FROM THE ECONOMIST INTELLIGENCE UNIT

Out-priced in Iraq and now set to offload its operations in Zimbabwe and Algeria, Orascom's strategy of withdrawal from its high risk, low return investments is in stark contrast with its acquisitive regional competitors.

If Egyptian telecoms operator Orascom had a coat of arms its motto would likely translate as 'discretion is the better part of valour', or possibly 'once bitten, twice shy'. The company's strategy has turned distinctly cautious since 2002, when it sold most of the sub-Saharan operations of its Telecel subsidiary, and thereby pulled back from its ambitious expansion into Africa.

Subsequently the Middle East's empire builder has largely stood aside from the region's telecoms acquisitions frenzy, participating in auctions for mobile licences but refusing to bid at the kind of premium that would ensure its victory. Meanwhile, regional rivals such as MTC, Etisalat, MTN and Qtel have engaged in lavish spending to become multiple-market operators themselves.

Now Iraqna, Orascom's mobile subsidiary in Iraq, has become the latest victim of its parent company's strict investment criteria, after failing to win one of three permanent mobile operator contracts auctioned earlier this month. The company withdrew after bidding reached US$1.25bn per licence, and Orascom is now set to leave the country – a drastic move for a company that has operated in Iraq since 2003 under a temporary licence, investing over US$300m, and building a subscriber base of 2.9m that contributed US$520m to company revenues last year, close to 12% of the total.

Orascom's surprising retreat from Iraq comes at a time when it is also under pressure in two of its other markets. Telecel Zimbabwe, Orascom's one remaining sub-Saharan operation, has had its mobile operating licence withdrawn for an alleged failure to comply with Zimbabwe regulations restricting foreign ownership to 49%. Although it is appealing the ruling, Orascom may end up selling its 60% stake in the operation, or merging it with another sub-Saharan mobile operator in exchange for equity.

In Algeria, meanwhile, Orascom is said to be looking for a way out of the fiercely competitive fixed-line market. LACOM, its joint venture there with Telecom Egypt, is facing bankruptcy after reporting loses of US$45m for the first quarter of 2007. Accusing its rivals of unfair competition, LACOM has struggled to compete with heavy discounting of calls and handsets by incumbent state-owned telco Algerie Telecom. It has also complained of inadequate protection from Algeria's regulator, the Post and Telecommunications Regulation Agency (PTRA).

Exercising caution

Given these problems, Orascom's decision to withdraw from bidding for the Iraqi licence is understandable. The company believed that the licence fee was too high a price to pay in a market afflicted by civil war. Orascom already spends US$25m a year in Iraq on security alone, along with other costs such as generators to ensure a stable electricity supply and overseas training for staff. At the same time, subscriptions are falling among Iraq’s middle classes due to mass emigration, and the new licences came with a requirement that 18% of revenues be paid directly to the Iraqi government. This added up to a clear case for exiting the country.

So why did every other existing operator stump up the licence fee in order to stay in the game? They must have viewed Iraq’s fast-growing mobile market as a good long-term bet, despite the current political turmoil and economic uncertainty.

Where Orascom differs from its regional peers is in its financing. With a comparatively high level of debt, at US$3.8bn according to the company's first quarter results, it simply cannot afford to take the risks that cash rich former state-owned telcos such as Etisalat, MTC, and Qtel can.

Given these constraints, Chief Executive Naguib Sawiris has set his company's strict investment criteria. Orascom will only get involved in markets with large population and high growth potential where there is a strong chance of becoming the dominant operator, and in operations where Orascom can have total management control. He is also clear that political and regulatory risks are a major disincentive. Speaking at the annual 3GSM Congress conference in Barcelona earlier this year he said that margins in many markets on the African continent were too thin considering the management time required to deal with problems such as bureaucracy and corruption.

Tested against these standards it is clear that neither Orascom's operation in Zimbabwe, where it stands in a distant third place, or in Algeria are worth the management time required to sort out their difficulties. Meanwhile, in Iraq the benefits of staying were marginal at best despite the operation's contribution to revenues and potential. With strong growth for its mobile operations in Egypt, Bangladesh, Pakistan, Tunisia, and Algeria, Orascom could do well to focus its management resources on these large key markets, while pursuing new opportunities in more stable markets.

Sawiris is already making inroads into Europe through his family's Weather Investments vehicle, which bought mobile operators Wind Telecomunicazioni in Italy and TIM Hellas in Greece in the last two years. Meanwhile, Orascom's interest in the fourth French UMTS third generation licence was revealed at the end of July, following abortive talks with French cable operator Numericable about a joint bid. Clearly more at home with Europe's stable regulatory regimes and high-value customer base, Sawiris is unlikely to mourn his misfiring riskier markets for long.

SOURCE: INDUSTRY BRIEFING

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