Market participants had penciled in this Thursday, 10 September, as the deadline for KSA-based STC [KSA: 7010] to make up its mind with regards to its intended acquisition of Vodafone Group’s [UK: VOD] 55% stake in Vodafone Egypt [VODE]—Egypt’s largest mobile operator in terms of size and profitability, in which Telecom Egypt [ETEL] still owns a 45% stake. Back on 29 January 2020, STC said it was considering acquiring VOD’s 55% stake for USD2.39bn, valuing VODE at USD4.35bn. Since then, VOD’s stock traded on London Stock Exchange fell 31%, while STC’s stock traded on Tadawul advanced 8%, and ETEL jumped 30%. Yesterday, media reports suggested that STC wants to reduce its non-binding USD2.39bn offer, citing people with direct knowledge of the deal. By way of background, on 29 January 2020, both STC and VOD had signed a 75-day memorandum of understanding (MOU) which was later extended twice; for 90 days then for another 60 days ending this Thursday. Today, after 223 days, we lay down the options available for all parties, ending with our own opinion.
1. The buyer (STC): Saudi Arabia’s No. 1 telecom operator is the state-owned incumbent in the kingdom, which has exposure to other GCC and Asian countries. Operating in four Asian countries, STC’s acquisition of VODE would mark its first foray into Africa and will help improve its growth profile in the most populous country in the Arab region.
2. The seller (VOD): As part of its restructuring plan, VOD had decided to exit Egypt in an effort to simplify the group into two differentiated, scaled geographic regions, namely Europe and sub-Saharan Africa. Thus, sooner or later VOD will need to divest its Egypt operations.
3. The target (VODE): Egypt’s No. 1 mobile operator,[p1] VODE stands to benefit off the growing demand for data with double-digit growth envisaged, especially in the wake of COVID-19 crisis.
4. The partner (ETEL): Egypt’s incumbent operator, ETEL has a choice—remain a partner in VODE, make a counterbid for VOD’s 55% stake, or tag along and sell its 45% to STC.
Our opinion: STC could be trying to bargain over the price it needs to shell out for VOD’s 55%, thinking that the world post-COVID is totally different than before-COVID, especially that it might need to buy out ETEL as well, almost doubling its cost. If the reduction in the deal is large enough, it might make sense for ETEL to make that counterbid and swallow up VODE altogether then decide later what to do with its mobile venture “we”. Regardless, whether the STC-VOD deal goes through or not and whatever the decision ETEL will make, we continue to believe that ETEL is deeply undervalued at market price. The STC-VOD deal values VODE at USD4.35bn (5.8x LTM EBITDA and 11.5x LTM P/E), implying USD1.96bn for ETEL’s 45% stake or EGP18.1/share, gross of taxes (EGP14.8/share, net of capital gains taxes). This means that the market is currently attaching a negative value to ETEL’s other lines of business, which we believe—based on latest financials—could be worth EGP8.3/share (only 3.5x LTM EBITDA of EGP8.71bn). In other words, we value ETEL at EGP23.1/share. Now, assuming STC’s deal value is slashed by 30% (around the same price drop of VOD’s stock price since 29 January 2020), VODE’s value would fall to USD3.04bn, which would reduce ETEL’s stake to EGP10.6/share, cutting ETEL’s overall value to EGP18.9/share (still c.30% upside).
[p1]It’s new to me using this structure without the word “being” at the beginning, unless “VODE” comes first.