June 2012

Egyptian Company for Mobile Services

S.A.E. (Mobinil)

Analysts Contact:

Opportunities/Strengths
Egypt Cairo

Tel. (202) 3749 5616

Fax (202) 3749 6184

Marwa Ezzat M. Osman - Senior Risk Rating Analyst

marwa.ezzat@merisratings.com

Miglena Spasova - Senior Risk Rating Analyst

miglena.spasova@merisratings.com

Neal A. Hussein - Junior Risk Rating Analyst

neal.hussein@merisratings.com

Rating Table:
Current
Rating

Previous
Rating*

Entity Rating: Senior Unsecured

A+

Bond Rating: Senior Unsecured

A-

Stable

Stable

Category

Rating Outlook

Risks/Weaknesses

Stand Alone Operating Statistics:

Figures in EGP mn

3 Yrs
Average*

FY 11

FY10

FY09
15.4

AROA %

7.1

(1.0)

8.9

AROE %

31.9

(5.0)

34.7

74.2

2,319.3

1,113.6

2,515.3

3,329.0

EBIT
EBIT Margin %
EBITDA
EBITDA Margin %

22.4

11.4

24.1

30.8

4,386.9

3,438.4

4,486.3

5,236.1

42.4

35.2

42.9

48.5

* Based on FY09, FY10 and FY11 results.

NB: EBITDA and EBIT figures exclude provisions and provisions no longer required

Stand Alone Key Statistics:

Figures in EGP mn

3 Yrs
Average*

FY11

FY10

FY09

Turnover

10,399.2

9,768.0

10,450.1

10,799.6

Total Assets

15,598.5

16,776.7

16,427.7

14,671.2

Debt/EBITDA(x)

1.5

2.4

1.6

1.0

EBITDA/Interest
Ex. (x)

6.0

4.1

7.1

7.2

* Based on FY09, FY10 and FY11 results.

NB: EBITDA and EBIT figures exclude provisions and provisions no longer required

MERIS Analysis

New and simplified shareholding structure

following FTs acquisition of most of OTs shares
in Mobinil is expected to reflect positively on
operations and ease complexity of the decision
making process.
One of the leading mobile operators in Egypt with
proven track record and strong brand equity.
Strong and highly rated majority shareholder and
an experienced management partner, who have a
strategic interest in their Egyptian operations.
A new strong and unified senior management
team, with a clear vision and strategy, working
hard on overcoming the existing obstacles.
A clear shift in management strategy and focus on
value creation, rather than sheer market share
leadership.
Focus on organic growth in its home market.

Significant weakening in the operating and

financial metrics due to a number of internal and
external factors additionally aggravated by the
increased political uncertainty and general
deterioration in the macro-economic conditions.
Loss of market leadership, further exacerbated by
the sustained brand damage and loss of
subscribers due to political controversies.
Increasingly competitive operating environment,
exerting negative pressure on margins and market
share.
High capex requirements needed for capacity
expansion and network enhancement negatively
affecting Mobinils free cash flow position.
Historically high dividend distribution to meet
shareholders return expectations, which has
adversely impacted the free cash flow position of
the company for years, albeit managements
indicated preference towards a more conservative
dividend distribution policy going forward.
Existing disputes with the regulator and further
reductions in termination/interconnections rates
might limit Mobinils growth initiatives, and at the
same time put downward pressure on
performance metrics.

June 2012

Egyptian Company for Mobile Services (S.A.E.) Mobinil

Summary Rating Rationale

MERIS downgraded the Egyptian Company for Mobile Service (Mobinil) both long-term entity and bond rating by one
notch to A and A-, respectively. The outlook remains stable.
The rating downgrade reflects MERIS concerns about the companys stressed operating and financial performance
and the expectation that Mobinil is unlikely to meet the financial ratio guidance set for the previous rating level over the
short to medium-term. The drop in performance was evident through (i) the notable decline in the quantitative aspects,
witnessed in weak revenue growth, a significant deterioration in bottom line results, and profitability margins. This has
also adversely affected the leverage and coverage positions; (ii) Political controversies that led to a boycott campaign,
which was reflected in a loss of subscribers and jeopardized brand reputation; (iii) the loss of its lead market position
as a result of the erosion in market share from 40% in 2010, to roughly 34% in 2011. At the same time, the rating
continues to reflect the company's underlying business risk, given that it operates in a challenging market, in which
revenue growth prospects remain suppressed due to a contraction in consumer spending as a result of the uncertainty
th
surrounding the political and economic environment following the January 25 Revolution. The companys credit
metrics are further pressured by the fierce competition in the Egyptian wireless market, which had exceeded the 100%
penetration rate, suggesting limited room for future growth. It is worth mentioning that the historically high dividend
distribution and capex requirements have adversely affected the companys free cash flow position. MERIS views the
capital expenditures related to network expansion and enhancement as a necessary requirement to maintain the
companys technological competitiveness in the market. However, MERIS expects to see a more conservative
dividend distribution policy going forward, with a focus on the use of free cash flows for debt reduction rather than
shareholders remuneration.
Mobinils rating grade takes positively into consideration the completion of France Telecom (FT) acquisition of roughly
94% of the companys stake. Although there is no clear guidance regarding the full integration of Mobinil into FT
groups business operation, and the expected synergies thereof, the simplified shareholding structure is anticipated to
result in an increased efficiency of the strategy formulation and decision making process of the company, which is
foreseen to reflect positively on the daily business operations of Mobinil. At the same time, the companys business
model is supported by a strong and highly rated strategic shareholder with global operations and a reputable
management partner with significant emerging markets experience, who have a strategic interest in their Egyptian
operations. The companys well-established brand, backed by a high quality network and innovative service offering,
are also supportive of the rating. Given the saturation of the market, MERIS also views positively the managements
clear shift in strategy from a mere market share leadership to value extraction. The new strategy is expected to fend
off competitive pressures and the resulting deterioration in the companys credit and profitability metrics.

Rating Outlook
The stable outlook balances Mobinils pressured operational and financial performance over the short- to medium-term
due to the heightened market competitiveness and unstable macroeconomic and political environment in Egypt with
the prospects for moderate improvement in the companys market and financial position in view of the management
teams shift towards a more value oriented strategy and a rather conservative dividend policy to ensure higher financial
flexibility.

What Could Change the Rating Up

Mobinils rating could be upgraded provided that the company: i) improve its financial profile by enhancing its operating
margins, cash flow metrics and leverage position; ii) strengthen its cash-flow generation, translating into sustainable
positive free cash flows; iii) succeed in fully integrating its business with the key shareholder and thereby realize
marketing and operational synergies.

What Could Change the Rating Down

The rating could be further downgraded if: i) the companys financial performance continues its downward spiral as a
result of the increased intensity in the competitive environment, the stressed macro-economic conditions and current
political uncertainty; ii) the cash flow metrics weaken further under the pressure of dividend distribution and/or
excessive capex/investment outlays, which might result in additional indebtedness.

MERIS Analysis

June 2012

Egyptian Company for Mobile Services (S.A.E.) Mobinil

Company Profile
The Egyptian Company for Mobile Services (ECMS) is a leading wireless telecom service provider in Egypt. ECMS
operates under the brand name Mobinil and has 32.6mn subscribers as of March 2012 (32.9mn as of December
2011), which translates into a market share of approximately 34%. Its network of 5299 sites at the end of 2011 and 34
switches currently covers most of the urban areas in Egypt, or 99.66% of the population.
ECMS was initially established in November 1997 by the state-owned Arab Republic of Egypt National
Telecommunication Organization (ARENTO), which was succeeded by Telecom Egypt. The company commenced its
operations in May 1998, when all the mobile-related assets of TE were sold off to Mobinil Telecommunications, a
consortium comprised of one local and two international telecom giants, Orascom Telecom Holding (OTH) France
Telecom (FT), and Motorola. Going forward, the company was owned by two of its founding shareholders OTH and
FT/Orange Group, with direct and indirect ownership of 34.6% and 36.4% respectively. The remaining 29% of the
shares represented free float. OTH name was changed to Orascom Telecom Media Technology (OTMT) in light of the
acquisition of VimpelCom Ltd. In a recent action, FT acquired additional stake in Mobinil, ultimately gaining majority
control of the company with a total shareholding of roughly 94%. As a result, OTMTs share was reduced to only 5%
and the balance represents free float.

Key Rating Considerations

BUSINESS RISK FACTORS

FACTOR 1: Size, Scale, Business Model and Competitive Environment

Mobinil is a leading mobile operator in Egypt. It is the second largest national player in terms of subscribers, with more
than 32.6mn subscriber as of March 2012 (32.9mn as of FY11, reporting 8.9% growth rate on a Y-o-Y basis). Despite
the moderate size and scale of the business by industry norms, Mobinil still enjoys some of the benefits of larger
companies by making use of the strength and size of its strategic shareholder (FT) and management partner (OTMT),
when making equipment purchases and entering into roaming agreements. Furthermore, Mobinils commercial and
marketing departments maintain strong links with their counterparts at FT and OTMT, sharing best practice and market
knowledge. Thus, the relationship with its strategic shareholder and management partner gives the company some
additional strength, beyond that of a pure national player.
The companys business operations experienced a number of challenges over the last two years, due to various
internal as well as external factors. While in 2010, the main challenge facing the company was the limited dial up
numbers, which suppressed the companys growth prospects, 2011 saw a number of obstacles of various nature,
which adversely affected its operations and financial performance. The main causes for the companys weakened
th
position in 2011 included: i) the political and economic turmoil, following the January 25 Revolution; ii) the boycott
campaign in 2011, following the highly politicized tweet and the subsequent loss of subscribers and brand damage;
and iii) changes in the senior management team, including a new Chief Executive Officer, Chief Financial Officer, Chief
Commercial Officer and Human Resources Vice President. The combined effect of all these events was reflected in a
significant drop in Mobinils market share from approximately 40% in 2010 to roughly 34% in March 2012, a decline in
the top line figure and EBITDA figure by 7% and 23% respectively.
The new management team has a solid experience in the telecom industry both in the local and the international
markets. MERIS met with the new managers and believes that they form a strong and unified team with a clear view
and strategy for the companys way forward. The team is well aware of the challenges and is working hard to
overcome the existing obstacles. March 2012 financial results have already shown signs of recovery with 2.8%
increase in revenue figures on a Y-o-Y basis, nonetheless, the subscribers base, reported negative net adds by
290,000 customers. Management views this decline in line with its revised strategy to focus on capturing value driven/
high quality customers.
Historically, Mobinils strategy has focused on growing its subscribers numbers and was the first to introduce new
aggressive offers to the market, maintaining leading market share until recently. Going forward, and in light of the
saturation of the local mobile market, management reviewed the growth strategy to include a more pronounced shift
towards value creation. Nonetheless, management underscored the need to maintain a leading market share as well.

MERIS Analysis

June 2012

Egyptian Company for Mobile Services (S.A.E.) Mobinil

As part of its value oriented strategy, management is planning to expand rapidly on the data/broadband front, taking
into account the low penetration rate, which offers high growth opportunities. In this regard, Mobinil will capitalize on
its fully owned subsidiary Link Dot Net, which was acquired in 2H10.
Mobinil offers a diversified product mix covering both the corporate and retail market segments. With regard to the
retail segment it pursues a dual strategy, targeting both the lower and higher ends of the market. Staying close to the
customers, understanding their needs and creating the right products to address the clients different needs is at the
core of Mobinils commercial strategy. Voice telephony is the main revenue stream for the company, but following the
recent rollout of the 3G network, it also provides other services such as mobile broadband. Going forward, the
company will continue expanding in value-added service, such as internet broadband and mobile banking to
compensate for the expected decline in the voice business.
In terms of business model, Mobinil is a national wireless operator with a focus on growing its operations organically
and with no appetite for regional or international expansion. In general, MERIS views a mobile only operation as a less
robust business model than a fully integrated telecom. Integrated players have sounder platforms for adopting a range
of new products and benefit from the diversity of their business risks. Nevertheless, pursuing an integrated business
model in Egypt is currently not an option for the wireless operators, as long as Telecom Egypt remains the sole
provider of fixed-line services. The auction of a second fixed-line operator license has been postponed a number of
times by the government, and will probably not materialize any time soon in view of the difficult economic and political
nd
situation. Furthermore, the wireless mobile operators in the country are prohibited from participating in the 2 fixed
line auction, although their shareholders are not subject to the same restrictions.
On the international gateway front, Mobinil and Vodafone are still negotiating the proposed terms and conditions with
the regulator. The cost of the license provided to Etisalat Egypt in 2007 was equal to EGP100/active subscriber
totaling more than EGP 100mn at that time. Furthermore, there is a one-time payment of EGP20 per every new
subscriber, in addition to a maximum of 6% of associated revenues. The total consideration is not clear yet, as it is
subject to the on-going negotiations.
With equal note, the government recently announced its intention to launch the Mobile Virtual Network Operator
(MVNO) license. A MVNO does not own its own spectrum and usually does not have its own network infrastructure.
Instead, MVNOs have business arrangements with traditional mobile operators to buy minutes of use (MOU) for sale to
their own customers. MERIS believes that the impact of the proposed business model might affect the mobile market
dynamics, as it is anticipated to intensify competition even further; imposing extra pressure on margins.

Factor 2: Operating Environment

(a) Regulatory Framework
In MERISs view, the regulatory environment in Egypt is still volatile with a considerable degree of uncertainty.
Liberalization of the Egyptian telecom market started in 1998 through the issuance of two mobile network operating
licenses. Furthermore, 1998 saw the establishment of the Ministry of Communications and Information Technology
(MCIT) with the responsibility of developing Egypts ICT infrastructure, stimulating the knowledge economy and forging
an e-government strategy and a legal framework that is in line with international digital requirements. Liberalization
was further advanced by the Telecommunication Regulation Law (No. 10) of February 2003. The law rests on four
main pillars: information disclosure, free competition, the provision of universal services, and user protection. A
central aspect of the law was the creation of the National Telecom Regulatory Authority (NTRA), which replaced the
Telecom Regulatory Authority (TRA) in 2003 and took over all the regulatory functions as an independent regulatory
authority.
The NTRA grants all telecommunication operating licenses. Since 2003, it has awarded over 20 licenses to operators
who offer telecom services to the Egyptian market, including mobile, payphone, prepaid calling cards, internet, data
and VSAT (satellite) services. The NTRA has also announced an auction for a second fixed-line license; however, so
far the tender has been postponed three times and might remain on hold long term, given the current status of the
global economy.
While liberalization has been progressing relatively smoothly, criticism has centered on the overprotection of the
incumbent telecom operator. Among some of the challenges to the liberalization process is the role of the Ministry of

MERIS Analysis

June 2012

Egyptian Company for Mobile Services (S.A.E.) Mobinil

Communications and Information Technology in overseeing both the regulator and Telecom Egypt (80% government
owned and the sole fixed line service provider), a dual role that makes for a difficult balancing act.
The intricate position of the regulator has been played out in the recent interconnection dispute between Mobinil and
Telecom Egypt (TE). The NTRA had sided with TEs decision to lower its fixed-to-mobile termination rates, despite the
existing effective agreement between TE and the wireless operator. Mobinil has appealed the decision and has filed a
law suit against the NTRA to resolve the interconnection dispute. Both law suits are currently on going. As a
counteraction, TE is allegedly asking for EGP 2bn in compensation. The legal counsel considers Mobinil to be in a
strong legal position; nonetheless, the overall position still remains uncertain. While the above-mentioned contingent
liability is considered a significant exposure, thanks to the strong funds flow from operations, MERIS believes that the
implications of such a contingency (if applicable) on Mobinils financial position will be moderate, taking into account
Mobinils still sound financial position. From an operational perspective, however, the continuous decline of
interconnection rates is perceived as a main threat to the wireless operator, putting downward pressure on its
revenues, returns and margins.

(b) Technology Risk

MERISs ratings take into consideration a companys exposure to technological advancement and how well positioned
it might be in handling such developments. The ratings also factor in the potential capital expenditure implications of
any technological improvements and advances.
It is worth mentioning that according to management and as per the latest NTRA report, Mobinils network was
considered number one in terms of quality of voice service. In terms of data, it shared the first place with Etisalat. The
management has clearly stated its commitment to continuously invest in the expansion and modernization of the
network in order to maintain the companys technological competitiveness vis--vis its rivals in the market. It is
noteworthy that all new investments are 4G compatible.

(c) Market Share

As we highlighted earlier, Mobinils market share was pressured significantly over the last two years culminating in the
loss of its market lead to Vodafone in 2011. The main reasons contributing to the drop in market share were the
challenging market environment, the shortage in new dials, and the tweet-related political controversy, which led to a
boycott campaign against the company.
On the subscribers front, Mobinils subscriber mix remains predominantly prepaid, with more than 97%; as the local
market predominantly prepaid in nature. The rapid expansion of prepaid services in the market has been the main tool
for the operators in their quest for expanding their respective market shares. It is worth mentioning that the increasing
prominence of prepaid tariffs, however, has been reflected in the operators declining ARPU levels, as prepaid
spending levels are 6-7 times lower than postpaid levels. This stark difference in spending levels between the two
market segments illustrates the acute need for operators to improve their subscriber mixes and introduce new
services. Vodafone have slightly higher number of postpaid customers. Historically, Vodafone used to have a
relatively better subscriber mix, as illustrated by its higher ARPU. However, following the companys aggressive
subscriber base expansion initiatives, which led to the acquisition of mostly lower income clients, it has recently
narrowed the gap with Mobinils blended ARPU. Going forward, in accordance wtih managements revised growth
plan, Mobinil will focus on the postpaid segment, with relatively higher income generation capacity.

Factor 3: Managements Financial Strategy

In May 2012, FT (rated A- on a global scale, with a stable outlook according to Moodys), acquired roughly 94% of
Mobinils capital through its wholly-owned subsidiary, MT Telecom SCRL (MT Telecom). The acquisition is viewed
positively by MERIS. Despite the fact that there is no clear plan for fully integrating Mobinils business into the FT
group, the new and simplified shareholding structure is anticipated to increase the efficiency of running the business,
through easing the complexity of the strategy formulation and decision making process.
It is worth mentioning that in April 2012, the two shareholders announced the terms and conditions of a Sale and
Partnership Agreement (SPA), which governs their relations going forward. The most important elements of the SPA
were as follows:

MERIS Analysis

June 2012

Egyptian Company for Mobile Services (S.A.E.) Mobinil

OTMT will reduce its direct shareholding interest in ECMS to 5% of the companys capital and 28.75% of the
voting rights. At the same time, OTMT will remain FTs strategic partner in Egypt and will continue to
participate in the governance at least until 2015;
The Board of Directors of ECMS will consist of 13 directors, 7 appointed by FT and 6 Egyptian citizens
including 3 appointed by OTMT and 3 independent directors.
OTMT will continue to participate in the governance of ECMS, through its participation in the Audit Committee
and in the Nomination and Compensation Committee of ECMS.
The CEO of ECMS will be appointed by the Board of Directors of ECMS following consultation with ECMS
Nomination and Compensation Committee. The CEO, further to consultation with the Nomination and
Compensation Committee, will appoint the other senior management of ECMS.
OTMT is expected to receive aggregate proceeds of approximately EGP 6 billion for its direct and indirect
ECMS stake tendered in the MTO.
Shareholders agreed to revisit the put option to limit OTMTs put option for its 5% remaining direct stake in
ECMS to 1.67% per annum over a three-year period from 2015 to 2017, subject to the Trading Rules and the
applicable law at the time. This option is exercisable in January-February of each such year at accreting
prices determined based on the date of exercise ranging from EGP 268.5 in 2015 to EGP 296 in 2017 per
ECMS share, the last exercise of such put option leading to the sale of the 28.75% voting rights in MT
Telecom.
OTMT will also have certain agreed exit rights in the event FT involves another strategic partner in the Mobinil
business.
FT will have the option to call all (but not less than all) of OTMTs remaining direct stake in ECMS and in MT
Telecom. This option is exercisable during a January-February exercise period in each year from 2013 to
2017, at prices accreting at a rate similar to that for the put option granted to OTMT and described above,
ranging from EGP 243.5 to EGP 296 per ECMS share. Also, FT has the call options rights in other
circumstances, including upon a change of control of OTMT.
OTMT will also grant FT a right of first refusal over any sale by OTMT of its stake in ECMS.

According to management, the new takeover will not affect the day-to-day management of the operator, but will
facilitate the decision making process and strategic management of the company.
The recently signed PSA is the latest development in the relationship between FT and OTH, which has been
experiencing difficulties since 2007. The initial dispute was caused by the two owners differing views on the
companys operational tactics in preparation for the entry of the 3rd GSM operator, which ended up with an arbitration
tribunal mandating OT to sell its stake in the Mobinil holding company to FT. The share transfer did not materialize at
that time and instead the two shareholders reviewed the shareholders/management agreement. The amended
agreement was signed in April 2010; the most important aspect of which was that FT would fully consolidates the
financial results of Mobinil Telecom and its subsidiaries in its consolidated financial statements. Moreover, FT and
OTH were to continue rendering technical support and management services to ECMS according to the two existing
General Service Agreements and whereby each party received a fee equal to 0.75% of ECMS net revenues.
With regard to the companys financial strategy, it is worth noting that the dividends policy, coupled with the fierce
market competition has put significant pressure on the companys cash flow position over the last couple of years.
Historically, Mobinil has been following a high dividend payout policy to meet its shareholders' objectives. The
companys cash flow has also been used to support the high capex and investment requirements, especially those
associated with the payment of the 3G license and network upgrading. The companys high dividend payout policy,
coupled with the capital intensive nature of the industry and the uncertainty in the banking sector have already
constrained Mobinils financial flexibility. Going forward, the companys management has affirmed its orientation to
balance the shareholders high return requirements with the need to maintain a healthy debt profile. Accordingly, the
company will be flexible in reviewing the future strategy based on market, economic and funding conditions. The
companys financial strategy for the next 3 years is to keep it within the covenants range and to invest heavily to further
upgrade and expand its network. At the same time, it is carefully assessing the feasibility of any other expansion
initiatives in the local market (i.e. international gateway, 4G network, etc.). In terms of geographical expansion, Mobinil
remains committed to its growth within Egypt, with no appetite for further diversification by embarking on a regional
expansion. It is worth mentioning that the management strategy and tolerance for financial risk will directly affect its
debt level and credit quality and is therefore paramount for the rating grade.

MERIS Analysis

June 2012

Egyptian Company for Mobile Services (S.A.E.) Mobinil

FACTOR 4: Operating Performance

Mobinil financial statements are dually audited by Ernst & Young and Hazem Hassan, a member of the KPMG firm.
The company's financial statements have been prepared in accordance with Egyptian Accounting Standards (EAS).
However, in the auditor's opinion, there are no material differences between EAS and the International Accounting
Standards (IAS). For the entity rating, as well as the bond, MERIS analysis is based on the audited unconsolidated
accounts (a stand-alone basis); as such we didnt take into consideration the acquisition of Link Dot Net investment.

Revenue and Margins Pressured on the Back of a Difficult Operating Environment

In FY11, Mobinil generated EGP 9.77bn revenues,
Revenue & Profitability
reporting a negative growth rate by 6.5% on a y-o-y
Figures in EGP mn
1Q12
FY11
FY10
FY09
basis. The decline continued on the EBITDA level,
Revenue
2,409.3 9,768.0 10,450.1 10,799.6
due to the instability in the political and economic
8.3
Growth (%)*
(1.3)
(6.5)
(3.2)
environment, as well as the severe competitive
pressure, especially following the Twitter-related
EBIT
161.6 1,113.6
2,515.3
3,329.0
EBITDA
842.1 3,438.4
4,486.3
5,236.1
boycott campaign.
In addition, the company
EBITDA
Margin
(%)
35.0
35.2
42.9
48.5
accelerated the depreciation base switching from
Operating Profit Margin
6.7
11.4
24.1
30.8
the 2G to 3G technology - which resulted in an
(%)
increase in the depreciation and amortization figures
Interest Expense
(212.4)
(838.8)
(631.5)
(723.6)
by approximately 20%. As the graph below shows,
Interest Income
15.9
42.6
43.5
34.8
the decline was steeper on the EBIT front with more
than 50% drop in absolute figures mainly as a result
Net Income
(57.4)
(171.0)
1,378.0
2,171.6
of the impact of the changes in the accounting
Net Income Margin (%)
(2.4)
(1.8)
13.2
20.1
1
* Y-o-Y Basis
treatment of the employees profit sharing (Annex 2
NB: EBITDA and EBIT figures exclude provisions and provisions no longer required figures
charts show the companys restated figures
excluding the effect of the changes in accounting treatment). Going forward, management anticipates its operating
profitability to be maintained at below 10%.
Similarly, FY11 bottom line was hit dramatically to reach EGP 171mn in losses and EGP 57mn in 1Q12. The severe
drop resulted from the overall poor operating performance, followed by the notable increase in interest expenses and
the change in the tax regime (from 20% to 25% bracket), which affected the deferred tax figures. In view of the
saturation of the market, as well as the difficult macroeconomic and political environment in Egypt, MERIS believes
that the coming years will continue to challenge the local mobile operators in general and Mobinil in specific, especially
after losing its leading position.
12,000

55%

Profitability

10,000

45%

EGPmn

8,000

35%

6,000
25%
4,000
15%

2,000

5%

2007

2008

2009

2010

2011

Q1 2012

-2,000

-5%
Revenues

EBITDA*

EBIT*

Net Income*

EBITDA Margin %

EBIT Margin %

Net Income Margin %

*Adjusted for employees' bonus retroactively for 2007, 2008, 2009 and 2010

In an action to separate between the shareholders remunerations and employees profit sharing, management changed the accounting treatment of the employees bonus in
2011, to be accounted for in other operating cost (employees bonus accounts for EGP 225mn in FY11, and EGP 58mn in 1Q12).

MERIS Analysis

June 2012

Egyptian Company for Mobile Services (S.A.E.) Mobinil

In terms of revenue mix, prepaid subscribers continue to be the companys key driver accounting for more than 97% of
customer base as of yearend 2011. Although prepaid customers are expected to continue dominating the revenue mix
going forward, a minor erosion of their share might be foreseen in light of the management intention to shift to a value
extracting strategy. By service type, voice revenue is considered the main revenue driver, accounting for more than
90% of revenues. Despite the fact that the share of non-voice and other revenues registered a slight increase, voice
revenue will continue to have the dominant share with more than 70% of total revenue, since the Egyptian consumer is
mainly voice oriented. Roaming revenue accounted for 2% of revenue down from 4% in 2010, due to the drop in
th
tourist visitors to Egypt following the January 25 revolution.
Historically, Mobinil has been more aggressive in terms of customer acquisition especially in the middle and lowerend segments, which jeopardized its ARPU figures and profitability margins, which were relatively lower compared to
its peer group. Going forward, management has indicated a shift in its growth strategy towards value extraction in an
attempt to ease the pressure on the companys operating metrics. Nevertheless, given the intensified competitive
environment, especially in a saturated market with more than 100% penetration, MERIS believes that the companys
margins will remain under pressure.

FACTOR 5: Financial Strength

Difficult Operating Environment, Challenging Credit Metrics
Cash flow & Coverage
Historically, the company has been
1Q12
FY11
Figures in EGP mn
generating strong operating cash flow.
Funds From Operation (FFO)
582.8
3,053.3
Nonetheless, the free cash flow position
- Dividends
0.0
(1,412.4)
was pressured by the aggressive dividends
Retained Cash Flow (RCF)
235.5
920.7
distribution policy, coupled with the
significant capex requirements. In 1Q12,
Funds From Operation (FFO)
582.8
3,053.3
Mobinil generated EGP 24mn free cash
+/- Changes in Working
(347.2)
(720.3)
flow, backed by the cut down in
Capital
Cash Flow From Operation
shareholder remuneration. As highlighted
235.5
2,333.0
(CFO)
earlier, management might have to scale
- Dividends
0.0
(1,412.4)
down shareholder returns, should market
- Capex
(211.1)
(1,707.1)
conditions make such cash preservation
- Investments (license Fees)
0.0
0.0
tactics necessary.
This conservative
Free Cash Flow (FCF)
24.4
(787.1)
dividend distribution policy is viewed
RCF/Capex (%)
2.8
1.0
positively by MERIS. On the capex front,
EBITDA/
Interest
Exp
(x)
4.0
4.1
expenditure declined in FY11 in view of the
slowdown in the general macroeconomic
conditions. Going forward, capex figures are expected to stabilize within the EGP 2bn range.
coverage, Mobinil's position deteriorated significantly from the 7x range to 4x in 1Q12, which is
higher debt level linked to network enhancement, license fees and working capital requirements.
5,000

FY10

FY09

4,063.9
(889.3)
2,037.8

4,791.1
(931.8)
3,144.3

4,063.9

4,791.1

(1,136.8)

(715.0)

2,927.1

4,076.1

(889.3)
(1,919.4)
(1,850.0)
(1,731.5)

(931.8)
(2,241.0)
(160.0)
743.4

1.7
7.1

1.7
7.2

In terms of interest
associated with the

Cash Flow

4,000

EGPmn

3,000
2,000
1,000
2007

2008

2009

2010

2011

Q1 2012

-1,000
-2,000
-3,000
Retained Cash Flow (RCF)

MERIS Analysis

Cash Flow from Operations (CFO)

Free Cash Flow (FCF)

June 2012

Egyptian Company for Mobile Services (S.A.E.) Mobinil

A Leveraged Debt Profile

Mobinil's leverage position has been
pressured over the last couple of
Financial Leverage
years.
The companys borrowing
Figures in EGP mn
1Q12
FY11
FY10
FY09
increased after the EGP 1.5 billion
Short-term Debt
2,079.1
2,111.2
1,017.2
966.6
bond issued in 2010, followed by the
Long-term Debt
6,071.0
6,300.8
5,968.2
4,013.4
EGP 2bn, seven-year unsecured
Total Debt
8,150.1
8,412.0
6,985.4
4,980.0
syndicated
loan
which
was
Cash and Cash Equivalent
1,007.3
1,208.0
546.3
804.0
successfully
negotiated
in
2011.
The
Net Debt
7,142.8
7,204.0
6,439.1
4,176.0
latter is divided into two equal
tranches: (i) a medium-term loan to
O. Financial Obligations (License fees)
750.0
750.0
750.0
1,500.0
finance a bridge loan which was
Total Financial Obligations
8,900.1
9,162.0
7,735.4
6,480.0
obtained earlier to finance capex and
working capital requirements; (ii) a
Debt Adjustments:
declining revolving facility, to be paid
Capital commitments & contingent L.
676.0
593.0
699.0
2,010
gradually over the two years before the
Adjusted Debt
9,576.2
9,755.0
9,434.3
8,489.9
debt maturity.
The loan entails a
floating interest rate to be paid
Equity
2,568.7
2,640.5
4,227.0
3,715.7
semiannually. The favorable terms
and conditions of the newly negotiated
EBITDA Capex / Interest Exp. (x)
3.0
2.1
4.1
4.1
syndicated facility in a difficult political
FFO + Interest Exp / Interest Exp (x)
3.7
4.6
7.4
7.6
and macroeconomic environment are a
Net Debt/EBITDA (x)
2.1*
2.1
1.4
0.8
Gross Debt/Equity (x)
3.2
3.2
1.7
1.3
clear testimony to the strong
Gross Debt/ EBITDA (x)
2.4*
2.4
1.6
1.0
partnership of Mobinil with the banks.
Adj. Debt / Capitalization (%)
83.0
82.8
72.2
93.7
According
to
management,
the
FCF/Adjusted Debt (%)
1.0*
(7.9)
(20.2)
8.6
company will operate within a target
RCF / Adjusted Debt (%)
24.3*
16.6
37.0
44.6
leverage range (Net Debt/EBIT) of
*Annualized figures for 1Q 2012
around 2.0 3.0x. The companys
debt profile is considered well spread, with approximately 25% of the outstanding balance short-term in nature,
containing the current portion of long-term debts and credit facilities.
Mobinils second unsecured bullet bond, issued in 2010 and maturing in 2015, amounted to EGP 1.5bn. The bond
bears a fixed coupon rate of 12.25%, payable semi-annually. It is non-convertible and callable after three years. As
illustrated in the graph above, regardless of the notable increase in Mobinil's indebtedness, the amortization of the
loans is designed in a way, which alleviates the pressure on the companys liquidity metrics.

Mobinil Financial Obligations 2010-2015

2500
80
2000

2257

2008.6
1622.6

1500
1042.8

285.6

285.6
285.6

102

203

471

203
1000

1500

471
1850

142.8
102

471

471

500

460
327

0
2010

2011

203
2012

License Payment
EGP 2300mn Facility signed 2007
EGP 610mn Facility signed 2009
2nd Bond Issue

2020.6

1814.6

327

MERIS Analysis

690

1150
285.6
235

165
2013

2014

2015

EGP 1800mn Facility signed 2005

EGP 2200mn Facility signed 2008
EGP 2000mn Facility Signed 2011
Total Obligations

June 2012

Egyptian Company for Mobile Services (S.A.E.) Mobinil

Drop in Debt Protection Ratios

RCF figures dropped significantly in FY11 on the back of the deterioration in operating performance, as well as the
excessive dividends distribution. This resulted in a substantial hit to the RCF/Adjusted Debt ratio, which declined from
mid-40% range in FY09 to 16.6% in FY11. It is worth mentioning that the adjusted debt ratio, takes into consideration
the debt obligation (bank debts as well as bonds), in addition to license payment obligations, capital commitments and
contingent liabilities. At the same time, the FCF was squeezed too, due to the considerable capex requirements,
license investment and dividends distribution.
The companys indebtedness has been on the rise as reflected in the Gross Debt/EBITDA position, which deteriorated
from 1x in FY09 to 2.4x in FY11. Moreover, the Adjusted Debt as a percentage of the companys capitalization
increased from 72.2% in FY10 to 83.0% in 1Q12.
In terms of coverage, despite the deterioration, the company was still able to report healthy ratios with enough room to
serve interest obligations after fulfilling its on-going investment needs. As detailed in the table above, EBITDA less
Capex/Interest Expense ratio was 2.1x in FY11, compared to around 4.1x in FY09.
35

Indebtedness and Coverage

30

25

20

15

10

5
0

0
2007
2008
Gross Debt/Equity (x)

2009

2010
2011
Net Debt/Equity (x)

Gross Debt/EBITDA (x)*

Q1 2012

Net Debt/EBITDA (x)*

EBITDA/Interest Expense (x)* (right axis)

*Adjusted for employees' bonus retroactively for 2007, 2008, 2009 and 2010

Other Considerations
Liquidity Position is Considered Adequate
Mobinil's liquidity position is considered adequate. As of March 2012, Mobinil had more than EGP 1 billion in cash and
cash equivalent. The notable increase in cash is mostly driven by increase in foreign currency cash in an attempt by
the management to partially off-set any expected devaluation of the local currency. At the same time, management
engaged more readily in hedging agreements, to mitigate the companys exposure to FX risk.
It is also worth noting that the single obligor limit with the banks improved significantly following the FT takeover and
the subsequent removal of Mobinil from the OT group exposure. This has provided the company with additional
opportunities for access to bank debt. As of April 30, 2012, the company had credit facilities sourced from 11 different
banks, amounting to roughly EGP 1 billion. Around 55% of the total authorized limits were unutilized. Furthermore,
Mobinil has an additional available limit of EGP 1 billion as a revolving loan under the recently negotiated syndicated
loan, which is also supportive of its liquidity position.

10 MERIS Analysis

June 2012

Egyptian Company for Mobile Services (S.A.E.) Mobinil

Annex 1: Shareholding Structure as of May 31st, 2012

ECMS

MT Telecom (MTT)
94%

11 MERIS Analysis

Orascom Telecom Media and

Technology Holding (OTMT)

5%

Free Float
1%

June 2012

Egyptian Company for Mobile Services (S.A.E.) Mobinil

Annex 2:

12 MERIS Analysis

June 2012

Egyptian Company for Mobile Services (S.A.E.) Mobinil

Annex 3: National Rating Scale

Gilt edged

AAA

Very high

AA+
AA
AA-

Upper-medium

A+
A
A-

Medium grade

BBB+
BBB
BBB-

Short

Prime 1

Prime 2

Questionable

BB+
BB
BB-

Poor quality

B+
B
B-

Very poor
Quality of credit

CCC+
CCC
CCCCC
C

Investment Grade

Long

Prime 3

Not Prime

Speculative Grade

Quality of credit

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13 MERIS Analysis

June 2012