Missed Call?

Equity Research

March 25th, 2007
Following the hotly contested third mobile license in Egypt and the relatively high price paid for it (Etisalat of UAE won with a bid at USD 2.9 bn – please refer to our equity note dated 5th July 2006), the third GSM license in the Kingdom of Saudi Arabia (KSA) was expected to be even more disputed. The stage was set to make it a landmark event in the race for international expansion pursued by several regional telecoms operators: profile of the market (young and large population, largest economy in the Middle East, mobile penetration of 79%, relatively high ARPU of USD 37/month), prominent bidders (MTC, MTN, Turkcell, Oger Telecom, etc.) set against the scarcity of opportunities in the region.

Sector Coverage Team
Marc Hammoud +9714 3199 753 mhammoud@shuaacapital.com

Just as in Egypt, the staggering winning bid of SAR 22.91 bn (USD 6.11 bn) that was offered by the MTC-led consortium came as a surprise, and well above our expectations. The second and third largest bids stood at USD 4.6 and USD 4.3 bn, respectively. Given the constraints on foreign investments in KSA, MTC’s holding in the consortium is at 50%, with the remaining 50% in the hands of local partners. Local partners include Saudi Plastics Factory, Almarai Company, Rakisa Holdings and Al Jeraisy Development Company. However, the company will have to float 40% of its shares before the start of operations and allocate another 10% to the Public Pension Agency and the General Organization for Social Insurance - 5% each. No further share sales will be allowed until two years after licensing. With a 25% stake after the Initial Public Offering (IPO), MTC will consolidate its stake in the company as an associate but will have full operational control over the business. MTC Consortium Post-IPO Shareholding Structure
Saudi Investors 25% MTC 25%

Organization for Social Insurance 5% Public Pension Agency 5%

Free Float 40%

Source: MTC, SHUAA Capital

We believe that one the reasons that pushed the price of the third mobile license in Saudi Arabia to USD 6.11 bn is the shareholding structure of the consortia enrolled in the bidding process. Indeed, local Saudi investors are cash rich and are looking for investment opportunities, in particular in the telecoms industry. On the other hand, local Saudi investors should ease the burden of financing the acquisition. MTC will have to fund USD 3.05 bn (50/50 equity/debt), representing its initial stake in the consortium until the company sells 40% of its shares through an IPO, which is expected to take place sometime in Q3 07, and 10% to the pension and social funds in the KSA. The third mobile license will be valid for 25 years, and includes an international gateway and the right to provide 3G services.

Missed Call?

Equities research

Saudi Arabia mobile market overview There are currently two GSM and one iDEN operator in Saudi Arabia.
2004 Mobile subscriber base STC GSM Mobily iDEN Bravo Total Mobile penetration 9,146,000 38.2% 0% 0% 100% 2,315,000 11,806 14,171,988 57.6% 16.3% 0.1% 100.0% 6,073,000 68,191 19,941,191 78.9% 30.5% 0.3% 100.0% 9,146,000 Market share 100% 2005 Market Mobile subscriber base share 11,845,182 83.6% 2006 Mobile subscriber base 13,800,000 Market share 69.2%

Source: STC, Mobily, Wataniya, SHUAA Capital

In June 2006, the Communications and Information Technology Commission (CITC) - the country’s telecoms watchdog - introduced Mobile Number Portability (MNP), allowing mobile phone subscribers to switch their mobile number from one service provider to another at no cost. In our opinion, MNP should also help to bring service charges down and improve the quality of service as competition is expected to further intensify. MNP should also help the third mobile operator to grow its subscriber base and gain market share. How expensive was the price compared to other similar transactions in the region? If we were to assume that Mobily, the second mobile operator in Saudi Arabia, had paid the same price for its license, and if we value the company’s estimated 6.7 million mobile users as at Q1 07 by taking the average price of the eight latest transactions involving mobile operators in the region, we would reach a ‘market’ value for Mobily of SAR 39.82 bn (USD 10.62 bn) or SAR 79.6/share.
Date Apr-05 Dec-05 Dec-05 Feb-05 May-06 May-06 Jun-06 Mar-07 Average
Source: SHUAA Capital

Name of operator Celtel - Africa Madacom - Madagascar Telsim - Turkey Mobitel - Sudan

Acquired by % of acquisition MTC - Kuwait MTC - Kuwait Vodafone - UK MTC - Kuwait 100 100 100 61 100 65 96 51 -

Total transaction price (USD mn) 3,360 97 4,550 1,332 5,526 1,005 415 3,720 -

Number of subscribers at time of acquisition 5,658,000 250,000 9,700,000 2,050,000 6,144,000 5,000,000 505,000 9,992,461 -

Price/subscriber (USD) 594 388 469 1,065 969 309 856 730 673

Investcom - Africa and ME MTN - South Africa Vmobile - Nigeria Umniah - Jordan Wataniya - Kuwait MTC - Kuwait Batelco - Jordan Qtel - Qatar -

USD Mobily’s license value based on the amount paid by MTC for the third mobile license (mn) Mobily’s value based on the average market price of each subscriber (mn) Total (mn) Value per share
Source: SHUAA Capital

SAR 22,910 16,909 39,819 79.6

6,109 4,509 10,618 21.2

March 25th, 2007


Missed Call?

Equities research

Another way to assess the price of this transaction is to compare it with other green field licences in terms of license fee per capita. As shown in the table below, the license fee per capita for this transaction was 67.2% higher than the previous most expensive transaction (Mobily), which in turn was by far more expansive than any other green field license award.
Country Algeria Jordan Oman Saudi Arabia Egypt Saudi Arabia
Source: SHUAA Capital

Licensee Nedjma - Wataniya Umniah Nawras - Qtel Mobily - Etisalat (including 3G licenses) Etisalat MTC

Year of license 2003 2004 2004 2004 2006 2006

License cost (USD mn) 421 5.6 105.3 3,451 2,904 6,109

Population at year of license award (mn) 31,900,000 5,630,000 2,710,000 23,900,000 75,430,000 25,300,000

License fee per capita at year of license award (USD) 13.2 1.0 38.9 144.4 38.5 241.5

We also compared the third mobile license in Saudi Arabia to the third mobile license in Egypt and to the second mobile license in Saudi Arabia:
Saudi Arabia - 2nd mobile license Population at the time of license award (mn) GDP/capita at the time of license award (USD at PPP) Mobile penetration at the time of license award Average ARPU at the time of license award (USD) Price (USD mn)
Source: SHUAA Capital

Egypt - 3rd mobile license 74.0 4,060 20% 12.8 2,897

Saudi Arabia - 3rd mobile license 25.5 13,587 79% 37.5 6,300

24.3 12,560 40% 55.0 3,250

The main difference with the third mobile license in Egypt lies in the validity of the license - 25 years in Saudi Arabia vs. 15 years in Egypt, which gives the MTC-led consortium a longer period to maximise its return on investment. If we were to simulate a price for a 15year license based on the USD 6.11 bn paid for 25 years, we would arrive at USD 3.67 bn. Three possible market scenarios to assess the return on investment We took into account three different scenarios to assess the time it will take for MTC to pay back its investment.
Scenario 1 - Worst Case Mobile penetration Monthly blended ARPU (USD) Market share Number of years required to breakeven on investment
Source: SHUAA Capital

Scenario 2 - Base Case Increased gradually to 121% Decreased from 25.3 in 2008 to 21.3 in 2011 and 22.1 from 2014 onwards Increased gradually to 25% 13.5

Scenario 3 - Best Case Increased gradually to 121% Decreased from 23.2 in 2008 to 20.0 in 2011 and 21.1 from 2014 onwards Increased gradually to 30% 12

Increased gradually to 121% Decreased from 27.2 in 2008 to 22.1 in 2011 and 23.2 from 2014 onwards Increased gradually to 20% 15.5

We expect MTC to start commercial operations in January 2008 and to invest USD 1.2 bn in Capex by 2010. According to a survey conducted by the Arab Advisors Group, 39.6% of mobile users have more than one line, of which 20.3% have the second line from a different network operator. Separate business and personal lines and cost savings were the two main reasons for having more than one line (53.9% and 22.8% of respondents with more than one line, respectively). This would mean that mobile penetration could actually go up to around 120% in the medium to long term if we assume the same ratio of people having more than one line in the country.

March 25th, 2007


Missed Call?

Equities research

The monthly blended Average Revenue per User (ARPU) declined to around USD 39/ month and USD 34/month at the end of 2006 for STC and Mobily, respectively, from over USD 50 when Mobily entered the market. The sharp decline in ARPU can be attributed to increased competition that resulted in rate reductions and increased discounts from both operators. We see mobile telephony tariffs declining further as cost of calls are at best within regional call charge averages. Cheaper services combined to the fact that new subscribers (who belong to lower segments of the population) have less disposable revenues should in turn result in lower ARPU going forward, in particular for the third mobile operator. In Saudi Arabia, STC and Mobily have been offering On-net and Off-net rates. By offering cheaper On-net prices, MTC could attract a significant number of low income subscribers and create what we call a ‘network effect’, with friends, relatives and peers in general subscribing to the same network in order to reduce their bills. The more aggressive MTC will be, the more ARPU is expected to decline as it would mean that competition would be primarily based on prices.
Base Case Scenario Population Addressable population Mobile Penetration rate Number of mobile operators Year end respective market share Year end total mobile subscribers Annual net additions YoY Growth Year end MTC subscribers Annual net additions YoY Growth Monthly blended ARPU in SAR Monthly blended ARPU in USD
Source: STC, Mobily, SHUAA Capital

2005 24,600,000 18,204,000 57.6% STC - Mobily 84% - 16% 14,171,988 5,025,988 68.7% -

2006 25,260,000 19,197,600 78.9% STC - Mobily 70% - 30% 19,941,191 5,769,203 27.2% -

2007E 25,942,020 20,494,196 96.5% STC - Mobily 59% - 41% 25,046,136 5,104,945 25.6% -

2008E 26,642,455 21,846,813 106.4% STC - Mobily - MTC 50% - 40% - 10% 28,352,226 3,306,090 13.2% 2,835,223 2,835,223 95 25.3

2009E 27,361,801 23,257,531 112.9% STC - Mobily - MTC 45% - 37% - 18% 30,903,926 2,551,700 9.0% 5,562,707 2,727,484 96.2% 87 23.2

2010E 28,100,569 24,166,490 116.5% STC - Mobily - MTC 42% - 35% - 23% 32,727,258 1,823,332 5.9% 7,527,269 1,964,563 35.3% 83 22.1

2011E 28,803,084 24,770,652 119.1% STC - Mobily - MTC 41% - 34% - 25% 34,298,166 1,570,908 4.8% 8,574,542 1,047,272 13.9% 80 21.3

We have not included Bravo, the iDEN-based technology mobile operator, as our focus is on GSM mobile operators. Moreover, we do not expect Bravo to capture more than 1% market share in the medium to long term.

March 25th, 2007


Missed Call?

Equities research

The table below presents the results of our Base Case scenario.
(USD ‘000) Revenues EBITDA EBITDA margin Other costs PBT Tax (Zakat) Capex Capex/Revenues % ∑ Capex Change in working capital FCF
Source: SHUAA Capital

2007E -107,000 -3,000 -110,000 -348,000 -348,000 -458,000

2008E 430,954 16,700 3.9% -21,548 -4,848 -306,000 71.0% -654,000 -38,786 -349,634

2009E 1,168,992 327,318 28.0% -46,760 280,558 -7,014 -292,248 25.0% -946,248 -93,519 -112,223

2010E 1,738,349 764,873 44.0% -52,150 712,723 -17,818 -225,985 13.0% -1,172,233 -104,301 364,619

2011E 2,061,032 865,633 42.0% -61,831 803,802 -20,095 -185,493 9.0% -1,357,726 -103,052 495,163

MTC’s international gateway, a recent reduction of interconnection rates (fixed line and mobile) and synergies with other existing operations in the Middle East (MTC is already present in four direct neighbours to the KSA) should help MTC to grow both its subscriber base and its profitability (margins) in the short term. Why MTC? MTC’s success in securing the third mobile license did not come as a surprise. Indeed, MTC, in our opinion, needed to add another large market such as Saudi Arabia to its existing operations in the Arab world. Apart from Iraq, MTC was only present in relatively small markets such as Kuwait (home market), Jordan, Lebanon, and Bahrain. Moreover, this was not MTC’s first attempt to enter Saudi Arabia. The company lost the tender for the second mobile license in August 2004 that was won by Etisalat of UAE with a winning bid of USD 3.25 bn. MTC also failed to win the third mobile license in Egypt that was also secured by Etisalat with a final bid of USD 2.9 bn. In our opinion, MTC fancied a market such as Saudi Arabia in order to be able to meet its ambitious new plan to reach an EBITDA of USD 6 billion (USD 1.97 bn at the end of 2006), double its market capitalisation to USD 30 bn (currently hovering around USD 20 bn) and have over 70 million customers (27.04 million subscribers at the end of 2006) that was announced in January this year. MTC is rapidly expanding beyond its domestic market, which has a mobile penetration rate of 80%. MTC now operates in 15 African countries through its subsidiary Celtel International, which it acquired for USD 3.36 bn in April 2005. More precisely, MTC acquired 85% of Celtel for USD 2.84 bn, with a pledge to buy the remaining 15% by the second anniversary of the closing date of the deal for USD 520 mn. The company also runs networks in Kuwait, Iraq, Jordan, Lebanon and Bahrain and is considering bidding for a stake in state-run Algerie Telecom.

March 25th, 2007


Missed Call?

Equities research

Telecoms operators’ debt level under scrutiny This latest acquisition once again raises our concern on the level of debt that telecoms operators are accruing in order to achieve their expansion strategy. Though operations are still highly profitable and generate strong cash flows, the staggering premiums paid for existing operations or green field licenses have obliged operators to take on substantial levels of debt. Over the past two years, most telecoms companies’ cash has melted away as a result of the increasing pace of the consolidation and the technological shift in the sector. Most telecoms operators that adopted an acquisition-based strategy saw their solvability (net debt level) and profitability deteriorating.
Net Debt (Cash) – USD mn MTC

Dec-04 (135) (2,124) 868 (377) 550

Latest available 4,666* (486) 3,433 4,289 543

Etisalat Orascom Telecom (OTH) Qtel Wataniya

* Including the financing required for the third mobile license in Saudi Arabia Source: MTC, Etisalat, OTH, Qtel, Wataniya, SHUAA Capital

Interest expenses as a % of Net Profit MTC Etisalat Orascom Telecom (OTH) Qtel Wataniya

Dec-04 4.4% 0.0% 31.7% 0.0% 25.1%

Dec-06 28.9% 4.5% 47.2% 1.1% 21.4%

Source: MTC, Etisalat, OTH, Qtel, Wataniya, SHUAA Capital

March 25th, 2007


Missed Call?

Equities research

Head of Research
Walid Shihabi +9714 3199 750

Heavy Industries and Utilities
Mohamed El Nabarawy, CFA +9714 3199 756

Strategy and Economics
Walid Shihabi +9714 3199 750

Munir Shahin +9714 3199 754

Telecommunications, Media and Technology
Marc Hammoud +9714 3199 753

Ahmad Shahin +9714 3199 742

Ryan Ayache +9714 3199 758

Transportation and Logistics
Kareem Murad +9714 3199 757

Commercial Banks and other Financial Services
Mohamed El Nabarawy, CFA +9714 3199 756

Real Estate, Construction and Construction Materials
Roy Cherry +9714 3199 767

Munir Shahin +9714 3199 754

Ryan Ayache +9714 3199 758

Lara Hourani +9714 3199 687

Ahmad Shahin +9714 3199 742

Layout & Design
Jovan Ruseski +9714 3199 759

Head of Sales
Jamil Barrage +9714 3199 718

International Sales
Nadine Haddad +9714 3199 733

Regional Sales
Mohamad Bleik +9714 3199 773

Saad Tayara +9714 3199 765

Equity Advisory
Fares Mechelany
+9714 3199 745 fmechelany@shuaacapital.com

Elias Bakhazi +9714 3199 732

Faisal Rajeh +9714 3199 794

Diya Al Sarraj +9714 3199 740

Tala Al-Sahsah +9714 3199 768

Yazen Abu Gulal +9714 3199 683

Nadeem Outry +9714 3199 744

March 25th, 2007


This page was intentionally left blank

This document has been issued by SHUAA Capital for informational purposes only. This document is not and should not be construed as an offer or the solicitation of an offer to purchase or subscribe or sell any investment or subscribe to any investment management or advisory service. This document is not intended as investment advice as to the value of any securities or as to the advisability of investing in, purchasing, or selling any security. SHUAA Capital has based this document on information obtained from sources it believes to be reliable. It makes no guarantee, representation or warranty as to its accuracy or completeness and accepts no responsibility or liability in respect thereof or for any reliance placed by any person on such information. All opinions expressed herein are subject to change without notice. This document may not be reproduced or circulated without the prior written consent of SHUAA Capital psc.