The strategies that served Orascom so well in the past will not be solely sufficient in allowing the Egyptian telecoms provider to prosper in the future.
Orascom founder says company will have to evolve to survive
In the past decade, Orascom Telecom has grown from an Egyptian start-up to an international telecommunications giant that attracted more customers than any of its Middle East peers. The company rode the explosive growth of mobile phone use across Africa, the Middle East and the subcontinent, in combination with a strategy of making big investments into risky markets.
The two tactics paid off, making the company Egypt's largest public one and its founder, Naguib Sawiris, one of the Middle East's richest and best-known businessmen. But Mr Sawiris, who stepped down as the Orascom chief executive late last year but remains its chairman, says these strategies alone will not be enough to make it through the next decade. "We had a very easy life," he says. "It was like a machine, producing subscribers, growing organically. What a wonderful life. But it's finished, this life." In its place is a world where there are already 5 billion mobile connections and an industry where growth will be increasingly linked to massive scale and an intense focus on wringing extra dollars out of subscribers. "The going is going to get much tougher," Mr Sawiris says.
In response, he is now ready to cede control of the company he founded and join forces with another of similar size, or larger. The strategy, he told The National, is the only way a company like his can remain one of the world's largest during an era of major industry consolidation. "If it is not done in the next two to three years, we will miss the train," he says. "We have real pressure to do this, because every day when you wait, an opportunity vanishes."
On top of the pressure to stay in the top tier of an increasingly tough market, the company faces an even more pressing problem. In its two biggest markets, Orascom Telecom's future is in doubt. The cost of its high-risk, high-return strategy is emerging in two disputes that have raised serious concerns among analysts and investors. In Algeria, people familiar with the company say that Orascom is being pressured to sell its Djezzy mobile network, the country's largest, to a local buyer. In recent years, Algeria's government has issued a number of restrictions on foreign investment.
The moves were widely seen as reactions to the sale by Nassef Sawiris, the brother of the Orascom Telecom chairman, of a number of Algerian cement factories to Lafarge, a French construction business. Reports said the Algerian government, which had previously rebuffed a number of attempts by Lafarge to enter the market, was upset by the way the sale sidestepped its authority over foreign investment.
Citing the sensitivity of the situation, Naguib Sawiris declined to comment on the specifics of the negotiations, or his company's future in the North African country. On top of an ownership battle in Egypt with its joint-venture partner, France Telecom, the Algerian dispute has exposed the downside to the risk-taking business model that has made Orascom the world's eighth-largest mobile operator and exposed it to high-growth, high-risk markets such as North Korea, Zimbabwe and Pakistan.
"When the risks are high, the rewards are high," Mr Sawiris says. "We created an Algerian company that has US$2 billion (Dh7.34bn) of revenues and a billion of Ebitda [earnings before interest, taxation, depreciation and amortisation] in six years. "Where else can you do that? You can't do that in the UK. We don't go to these places because we like trouble." But as Orascom faces ownership challenges in its core markets, its approach to new business suggests there is more to the company than the battles that immediately meet the eye.
A decade ago, Orascom was one of Africa's biggest operators, with networks and licences in more than a dozen sub-Saharan markets. But the company beat a hasty retreat from much of the region as mounting debt worries led it to focus on a smaller number of core markets including Algeria, Egypt and Pakistan. Its return to sub-Saharan Africa is being managed by a new subsidiary, Telecel Globe, which is approaching the task with the benefit of experience.
"When you own smaller assets, a big company with 30 million subscribers in some markets will not put the same emphasis on 500,000 subscribers in another," says Kai Uebach, the chief executive of Telecel Globe. "The lesson learned from the past is that if you want to go into Africa, you have to have a focused team taking care of the operation, whose first priority is those operations." In small, low-margin markets, Telecel wrings out extra profit though its purchasing power as a part of the Orascom group. It can build and operate networks for 30 per cent less cost than competitors that are going it alone, and managed to save about $25 million last year through such purchasing.
"If you don't have to put all that saved cash on the table, your profitability looks completely different," Mr Uebach says. And while Orascom has made a specialised business out of targeting Africa's smaller, low-profile markets, its entry into Canada has been equally notable. Industry watchers in the world's 11th-largest economy say Orascom has brought about a major change in the country's approach to foreign investment in telecoms. Canadian law limits foreign ownership of telecoms operators to 47 per cent. Orascom owns 65 per cent of the equity issued by Globalive Wireless, a unit set up by Globalive Communications following a successful spectrum auction that saw the Egyptian-Canadian consortium spend $429m on rights. Orascom also holds most of Globalive's debt. Overall, Orascom has invested about $700m in its Canadian operations.
The Canadian government made the rare move of overruling the Canadian telecoms regulator's decision on ownership limits and allowing the Orascom unit to launch mobile services about two months ago. And on Wednesday, the government announced that laws on foreign telecoms investment would be eased this year. "Mr Sawiris is quite smart and astute politically," says Dvai Ghose, a telecoms analyst with Genuity Capital Markets in Toronto. He notes that a former Canadian provincial politician was appointed to Globalive's board to deal with government relations.
"He has a level of political manoeuvring that other guys don't have, especially guys in Canada that are already established." Mr Ghose says "time will tell" as to whether Mr Sawiris's investment in Canada will pay off, but notes that Orascom's scale will aid Globalive in rolling out competitive mobile promotions and getting discounts on network equipment and handsets. "Canada, even though it is a developed country, has the mobile penetration of an emerging market," Mr Ghose says. "In some ways, the characteristics in Canada in theory are favourable to new entrants, but what Mr Sawiris brings to the table that no other company has done is bring global scale and power."
Success in Canada and the smaller markets of Africa will be a pillar of an Orascom that makes it through the next decade as a major player. But in his new role as chairman, freed of much of the day-to-day work of a chief executive, Mr Sawiris is pondering what else a mobile operator can do to make money in a tough market. The answers may point to a future pillar of the business. "What is our business model? We produce networks and sell minutes. So imagine if I could produce power and sell electricity."