Algeria has slapped huge tax bill on Egyptian company's local subsidiary and the chairman has chosen to dilute his majority stake to raise cash.
Orascom presses Algeria on taxes
Orascom Telecom Holding's dispute with Algeria over its subsidiary's taxes has gone into extra time as the executive chairman Naguib Sawiris reduced his stake in the Egyptian company to help its tax appeal. Orascom Telecom, the largest telecommunications company in the Middle East, appealed last week against the North African country's decision that its Orascom Telecom Algerie subsidiary, known as Djezzy, owes US$596.6 million (Dh2.19 billion) in taxes dating from 2005 to 2007.
Orascom was slapped with the tax bill amid simmering tension between the North African countries following Algeria's 1-0 win against Egypt in a FIFA World Cup football qualifying match last month. The result sparked angry scenes in Algeria, where Egyptian businesses, including those owned by Djezzy, were attacked. Shareholders approved on Monday Orascom's plan for an $800m rights offering through Weather Investments. Weather is the investment vehicle controlled by Mr Sawiris that owns 85 per cent of Orascom Telecom.
The proceeds were used to strengthen Orascom Telecom's balance sheet and to help pay 20 per cent of the disputed tax bill to the Algerian Direction des Grandes Entreprises in order to begin the appeal. Algeria had also blocked a $255m dividend from Djezzy to Orascom Telecom. But the moves could be risky as by issuing 3 per cent of Orascom, Mr Sawiris diluted his majority stake in the company. "Strengthening Orascom and reducing the value of the controlling company [Weather] is the opposite of what one would expect from a majority shareholder in the controlling company if the intention was to merge the two companies," said the Deutsche Bank research analyst Carola Bardelli. Ahmed Adel, a financial analyst with Naeem Holding in Cairo, said he remained concerned that Djezzy's operations would continue to be hurt by the political fallout after it suffered "significant customer churn" in the fourth quarter.
"It might be hard for them in 2010 to keep their market share. They may lose 2 to 3 per cent or maybe even more through better promotions from competitors and asking Algerian people to leave an Egyptian company," Mr Adel said. Djezzy is one of Orascom Telecom's more successful subsidiaries. It controls about 54 per cent of Algeria's market with 15.3 million subscribers, but its revenues are expected to decline about 9 per cent to $1.8bn, Naeem Holding estimates.
Ms Bardelli said Mr Sawiris could have chosen to use the proceeds from selling Orascom Telecom's minority stake in the Egyptian mobile operator Mobinil to France Telecom for 245 Egyptian pounds (Dh164) a share, or a total of $1.3bn, last year to settle the Algerian tax issue. Instead, Mr Sawiris speculated that he could receive more for Mobinil than the offer that the Egyptian Financial Supervisory Authority had determined in arbitration in April.
The regulator was expected to make a ruling on the sale of Mobinil last week, but no announcement has been made yet. Executives from Orascom could not be reached for comment. Mr Adel said the offer for Mobinil was fair, but Mr Sawiris had stated that Orascom Telecom would not sell its stake under pressure from the regulator. "France Telecom might believe that it's the right time to make an acceptable offer for Mobinil shares, given that Orascom Telecom is thirsty for any cash injections and would accept to sell under the pressure of its cash position," Mr Adel said. "But Orascom decided to make the right issue to strengthen its balance sheet and keep fighting."
Orascom Telecom has more than 89 million subscribers in 15 countries. @Email:email@example.com