capital markets and consequent regional prosperity, it would be a shame if all of it were to collapse due to weak corporate governance and control freak behavior.

 

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Business

Ready For Take-Off

by Anthony Mills
written by Anthony Mills

In the United States today more than a third of all plane tickets are bought on the web, thanks in great part to the fact that 68% of the country’s 328 million inhabitants use the internet – according to www.internetworldstats.com – and that the credit card has become almost as ubiquitous as the wristwatch. In stark contrast, across the Middle East, only 8.2% of roughly 261 million inhabitants use the internet and many people have never seen a credit card. But despite this world of difference, Mitri Kurban, a partner of Lebanon’s Kurban Travel, is convinced that now is the time to launch a Middle East online travel booking agency – appropriately named uflyonline.com.

A revamped concept

Uflyonline – the website – has actually been around for a couple of years. But it has kept a distinctly low profile, operating behind the existing travel agent Kurban Travel. So, although you could buy a ticket online, you had to pick it up from Kurban Travel. “Not the best way of doing it,” agreed Kurban. Only recently, though, did he and his fellow investors decide that the time was ripe to transform uflyonline from an unpublicized website into a fully-fledged, independent company – a move streamlined by a marketing campaign that by the end of the year will have cost almost a quarter of a million dollars (around 70% of total costs).

“Two years ago, we didn’t feel that the market was ready. For two years, we advertised only online. Now, more people in Lebanon and the region are using the internet, technology has advanced, the internet is much faster, and airlines like Emirates, Saudi Arabian Airlines and even MEA are using e-ticketing and the internet more,” Kurban said. “We have opened a real bricks-and-mortar shop to let people know that we exist, that internet booking is a reality, that it’s the best way to book for a journey. The shop is licensed and operated in Lebanon. It’s open 24 hours. The choice is there and prices are very competitive.

“If we don’t move into the business, in this region now, someone else is going to.”

Uflyonline had only been functioning in its new form for five days when Executive spoke to Kurban, but he said sales already indicated the marketing campaign was drawing customers to the site. “We’ve been positively surprised by the appetite of people for this service,” he said. “People have been catching on immediately, jumping on the internet and booking.” In the 48 hours before the interview, Kurban said, uflyonline had sold 10 tickets.

Following international trends

Kurban witnessed firsthand the boom in online booking in the United States when he was living there in the late 1990s, and predicted its spread to Europe. In fact, one of uflyonline’s current owners is a Frenchman who set up an online booking agency in Europe just as the boom was spreading. “He told me: we should try this in the Middle East,” Kurban recalled. “I began seeing how it could be implemented here. I went from Cairo to Dubai to Abu Dhabi to establish the system. It took us almost a year-and-a-half to create alliances and understand the business. And we had to adapt the technology. We dealt with a lot of problems, a lot of bugs. We changed our business plan many times. Finally, we came to the conclusion that we would have to set up a shop in each target city and begin promoting online booking as a real product and give people the choice.”

The company is owned by four partners: Kurban, the French online booking agency owner who suggested the Middle East venture to Kurban and apparently wishes to remain anonymous, Openfares, a Canadian software solutions company active in North and South America and Europe and hoping to expand into the Middle East, and a Saudi silent investor. Together, the four have already invested almost a million dollars.

An inexpensive startup

“That’s actually a very small amount for this type of business,” said Kurban. “The startup budget for my French partner’s Europe venture in 1998 was 12 million euros. Today it would cost him 30, 40 or 50 million euros.

“The reason it has cost us so little here is first, we haven’t done that much yet; second, the cost of advertising and many other costs are much lower; and third, we don’t for the moment have any competition.”

But Kurban said he expected competition to flourish as the concept took hold in the region. “We have noticed that Europe follows the US by three to four years,” he said. “And we follow Europe by three to five years. So the gap between the United States and us is about 10 years. Online travel developed in the United States in 1996. Today, almost a third of European air travelers purchase online. In five or six years from today, online booking may take a 10% share of the Middle East market.

“I don’t think it will ever reach 30% or 40%,” he added, “because of the lack of education, of people speaking the languages. But even 10% of the Middle East online market is a lot of money.”

Kurban said he expected the company to spend a lot more over the next few years establishing client bases across the Middle East.

In Lebanon, over the coming year, another $300,000 to $500,000 will be spent, he said. And then come other Arab countries. “If our Lebanon venture is successful, we’re moving into Dubai next, then Abu Dhabi, then probably Kuwait. We’ve seen a huge number of US soldiers using our services in Kuwait.” Kurban said the company expected to spend another $6 million in the region over the next three years.

Regional reach

When uflyonline established its low-key internet presence behind an existing travel agent in Lebanon two years ago, it did the same thing in seven other Arab countries – Bahrain, Egypt, Jordan, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates. And just as it has transformed itself in Lebanon into a fully-fledged independent company, so it hopes to do the same in the other seven countries.

Kurban said he sees the company breaking even within two years. He said he hoped to be doing $10 million worth of business in Lebanon within two years, “comparable to one of Lebanon’s top five travel agents,” or 3% of Lebanon’s roughly $300 million travel agency sector.

Kurban acknowledged that it may not be easy drawing customers in this part of the world away from the traditional face-to-face purchasing they are used to. The website “doesn’t talk,” he noted. But he is convinced that there are enough modern, aeroplane-using internet users in the Middle East to make the system work. And in an effort to retain a reassuring human element, uflyonline has established call centers that are open to queries during regular working hours. Customers are also free to pick up their tickets from uflyonline offices.

In another tacit admission that it will take time for Middle Eastern online bookers to become as automated as their Western counterparts, uflyonline doesn’t oblige customers to pay by credit card. “People are happy to drop in at our office and pay cash. Many don’t trust credit cards,” Kurban observed. Nonetheless, he added, half of the purchases over the past five days had been made by credit card. “For the moment we are educating people in the region,” he said.

Kurban is keen to stress that uflyonline is not a subsidiary of Kurban Travel. It is an entirely separate company. However, his share of the investment is effectively a Kurban Travel investment. “And so we’re trying to do it in a way that hurts Kurban Travel least,” Kurban explained. “That’s why we’re keeping it totally separate, so the customer doesn’t have two choices in the same office.”

Uflyonline currently counts 25 staff, of whom only seven actually work in Lebanon. “Everything else is outsourced to web and technology people, mostly in Canada,” explained Kurban.

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Crossing the rubicon

by Michael Young
written by Michael Young

With Lebanon having crossed the Rubicon of the Mehlis report, it must now prepare for the storm that will follow. In many respects, the country will have to use the upcoming months to define, or redefine, what kind of society it expects to be – whether one imbued with a capitalist culture of openness and free markets, or one racked by fear and diffidence.

The answer is not an easy one, as the Lebanese will have contradictory answers to the three major challenges they can be expected to face: addressing the implications of what the United Nations investigator Detlev Mehlis revealed, and the legal consequences of this; the breadth of economic reform, and the limits of the society’s openness. In his report, Mehlis found compelling evidence to hold Syrian and Lebanese security officials and politicians responsible for former premier Rafik Hariri’s assassination, and described a widespread conspiracy that appeared to reach to the top leaderships in both countries. Whereas Mehlis’ conclusions may invariably lead to a clash with Syria, the dictates of the free market point in an opposite direction, namely to some sort of agreement so that Lebanese exports can travel through the common border, but also so Syrian guarantees of Lebanese security make the investment climate agreeable. The only problem is that intimidation and free markets rarely mix for long: if one party gains the upper hand, mutually beneficial exchanges – of goods, services, and much else – come to a grinding halt in favor of imposition by the stronger party. That’s why the Lebanese were compelled to applaud when months ago Syria was forced to end its border blockade of Lebanon after Iraq imposed a similar blockade on goods entering Syria. In other words, the desire for free markets may have to come accompanied with recognition that turbulence in trade and other exchanges will probably be inevitable in the coming months. This will not mean the government has no role to play in alleviating the consequences; but it does mean that it should probably not be held responsible for a worsening relationship with Syria it will almost certainly have little control over.

The fate of reforms

If foreign trade suffers from the aftershocks of the Mehlis report, the question of domestic economic reform is a different matter altogether. The difficulties of privatization are well known, and the government will certainly have to face those politicians or parties expected to lose the most from a cutback in the civil service. But instead of letting the ambient tension freeze privatization, the Seniora government (if indeed it remains in office in the coming months) must try to use the momentum created by that tension, so that any effort to derail a bureaucratic cutback can be played up as Lebanon’s missing a chance to be on the same page as foreign aid donors.

That might work if all things remain constant. Otherwise, Prime Minister Fouad Seniora’s ability to pursue reform will be a function of political cohesiveness, or lack thereof. The prospect that Lebanon may enter into a period of confrontation over the presidency, for example, may mean many weeks of costly idleness, where the international community loses interest in Lebanon. A third question the Lebanese will have to answer is how open they want their society to be. This means, particularly, looking at the future of media freedoms. The bomb attack against LBCI anchorwoman May Chidiac came as a shock; it shouldn’t have after the assassination of An Nahar columnist Samir Kassir and the threats directed against other journalists, particularly An Nahar owner Gibran Tueni. Lebanese media have accepted a small measure of self-censorship, particularly on matters Syrian, but overall this has been limited to the commentariat – as many journalists understand, it is less what they say specifically that disturbs the neighbors than the fact that Lebanon has a relatively free media sector in general. A warning to one journalist is a warning to all, and if something must be clarified in the coming months, it’s how extensively journalists will defend this; but also how wide a margin of expression the government will give media outlets.

No turning back

The Mehlis report was a break-off point between Syrian-controlled Lebanon and what now follows. The findings will hardly bring serenity, but they do push us into a new phase where it’s up to the Lebanese to begin defining the system they intend to build. There are no easy answers, and relations with Syria are bound to worsen before they get better. In that time, Lebanon’s government and society should stick to the proven certainties: adhering to an internationally sanctioned legal process in the Hariri assassination, pushing economic reform, and defending an open society.

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What went wrong at investcom’s IPO?

by Executive Staff
written by Executive Staff

Much anticipation surrounded the launch of the IPO of Investcom Holdings in the Middle East. While the Lebanese company did not have any major assets in the GCC or the Levant, it benefited from a high profile due to the political heritage of its main shareholders, as well as its presence at a number of high profile auctions in Europe and Africa.

An initial assessment of the IPO’s success and investor response should have been very positive, underpinned by an eight times oversubscribed offering. Such a response to the offering was not surprising, given the plethora of high-net-worth GCC investors and institutions seeking to benefit from Investcom’s strong economic performance. Coupled with the buoyant equity markets in the region, subscription applications were running out at various receiving banks across the region. Lebanese and regional banks were able to satisfy investor demands, as the lead bookrunners and receiving banks mobilized large numbers of sales agents and private banking officers to ramp up demand for the IPO and funds began flowing into escrow accounts at various receiving banks. Press coverage continued to entice new investors, and the Dubai International Financial Exchange (DIFX) was capitalizing on the hype to boost its own profile as a regional stock exchange, where Investcom would be the first listed company.

It wasn’t until the subscription period came to a close and allocations were complete that investors began to realize that things had not gone according to plan. Then the phones began to ring. Many high-profile GCC investors, who had put tens of millions of dollars into escrow accounts, had received practically no share allocation at all. Outrage erupted, but the underlying reason for the fallout was simple.

What transpired

The share allocation for Investcom’s IPO was completely “discretionary,” following neither the “pro-rata” nor “equal allocation” share offering formula (see box). The ultimate result was that Investcom alienated a large number of GCC investors, who are now up in arms at the results of the offering and are publicly vowing to be more cautious in future business dealings with the company unless satisfactory explanations are provided.

Perhaps one would understand the position of such investors, given that they were personally and individually approached by Investcom to subscribe to the IPO, and despite putting up a combined amount of more than $100 million, none received a single share in the company.

To make matters worse, upon receipt of notification by Investcom of no allocation of shares, those investors were also notified in writing that Investcom would immediately return the funds transferred by those investors (which had already been in an Investcom escrow account for a week). The refunds, however, didn’t materialize for another week. Assuming an average credit interest rate of 4%, the opportunity cost for those investors exceeded $150,000.

As of the date of the publication of this article, Investcom has not yet publicly responded to such allegations, which have ultimately prompted a group of large GCC investors to prepare an organized action to lodge an official complaint with the Lebanese government. Whether such a move is more of a theatrical ploy to spur a response from Investcom is not clear, but there is no doubt that many high-profile investors in the Gulf are irate.

They were not the only ones affected by the allocation. Most investors were brought in through the receiving banks appointed by the lead bookrunners (HSBC and Citigroup) for the GCC. The receiving banks included Abu Dhabi Commercial Bank, Audi Saradar Investment Bank, Dubai Bank and the Global Investment House in Kuwait. Some investors blamed their receiving bank for not securing the sought allocation. Many of those receiving banks in turn invested heavily in promoting the IPO, only to receive minimal allocation (and consequently a fraction of the placement fees).

While it may be difficult to clearly understand Investcom’s reasoning, this is how they might argue their case: Investcom was undertaking the IPO primarily to raise additional funding for new telecom acquisitions (such as Spacetel Yemen); and provide an opportunity for the founding shareholders to reap the benefits of their work (with the added benefit of reshuffling the shareholder structure of the company).

With the total offering accounting for 25% of the company’s overall share capital, the ultimate post-IPO shareholder/ownership structure would be a serious consideration to Investcom’s management and existing shareholders. With some of the largest GCC-based investors capable of bidding sufficient amounts to acquire a blocking or influential minority stake in the company, Investcom might be justified in attempting to keep the ownership structure in favor of management, and therefore avoiding the risk of a future hostile take-over. In effect, the discretionary allocation ultimately allowed Investcom to maintain an ownership structure for the 25% offered. It was highly fragmented in certain cases, and in the hands of “loyal” investors.

Interest in Investcom was fourfold. It was the first IPO of a Lebanese company outside Lebanon and a high-profile telecom IPO when the telecom craze was at its peak in the Middle East. GCC investors were (and are) swimming in liquidity, and last but not least, by any stretch it was the inaugural IPO of the new Dubai International Financial Exchange.

Whether the disappointment felt by GCC investors in the allocation will deter them from putting money on the table again, or whether Investcom’s experience should be a lesson learned for future IPOs, smaller investors continue to satisfy their appetite for speculative trades given market and liquidity conditions.

Still there is a bottom line. In the finance community, an IPO’s success does not culminate with raising enough funds to cover the offering, but with the performance of the listed shares in the immediate period following the listing. In the case of Investcom, the stock is up less than 10% since listing on the London Stock Exchange, in comparison to post-listing gains of more than 100% on recent Saudi or UAE IPOs.

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Investcom: Lebanon’s Telecom adventurers

by Tarek Zein
written by Tarek Zein

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.

Reviewing strategy

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.

The shortfalls

“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.
 

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Who Lost Out

by Clay Holden
written by Clay Holden

To listen to Jean Riachi tell it, the massive success of Investcom’s recent IPO offering could have been predicted by anyone in possession of even the most basic understanding of the regional investment market. “This was expected,” the chairman of Financial Fund Advisors (FFA) said, adding, “because once the IPO was announced, we received a lot of calls from Gulf customers who told us they were interested. And this level of interest was confirmed by HSBC and Citibank’s [participation] in the issue.” But what neither Riachi, the bookrunners, nor anyone else in Lebanon’s investment community seems to have predicted was the potential for widespread animosity and resentment in the aftermath of the allocation.

Out of their hands

Audi Saradar Investment Bank, the one Lebanese bank that was appointed a distribution agent, was unable to distribute the bulk of Investcom’s virgin shares to its own clients. In the end, Investcom carried out the allocation on a basis far removed from the “pro-rata” custom of distribution used to smooth client egos and guarantee at least a modicum of fairness in what remains a under-regulated industry.

There were red faces all round and, because many of the bank’s clients had broken time deposits to release funds, hastily-prepared explanations were dispatched. “The significant majority of the Bank Audi allocation (approximately 85%) was directed, by the company and the selling shareholder, to certain Gulf investors,” stated a Bank Audi circular to its reportedly 360 clients who had generated a demand of some $1.2 billion. “We regret any inconvenience that the allocation process may have caused you and wish to assure you our continued commitment to our clients.”

Accusations flew: the offering was flawed, hyped as an IPO but in reality it behaved as a private placement; the company was nothing more than a money making front for Syria’s Assad family and its entourage who, in a fit of pique, deemed there should be minimal Lebanese allocation; the IPO was merely an opportunity to turn a fast buck (a doubter only had to point to the extremely mediocre performance of the share price two weeks after the offering – slipping from $15 to $12.5 – to draw that conclusion).

Whatever the rumors and conspiracy theories on the local market (Investcom has denied them all – see page 68), the IPO was the event that propelled the company from relative obscurity into the spotlight of the financial world. From continuous coverage from the Financial Times and Dow Jones, to a successful capping replete with flashy advertisements on international news channels, the IPO was seen as a motif of optimism, growth and prosperity. The offering also set two milestones: first, by being the biggest international share sale by a Middle Eastern company, and second, as being the first to be listed on the newly formed Dubai International Financial Exchange (DIFX). The IPO – which was an international offering to institutional investors outside the United States – offered 59,995,428 GDSs (128,548,569 new shares and 171,428,571 existing ones) at a price of $12.35 per GDS. Each GDS, listed on the London Stock Exchange and the DIFX represents five ordinary shares. Upon issue, the GDSs were evidenced by a single Global Depositary Receipt.

The effect of the malaise

But what of the residual bad feeling? According to Walid Mussalam from the Middle East Capital Group, Investcom’s public debut was “handled in a manner which is unusual for an IPO of this kind, especially in developed markets.” But while Mussalam noted “it’s not unusual to have an allocation to friends and family of 5% or 10%,” the hearsay currently making the rounds among Lebanon’s investment community puts that figure much higher in the case of Investcom’s allocation. Mussalam said that while he personally views the Investcom IPO as being “definitely very good for Lebanon,” he also admitted that the current wave of bad feeling should also be “a lesson for anyone who tries to do this in the future.”

While making clear that he was speaking in broad, theoretical terms – and not talking about Investcom – Nicholas Sawan from Fidus noted that the practice of allocating shares among company favorites can work against the interest of the company itself, as well as against the interest of investors without connections. “It can result in a bad conflict against the idea of what IPOs are supposed to do in the first place,” Sawan said, noting that most companies should be using the opportunity of a public offering to build up a core of committed, outside investors who won’t simply flip the stock after a more-or-less guaranteed first-week profit. Also, if too many of a company’s shares are allocated to those close to the original owners, Sawan said: “What they do is hand pick, and when they hand pick, they are thinking about their short-term interest.”

Even less charitable was an official at a prominent investment house – who requested anonymity so that he could speak frankly about Investcom without damaging the interests of his clients – who said: “They [Investcom] should have been more careful. They blew a real success story with the way they handled their IPO. In fact, I was very happy the way it [the IPO] was handled poorly, that is, outside of Lebanon … If it had been done here, and it had happened like this, all the focus would be on Lebanon, and a lack of transparency.”

And while it’s important to remember that, with no cellular operations in Lebanon, the question of what, if anything, Investcom owes the Lebanese investment community is a fair one to ask, investment experts interviewed by Executive voiced private concerns about whether Investcom’s IPO model would become an acceptable model for privatization in Lebanon. One expert who requested anonymity said: “If this is going to be the norm, some of the clients we have will not be in the market. The bigger the client, the more upset he is when he is not given special treatment. Some clients take it personally … the real big ones are saying: ‘We’re out, we’ll never touch another Lebanese issue again.’”

Recovering from the backlash

But even Investcom’s most fervent critics doubt that the sharp pain of being cut out of the IPO will have a long-lasting effect on the company’s ability to do business. “People will go for the rational, not the emotional,” said one. Another critic simply said, “business is business.” Of course, the rub is that few would have cared about transparency and institutional fairness if Investcom weren’t so profitable in the first place.

Citing liquidity in the Gulf region and broad-based interest in the telecom sector as the main drivers behind Investcom’s over-subscription, Riachi suggested Investcom’s aggressive pursuit of profit in risky locales such as Afghanistan was, for the moment, being rewarded with a willingness on the part of investors to come along for the ride. “It [the stock’s current price] might be high for such risk … but the market has an appetite for this risk right now. They [Investcom] know how to take a profit through clever moves. It’s a success story, and the company’s management is quite good.”

Or at least good enough to not need to worry about ruffling feathers. That, finally, may be the lesson of IPO’s in Lebanon, where being able to turn a healthy profit in Syria means never having to say you’re sorry.

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Azmi Mikati defends Investcom’s IPO

by Thomas Schellen
written by Thomas Schellen

E There has been a lot of reaction to the IPO. Many within the sector claim it was nothing more than a private placement disguised as an IPO, designed to drag in small investors to hype the event. Can you comment on this?

There was no need for any hype. We knew very early on that there would be a lot of demand for this offering. We went on a road show in Europe and met a lot of institutional investors over there who liked the story, so it wasn’t over-subscribed through hype; it was over-subscribed because it was a story of growth, a company that has a very strong track record, an excellent management team and a company that is operating in markets with a lot of potential. The fundamentals are there. We are not looking for hype. Anyway, overall demand came from Europe but being a Middle Eastern company with its roots in Lebanon we had demand here too. Far from being a private placement, it was a full public offering in which 60% [of demand] came from Europe but [in the end] we allocated 50% to the Middle East and 50% to Europe.

E So why was there no, or virtually no, Lebanese allocation?

Working with our global coordinators, we allocated mostly to institutional investors – Middle Eastern or Europeans – while a small portion went to individuals, mostly to our employees. We had a lot who requested allocation and they are the ones who deserve the most because they are the ones who have contributed the most to the success of the company. So most of the individual allocation went to those who have worked for the company and who have been with us for a long time.

E So what do you say to the many people, Banque Audi customers in particular, who broke time deposits and who received no allocation at all?

It’s an open market. There is nothing stopping someone buying shares on the open market even if he has not been allocated. These are shares that are tradable in volumes on the LSE and very soon on the DIFX (Dubai International Foreign Exchange). But in terms of allocation, we were way over-subscribed. Tough decisions needed to be taken and we decided to allocate to institutional investors. E But surely if there is a heavy over-subscription, allocation is reduced accordingly and everyone gets something, don’t they?

This might be the way it works in the Middle East but this is not the way it works in Europe. We did an IPO based on international standards. You cannot expect an investor X to come and demand his 10% allocation in the same way investor Y can come in and get his 10% allocation. At the end of the day you want a large investor base and like I said, tough decisions had to be made when we made that allocation in coordination with the global coordinators and this was the outcome. Today if somebody wants shares, let him buy them on the open market. So if I knew what the real problem is [that you are raising] it would be easier for me to discuss it.

E Have you felt any of the negative feedback?

I know a lot of local investors were unhappy because they did not get shares. I can understand their unhappiness, I really wish they could actually have been allocated and I hope they can become shareholders in the future – that they believe in the company and buy shares on the market.

E Roughly 40% of your company’s revenue comes from Syria. Given the international interest in that country, wouldn’t you say that this puts Investcom in a precarious situation should any embargo occur?

I don’t see why. In the countries in which we operate, there is always a level of risk. We operate in emerging markets, but these risks are more than compensated by the growth that these countries offer. So yes, there is risk but this is more than compensated by growth and profitability and investors do understand that. I don’t know if you have seen our prospectus; we have done an offering based on international standards. Everything is disclosed and this is key to us … that we operate in full transparency … and coming back to the first issue, we clearly said that the allocation is discretionary. It is not a proportional allocation and people should understand our position.

E Banque Audi was particularly embarrassed by the share allocation. You have a close relationship with the bank. Can you understand their position?

We had, have, and will continue to have an exceptional relationship with Banque Audi. Banque Audi was a key element in our success. They financed a lot of our operations when other banks were unwilling to take the risk or did not see the potential and Audi was beside us. Audi cares about its customers.

E Given your ties with Syria and the fact that there was no Lebanese allocation, some people are drawing unfavorable conclusions. Can you comment on this?

I don’t get what conclusions they are making. You say there was no Lebanese allocation but most of our employees are Lebanese and most of the non-institutional allocation went to Lebanese. I can’t make any correlation with what you are saying.

E Investcom shares are currently trading at around $13?

Around $13.50 to $14.

E They peaked at $15?

Yes, that is correct.

E What do you say to those people who say the current price is an indication that the offering was an opportunity to turn a fast buck and not a commitment to the long-term growth of Investcom?

These are not the type of investors we are looking for. I am not looking for flippers, in and out to make a quick buck. I am looking for investors who believe in the company, its strategy, management team and want to make more than a buck over a week or a month, but want to see growth in the long term. These are the sort of people we want as our shareholders.

E Moving on to your operations, how confident are you about developing under-developed markets such as Guinea Bissau, which has a population of 1.5 million and a GDP per capita of some $180?

Guinea Bissau is a good example. We started our operations in August 2004, and in less than a year we were EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization) and net income was positive on a month-to-month basis by July of this year. Countries like that are small but with high potential. They are highly under penetrated and we have the expertise to make them profitable and have them contribute to the net income of our business.

E Do you really believe that such markets will make you more competitive?

What do you mean by more competitive?

E Well these, as you say are underdeveloped markets. Where is the competition to develop your edge?

This is the nature of our business. Look at the contribution to the country, its population and its economy. There is a direct correlation between the direction telecom penetration rate and GDP growth. It is obvious we are contributing to regional development. It’s a way to have people talk to each other. So direct economic impact is profitable for us as a group. In Ghana we are up against three international players Hutchinson, Millicom and Telenor and yet we have held our position as the market leader with a 67% market share. So you can’t say it’s easy prey.

E You currently operate in 10 countries?

We operate in eight countries and we have two new licenses so within the next six months we will [be in ten].

E The word on the street is that you are eyeing up Saudi Arabia. Can you comment on this?

Well, we are looking for non-organic growth. We want to put our feet in countries with a relatively low penetration rate that have growth potential as well as countries that have a compelling competitive environment. If this profile is met, then we would be very interested.

E So does that mean you are looking at Saudi Arabia?

If you look at the profile of Saudi Arabia, it does meet these criteria.

E Currently over 70% of your revenues originate from only two of your markets, namely Syria and Ghana. How will your revenue distribution change in the next two years?

Sudan, Yemen and to a lesser extent Afghanistan will become the bulk contributors along with Ghana and Syria. The latter two will be then contributing around 50%, so there will be more of a spread.

E How challenging will Afghanistan be?

If you look at Afghanistan it fits our market criteria.

E You are really starting from scratch.

Totally. It has a population of 30 million, lots of growth potential and we believe it’s a great opportunity and we are looking forward to starting there.

E What about security?

Security is a concern in a few of the countries we operate in, but it is still manageable and we will deal with it like all the multinationals that operate in these environments.

E As Investcom Group, you started operations in Lebanon in 1982 under Inteltec. What sort of telecommunications engineering services did you offer and most importantly to whom? How successful was it?

As a corporate entity Investcom was founded in 1984. The group began its telecom adventure back in 1982. The partners lived in Abu Dhabi but moved back to Lebanon. They found the telecom situation very bad due to the war. We started selling and installing satellite phones designed for ships on office buildings as a sideline. We installed about 50 phones but they were very expensive, about $50,000 each with calls costing $10 per minute. Eventually we installed the first cellular network in the 1990s and we moved on from there.

E All of your operations are centralized via Beirut, how does this affect your operations across the board and do you have one similar strategy for all the countries you operate in?

We are headquartered in Lebanon but all our operations have their own structure and their own team and whenever there are value-added opportunities that can be created, then those functions are centralized in Lebanon.

E Can you tell us about Mednet, your international telecommunications operator based in Monaco? Is it successful, how does it operate and who does it serve?

Sure. Mednet is the international arm of the Investcom group and what Mednet does is it aggregates and carries traffic from the operations where we have the licenses to the outside world and at the same time it carries the traffic of other international carriers such as France Telecom, Telecom Italia, AT&T and BT into the markets where we have our own networks. It’s a long distance carrier based out of Monaco and contributing positively to the overall income of the group. It’s very successful.

E Finally, how will the IPO proceeds be used?

For non-organic growth. If we wanted just to go for organic growth we have a balance sheet that is very strong and under-leveraged and positive cash flow coming from our operations, so we wouldn’t have needed the IPO. The proceeds will be used to go after opportunities that fit the criteria we have discussed.
 

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