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Assessing Telecom Egypts

current strategic position and


the mobile opportunity

Presentation to the Board of Directors


January 5th, 2010
CONFIDENTIAL AND PROPRIETARY
Any use of this material without specific permission of McKinsey & Company is strictly prohibited

Executive summary (1/2)


1 Current business situation of TE not sustainable in the mid term; need to enter into the mobile market as an
operator to ensure future viability.
TEs fixed line business will cease to produce profits within the next 3-4 years, as a result of declining revenues
by 8-10%, mainly driven by retail (voice and access lines) revenue reduction and increasing cost base mainly
due to rising personnel costs, only partly offset by broadband growth
Furthermore, there are additional risks to TEs profitability as wholesale revenues, today representing 40% of the
total, can be significantly affected by increased regulatory and competitive pressures (e.g., another mobile
operator moving away from TEs infrastructure, reduction in international settlement rates, VoIP development)
As a consequence, in a few years, even considering a continuing positive cash contribution from its stake in
Vodafone Egypt, TE as a Group would be unable to either maintain its current dividend payout, or contribute to
the state through taxation, without changing its current annual compensation increase policy to its employees
This trend could only be temporarily postponed by 3-4 years through an aggressive revenue enhancement and
non-personnel cost reduction effort, but a full reversal would only be feasible if TE would be allowed to
participate directly in the mobile market by becoming an integrated operator, similar to most fixed line
incumbents in the world
2 After assessing several potential scenarios along financial, strategic, operational and feasibility criteria, two
alternative options emerge as preferable for TE: (a) acquiring control of an established operator, Vodafone
Egypt, or, should this not be possible, (b) setting up a new green-field operator through a new 3G license,
whose attractiveness would be directly dependent on a few core underlying assumptions (cost of license,
deployment Capex, achievable market share and ARPU levels after initial ramp up, etc.). Should TE fail to
proceed successfully with either of the preferred options within 6-12 months, alternative suboptimal options
would have to be re-assessed and pursued.
Acquiring control of an established operator would be the preferred option from a market structure perspective,
as it would not increase the already competitive market, while granting TE full access to a profitable mobile
opportunity. From this point of view, acquiring Vodafone Egypts remaining 55% stake would be value-creating
for TE at todays DCF calculated value of approximately EGP 15.3 and, assuming TE can execute a robust and
complex synergies-capture program, even if the purchase price increases for an acquisition premium, up to EGP
21.9 Bn (that would be the value obtained applying to Vodafone Egypt the implied multiples in the Mobinil
proposed transactions). We assume that acquisition of a controlling stake in Mobinil is currently not feasible
McKinsey & Company

| 1

Executive summary (2/2)


In case the Vodafone acquisition proves not feasible, TE should launch its own green-field mobile

operations as a 4th player in the market (assuming Egypt will have no more than 4 mobile players in the
long term), with a 3G play appearing attractive in the long-term, also enabling TE to position itself as a
market leading innovator. Short and medium-term financial attractiveness would directly depend on the
license award price, as well as assumed ARPU and market share uptake (need to achieve market
position at the very high end of the range for international 4th entrant examples), while rollout should be
carefully staged to ensure the EGP 4 Billion of Capex required for the 5,000 3G sites is gradually
committed.
In case TE is not able to act on either of the preferred scenarios within the next 6-12 months, it should
pursue alternative options to become a 4th mobile operator, to avoid its value being further depressed
and the viability of the mobile option becoming further reduced as the mobile market progressively
saturates.

3 Recommended next steps for TE to improve its long-term sustainability would consequently be: (a)
further enhancing/accelerating the ongoing profitability improvement program for TEs fixed line
business to protect current business to the degree possible, and (b) promptly engaging all
stakeholders with influence on the preferred mobile entry scenarios to present TEs case and
understand by mid 2010 which option could indeed be pursued within a short time frame

McKinsey & Company

| 2

Presentation agenda
1 Current business situation of TE not sustainable in the mid term; need to enter into the mobile

market as an operator to ensure future viability.

2 After assessing several potential scenarios along financial, strategic, operational and feasibility

criteria, two alternative options emerge as preferable for TE: (a) acquiring control of an
established operator, Vodafone Egypt, or, should this not be possible, (b) setting up a new
green-field operator through a new 3G license, whose attractiveness would be directly
dependent on a few core underlying assumptions (cost of license, deployment Capex,
achievable market share and ARPU levels after initial ramp up, etc.). Should TE fail to proceed
successfully with either of the preferred options within 6-12 months, alternative suboptimal
options would have to be re-assessed and pursued.

3 Recommended next steps for TE to improve its long-term sustainability would consequently be:

(a) further enhancing/accelerating the ongoing profitability improvement program for TEs fixed
line business to protect current business to the degree possible, and (b) promptly engaging all
stakeholders with influence on the preferred mobile entry scenarios to present TEs case and
understand by mid 2010 which option could indeed be pursued within a short time frame

McKinsey & Company

| 3

In the telecom industry value is shifting away from the fixed business
towards mobile example of OTE
Percent, Total EV in EUR Billion
Total Enterprise Value

100% =

15.4

9.1

10.7

29

CAGR EV/EBITDA
09E
-13%

4.1x

44
Domestic
Wireline

73

40

59

13%

5.4x

-5%

3.6x

Mobile

14

Rest1

13

16

12

Jun-2000

Feb-2005

Mar-2009

The contribution of
domestic wireline to
the overall enterprise
value of OTE Group
has been declining

1 Rest includes: RomTelecom, ArmenTel (until ), OTEnet, Telecom Serbia


2 Cosmote includes: CosmOTE, GloBul, Cosmofon (until 2007), Cosmote Bulgaria, Cosmote Romania, Cosmote Albania, Cosmote FYROM, Germanos
SOURCE: Deutsche Bank analyst reports dated Jun00, Feb05 and Mar09

McKinsey & Company

| 4

The competitive landscape raises several uncertainties about Telecom


Egypts business sustainability
Potentially likely scenarios
Projections for TE
business, EGP billion

Today (2008 YE)

2014

Competitive scenario
description

Wholesale revenue
Retail revenue
Non personnel cost
Personnel cost
EBITDA

EBIT

Low
Current fixed voice
erosion trends,
increasing BB, mobile
growth from
Vodafone holding
2nd and 3rd 3P
licenses are awarded
Mobile players active
on fixed broadband
Loss of 1 mobile
client in wholesale

Moderate
Mobile operators using
aggressive pricing tactics
further strengthening
FMS, with concurrent
expansion of mobile data
offerings
Mobile pressure on BB
taking advantage of 3P
licenses, with focus on
B2B and high end B2C
segments, while also
attacking youth segments

Intense
Mobile operators
using all out price
war tactics,
spearheading the
attack with flat
voice and mobile
data tariffs
Mobile players
further investing
in expanding their
broadband attack
in most segments

10.1
3.9
6.2

11.1
4.4
6.7

9.7
4.4
5.3

9.1
4.4
4.7

5.1

7.0

6.9

6.8

3.0

2.1

3.5

3.5

5.0

4.1

1.9

0.6

3.4

3.5

3.3

3.5

2.8

2.3

-0.6

-1.1
McKinsey & Company

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due to a significant erosion in voice that is unlikely to be offset by Internet


growth, with declining quality of the revenues
Potentially likely scenarios
Projections for TE
business, EGP billion

Today (2008 YE)

2014
Low

Moderate

Intense

11.1
10.1
Access

2.0

2.0

9.7
1.9

2.5
Voice

9.1
1.8

1.6

1.2

2.2

1.8

1.7

3.0

Internet & other

1.2

Wholesale

3.9

4.4

4.4

4.4

39%

40%

45%

48%

9.61

9.8

9.4

9.1

0.4

1.8

1.4

1.2

% of total

# access lines (mn)

# broadband lines
(mn)

1 As of June 30, 2009; includes policy change in disconnections

McKinsey & Company

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Indeed, under a moderate competition scenario, TEs profits will erode


rapidly, increasing uncertainties about the business sustainability
EGP billion

2008

2014

2020

10.1

9.7

9.9

5.1

6.9

8.3

Top-line is expected to decline


slightly, since the loss in voice and
access will not be totally offset
by internet/broadband and wholesale

Personnel cost will drive the


increase in operational expenses
(7% p.a.) at a high pace

Margin erosion will result in a


significant decrease in operational
performance

Bottom-line erosion is expected to


translate into minimal dividends in 5
years

Revenue

Non personnel
Personnel cost

EBITDA

3.0

2.1

5.0

3.4

3.5

3.6
4.7

2.8

1.6

Income TE fixed

1.5

-0.6

-2.2

Income Vodafone

1.3

1.5

1.8

2.8

0.9

Net income

-0.4
Dividends received
by Government
Tax received by
Government

1.8

0.7

0.5

Under such scenario, without


Vodafones dividends TE could
become net income negative
by 2012
McKinsey & Company

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If competition becomes very intense, TEs bottom line is expected to


become zero within the next five years
EGP billion

2008

2014

2020

10.1

9.1

9.2

Revenue

Non personnel
Personnel cost

EBITDA

3.0

2.1

5.0

8.2

6.8

5.1

3.3

3.5

3.5

4.7

2.3

1.0

Income TE fixed

1.5

-1.1

-2.7

Income Vodafone

1.3

1.3

1.3

Net income

2.8

0.2
-1.4

Dividends received
by Government
Tax received by
Government

1.8

0.2

0.5

Despite increasing broadband


penetration, F2M substitution will
impact heavily over TEs top-line

Personnel cost will drive the


increase in operational expenses
(7% p.a.) at a high pace

As a result, EBITDA could almost


disappear by 2020

In a 5-year horizon, income from


Vodafone will not suffice to offset the
deterioration of the fixed-line business

Without Vodafones
dividends TE would become
net income negative by 2011

McKinsey & Company

| 8

Under a moderate competition scenario, a profitability enhancement


program could potentially delay TEs fixed business erosion by 4 years
EGP billion

2008

2014

2020

10.1

11.0

11.5

5.1

7.3

Revenue

Non personnel
Personnel cost

3.0

2.1

3.8

3.5

8.8
4.1
4.7

5.0

3.4

1.9

Income TE fixed

1.5

0.3

-1.1

Income Vodafone

1.3

1.5

1.8

2.8

1.7

0.7

1.8

1.4

0.7

0.5

0.1

EBITDA

Net income
Dividends received
by Government
Tax received by
Government

Top-line to grow slowly, boosted by


internet/broadband growth and
innovative pricing introduction of flat
rates and bundles
Reduction in non-personnel cost
growth through a focused program
Still a high increase in personnel
cost (7% p.a.) will pose challenges to
TEs cost structure

Margin erosion will result in a


significant decrease in operational
performance

Bottom-line erosion is expected to


translate into lower dividends in 5
years and will disappear by 2020

Without Vodafones dividends,


TEs net income would be
eliminated by 2016
McKinsey & Company

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If competition becomes very intense, a profitability enhancement program


could only delay the inevitable business erosion by 3 years
EGP billion

2008

2014

2020

10.1

10.2

10.5

5.1

7.1

8.6

Revenue

Non personnel
Personnel cost

EBITDA

3.0

2.1

5.0

3.6

3.5

3.9
4.7

2.8

1.1

Income TE fixed

1.5

-0.2

-1.8

Income Vodafone

1.3

1.3

1.3

2.8

1.1

Net income

-0.5
Dividends received
by Government
Tax received by
Government

1.8

0.9

0.5

Revenue enhancement program could


keep a slow growth in revenues
despite heavy impact of F2M on TEs
top-line growth
Reduction in non-personnel cost
growth through a focused program
Still a high increase in personnel
cost (7% p.a.) will pose challenges to
TEs cost structure

As a result, gross operating income


will quickly decrease over time

Income from Vodafone will only


offset the deterioration of the fixed-line
business for the next 5 years

Without Vodafones dividends,


TEs net income would be
eliminated by 2014
McKinsey & Company

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Telecom Egypt has to enter the mobile market: significant growth still
expected and market still fluid with high churn among players
Egyptian telecom market revenue distribution
2008, EGP millions

+29

2007-08 change

Overall Egyptian Retail Telecom market revenues: 28,615

All
players

+80

+33

1,590

+5

20,953

5,185

+61
891
+38

Competitors

572

383

10,611

+72
5,185
TE/
1,018
Vodafone

TE Fixed Wholesale
4,146
3,493
10,342 2,249 2,800

+83
508

+19
+24
Mobile
data1

2005
Mobile voice

06

07

2008
Fixed voice3 Fixed
data2

1 Calculated as a percentage of total service revenues, including SMS, Data cards


2 Includes only BB
3 Includes only retail
SOURCE: Pyramid, analyst reports, team analysis

McKinsey & Company

| 11

Capital markets seem to value integrated and mobile operators more


favorably
EV/EBITDA 2009E
Fixed

Integrated operators

Mobile operators

7,3x
6,4x

Average: 5.5x

4,0x

Average: 5.0x
5,2x 5,4x
4,7x 4,9x 4,9x
3,9x 4,0x

4,7x

5,1x 5,2x

Zain

Mobinil

MTN

Orascom

Maroc
Telecom

Batelco

STC

Jordan

QTel

Omantel

Turk
Telecom

Etisalat

TE

Companies with more exposure to growing


mobile markets enjoy higher valuation multiples
SOURCE: Company data, broker research reports

McKinsey & Company

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Presentation agenda
1 Current business situation of TE not sustainable in the mid term; need to enter into the mobile

market as an operator to ensure future viability.

2 After assessing several potential scenarios along financial, strategic, operational and feasibility

criteria, two alternative options emerge as preferable for TE: (a) acquiring control of an
established operator, Vodafone Egypt, or, should this not be possible, (b) setting up a new
green-field operator through a new 3G license, whose attractiveness would be directly
dependent on a few core underlying assumptions (cost of license, deployment Capex,
achievable market share and ARPU levels after initial ramp up, etc.). Should TE fail to proceed
successfully with either of the preferred options within 6-12 months, alternative suboptimal
options would have to be re-assessed and pursued.

3 Recommended next steps for TE to improve its long-term sustainability would consequently be:

(a) further enhancing/accelerating the ongoing profitability improvement program for TEs fixed
line business to protect current business to the degree possible, and (b) promptly engaging all
stakeholders with influence on the preferred mobile entry scenarios to present TEs case and
understand by mid 2010 which option could indeed be pursued within a short time frame

McKinsey & Company

| 13

Mobile entry scenarios were assessed for alignment with Telecom Egypts
business priorities along several key dimensions
1

Key business
parameters
3

SOURCE: Team analysis

Financial
considerations

Operational
requirements/
prerequisites

Financial value creation expressed as TEs total equity


value, based on a set of reasonable business assumptions about
the combined fixed-mobile entity evolution

Operational parameters associated with potential constraints or


advantages in setting-up/operating the new mobile operator
(e.g., speed of deployment /attainment of significant market
presence, ability to leverage current infrastructure, lack of crucial
skills required in the commercial or network functions, etc.)

Strategic
objectives

Alignment with TEs long-term strategic objectives (e.g.,


ability to achieve a leading presence in the local mobile market,
potential to generate maximum value from fixed-mobile
synergies, having control of own infrastructure for the long-term,
etc.)

Practicality
assessment

Practical considerations, including availability of acquisition


targets, potential for raising funding, probability of being awarded
a license, ability to capture the theoretical synergies, technical
feasibility of offering competitive services, etc.
McKinsey & Company

| 14

Potential scenarios for Telecom Egypt entering the mobile market as an


operator
Possible permutations

Buy

Description

Acquire
Vodafone 100%

Acquire ownership and full operational control of Vodafone Egypt

Acquire
minority stake
in Mobinil

Additionally to existing Vodafone stake acquire 20% stake in Mobinil to enhance

3G license

Acquire 3G license and start services into mobile data and 3G-only voice,

position in mobile market and increase chances of commercial agreement


Strictly a financial investment

initially also leveraging roaming on 2G networks for mass market voice.


Gradually shift to 3G voice only as handsets become more available
Greenfield

Virtual
Operator

Universal
license

As above, plus 2G capabilities and voice services launched from the start
All other mobile operators offered full fixed licenses (all 4 operators become
universal operators)

CDMA

Leverage existing network and expand it to offer mobile data and voice

CDMA/MVNO

Leverage existing CDMA network and expand it to offer mobile broadband only
Offer mobile voice (and data) through an MVNO deal with an existing operator

MVNO

Offer full mobile services leveraging 3rd party network, with some control on products
More likely to leverage Vodafones network
Leverage TE brand value to resell 3rd party operators products, with limited

Commercial
agreement

input on product characteristics to benefit from margin and control FMS


More likely to collaborate with Vodafone in offering FMC bundles

McKinsey & Company

| 15

Financial attractiveness was based on a Discounted Cash Flow


analysis
TEs 45% stake
Equity value

in Vodafone
Egypt

DCF model
calculates
total
enterprise
value of fixed
line business
and stake in
VE
Two core
elements are:

ILLUSTRATIVE

Discounts in a
potential sale

TE fixed-line

VE

TE

Non-control

Liquidity

TE (market)

Operational
Operational

cash flows

Financial
premiums/
discounts

Implied DCF valuation based


on operational cash flows

Financial
Base case discount scenario: constant
dividend payout ratio expected, but no
control of cash flows (discount c.1030%). Discount could be up to c.30-40%
if dividends are in doubt and liquidity
concerns are high.

McKinsey & Company

| 16

Overview of mobile growth scenarios assessment


EGP billions
1 Evolution of existing (As Is) company structure under different market conditions
Way to
achieve

Options
to enter

Base Case
Low
competition

Moderate
competition

18.1
As is

Buy
stake

2 Mobile
market
entry for
Telecom
Egypt

31.8

Vodafone
Mobinil
stake

3G
Entry
to mobile
Green
Field

Universal
CDMA/
MVNO

CDMA

Virtual
Operator

SOURCE: Team analysis

MVNO

Comm

Moderate +
program

13.3 -4.8
24.4

Intense
competition

16.6 -1.5

Intense
+ program

11.6 -6.5

27.8

14.6 -3.5

20.6

23.6

13.7

11.1 -2.5

11.1 -2.5

9.0 -4.7

9.0 -4.7

35.5 19.6
15.9
40.1 4.5

27.3 14.4 -5.2


12.9 -3.0
30.4 3.1 -1.4

31.0 18.1 -1.6


12.9 -3.0
36.3 5.3 0.8

23.0 12.6 -7.0


10.4 -5.5
24.4 1.4 -3.1

26.2 15.8 -3.8


10.4 -5.5
28.7 2.5 -2.0

31.8 18.1
31.8
13.7
33.3 1.5
33.3

24.4 13.3 -4.8


11.1 -2.5
25.5 1.0 -0.5

27.8 16.6 -1.5


11.1 -2.5TE
29.5 1.7 0.2

20.6 11.6 -6.5


9.0 -4.7
21.1 0.5 -1.0

23.6 14.6 -3.5


9.0 -4.7
24.7 1.1 -0.4

30.3 19.4
10.9
32.6 2.3
32.6

25.1 14.2 -5.2


10.9 0.0
26.3 1.2 -1.1

28.7 17.8 -1.6


10.9 Value
0.0
32.3 3.6 1.3

23.9 13.0
23.9
Total Equity
10.9
26.9 3.0
26.9

9.0 -4.0
0.0
2.2 -0.8

19.91
Value
10.9
22.1

Total equity Value


19.6
14.4 -5.2
30.6
30.6
including
value 25.4
creation/
10.9
10.9 0.0
35.0
28.5
destruction
from
entering
35.0
4.4
3.2 -1.2
2
mobile
market
30.3 19.4
25.1 14.2 -5.2

fixed

22.8 11.9 -1.1


10.9 0.0
26.8 4.0 1.1
29.0 18.1 -1.6
10.9 0.0
33.4 4.4Value
0.0

10.9
33.0 2.7
33.0

10.9 0.0
27.0 1.9 -0.8

-1.6
28.7 17.8creation
10.9 0.0
32.4 3.6 1.0

32.3 19.6
32.3
12.7
35.5 3.2
35.5

24.7 14.4 -5.2


10.3 -2.4
27.2 2.5 -0.6

-1.6
28.3 18.1 Mobile
10.3 -2.4
32.1 3.8 0.6

32.3 19.6
12.7
33.0 0.7

24.7 14.4 -5.2


10.3 -2.4
25.1 0.4 -0.3

28.3 18.1 -1.6


10.3 -2.4
29.2 0.9 0.2

30.3

23.4
vs.12.5
10.9
As
23.5is

-6.9
0.0
0.1 -2.2

Value
7.7 -5.3
10.9 0.0
vs.
20.1 1.5 -1.5
18.6

As
23.6 12.6 -7.0
10.9 0.0
25.6
vs. 2.0 -2.4
As
12.5
23.4is

is

26.5 15.6 -3.8


10.9 0.0
28.9 2.3 0.1
21.1 10.2 -2.8
10.9 0.0
Vodafone
24.2 3.1 0.2
stake
26.8 15.8 -3.8
10.9 0.0
29.9 3.1 -1.3

-6.9
10.9 0.0
24.6 1.2 -1.5

26.5 15.6 -3.8


10.9 0.0
29.3 2.7 0.1

entry
12.6 -7.0
20.9 option
8.2 -4.5
1.9 -1.2

24.0 15.8 -3.8


8.2 -4.5
27.1 3.0 -0.2

20.9 12.6 -7.0


8.2 -4.5
21.0 0.2 -0.5

24.0 15.8 -3.8


8.2 -4.5
24.6 0.5 -0.2

22.8

McKinsey & Company

| 17

Preliminary assessment of leading mobile entry scenarios for TE along


key dimensions
Entry Scenarios
Acquire
Vodafone

3G license

Financial
+ Base case for value of
55% stake could be
EGP 18 Bn (20%
premium vs. DCF
value), total additional
value extracted EGP
6.2-8.5 Bn
+ Value creation even if
price is EGP 21.9 Bn
(implied by Mobinil
controlling stake
valuation)

Operational
Strategic
Practicality
+ All critical skills for
+ Most attractive market + Once deal decided,
mobile operations and
structure
no complex set-ups
distribution network
+ Full Fixed-Mobile
Willingness from
come ready-made
Collaboration (FMC)
Vodafones side to
+ Financial integration
potential
sell? (linked with their
(profit accretion) can + TE becomes mobile
future funding needs)
start immediately
operator with highest
High funding needs
+ Commercial and back- (revenue) market share
for TE
end integration can
+ Operator already well FMC cost synergies
commence at a later
positioned in high end,
also expected
stage without
potential to expand
through personnel
impeding cash flows
with no-frills brand
reduction
+ Full control of own
infrastructure

License cost assumed


significantly lower than
the full 3rd license which
also included 2G
Vodafone stake will
impact financial value
depending on timing and
discount of potential
disposal
NPV break-even
requires market share
and ARPU at the very
high end of the range for
international 4th entrant
examples

+
+

Existing infrastructure
(buildings, towers) to
be leveraged
No complex MVNO
agreement needed
Technologically simple
towards customer (vs.
CDMA solution) and
allows roaming
High CapEx required
to offer full coverage
and high capacity (but
can be staggered)
Scarce mobile
operator skills in TE

+
+
+
+
+

Simpler 4G roadmap
than alternative
technologies
Full FMC potential
TEs brand equity can
be fully leveraged
Full control of own
infrastructure
Full commercial
flexibility (capacity not
an issue vs.VNO)
Difficulty in capturing
voice market share in
the short-term only with
3G (handsets)

Realization of option
may depend on
license price

McKinsey & Company

| 18

Preliminary ranking of mobile growth options

Highest

PRELIMINARY

Lowest

Possible permutations

Financial

Operational

Strategic

Practicality

1 Buy: Acquire Vodafone


100%
2 Greenfield: 3G license

Greenfield / Virtual
Operator: CDMA / MVNO
Greenfield: Universal
license
Virtual Operator: MVNO

Greenfield: CDMA
Virtual Operator: Reseller
Buy: Acquire minority
stake in Mobinil

N/A
McKinsey & Company

| 19

Acquisition of Vodafone: sensitivities on Vodafone valuation and


acquisition premium
EGP billion
16,5

17,2

5,0x

5,2x

18,7

20,1

5,6x

6,0x

21,9

12,9
Value of 55% of
Vodafone Egypt
x EBITDA1

4,0x

6,5x

With maximum FMC value


creation of EGP 11 Bn, a price
of EGP 21,9 Bn is still value
creating (premium of 43% over
DCF value)

Vodafone stake at
DCF calculated value
is ~EGP 15,3 Bn
Equivalent
Mobinil share
price (EGP)

2082

222

245

273

Mobinil share
Premium (%)

18

31

8.6

10.0

11.5

13.2

Additional
funding
required3

4.3

7.9

1 Vodafone EBITDA EGP 6.5 bn


2 Closing price when regulatory approval was announced
3 Leverage of 1x EBITDA PF (EGP 10bn) Vodafone and TE net debt (EGP 1.4 bn) provides EGP 8.6 bn available cash

McKinsey & Company

| 20

Presentation agenda
1 Current business situation of TE not sustainable in the mid term; need to enter into the mobile

market as an operator to ensure future viability.

2 After assessing several potential scenarios along financial, strategic, operational and feasibility

criteria, two alternative options emerge as preferable for TE: (a) acquiring control of an
established operator, Vodafone Egypt, or, should this not be possible, (b) setting up a new
green-field operator through a new 3G license, whose attractiveness would be directly
dependent on a few core underlying assumptions (cost of license, deployment Capex,
achievable market share and ARPU levels after initial ramp up, etc.). Should TE fail to proceed
successfully with either of the preferred options within 6-12 months, alternative suboptimal
options would have to be re-assessed and pursued.

3 Recommended next steps for TE to improve its long-term sustainability would consequently be:

(a) further enhancing/accelerating the ongoing profitability improvement program for TEs fixed
line business to protect current business to the degree possible, and (b) promptly engaging all
stakeholders with influence on the preferred mobile entry scenarios to present TEs case and
understand by mid 2010 which option could indeed be pursued within a short time frame

McKinsey & Company

| 21

Backup

McKinsey & Company

| 22

Basic Assumptions 1/4

2008

2014

2020

11.7

9.8

9.9

0.4

1.6

2.4

0.9

1.1

1.2

9.4

9.0

0.4

1.4

2.0

0.9

1.0

1.1

9.1

8.3

0.4

1.3

1.7

0.9

1.0

1.1

ALIS (million)
Low
competition

Broadband lines (million)


Revenues per lines (000
EGP per line)

11.7
ALIS (million)
Moderate
competition

Broadband lines (million)


Revenues per lines (000
EGP per line)

11.7
ALIS (million)
Intense
competition

Broadband lines (million)


Revenues per lines (000
EGP per line)

McKinsey & Company

| 23

Basic Assumptions 2/4


EGP billion

2008

2014

2020

6.2

6.6

7.1

3.9

4.4

4.8

10.1

11.1

11.9

6.2

5.3

5.1

3.9

4.4

4.8

10.1

9.7

9.9

6.2

4.6

4.4

4.0

4.4

4.8

10.1

9.1

9.2

Retail
Low
competition

Wholesale
Total Revenues

Retail
Moderate
competition

Wholesale
Total Revenues

Retail
Intense
competition

Wholesale
Total Revenues
McKinsey & Company

| 24

Basic Assumptions 3/4


EGP billion

Access Revenue
Low
competition

Access Revenue

Voice Revenue

Internet and other

Access Revenue
Intense
competition

2014

2020

2.0

2.0

2.0

3.0

2.5

2.6

1.2

2.1

2.6

2.0

1.9

1.8

3.0

1.6

1.5

1.2

1.8

1.8

2.0

1.8

1.7

3.0

1.2

1.1

1.2

1.6

1.6

Voice Revenue

Internet and other

Moderate
competition

2008

Voice Revenue

Internet and other

McKinsey & Company

| 25

Basic Assumptions 4/4


EGP/month

2008

2014

2020

44.9

56.3

59.7

36.4

38.3

38.3

74.1

70.3

62.3

44.9

56.3

56.6

36.4

37.5

37.5

74.1

60.2

44.3

44.9

52.1

52.7

36.4

34.5

34.5

74.1

57.0

41.9

ARPU
Low
competition

Voice and Access

Broadband
ARPU
Moderate
competition

Voice and Access

Broadband

ARPU
Intense
competition

Voice and Access

Broadband
McKinsey & Company

| 26

Profitability enhancement program assumptions: moderate


EGP billion

Retail
broadband
market share
(%)

2008

2014

2020

60.0

55.0

55.0

60.0

60.0

60.0

45.0

47.0

48.0

45.0

56.0

57.0

3.0

3.0

4.0

4.0

Base case
w/ program
Delta

Base case
Retail ARPU
(EGP/mo)

w/ program
Delta

Base case
Advertising
costs as % of
revenue (%)

w/ program
Delta

1.0
1.0

McKinsey & Company

| 27

Profitability enhancement program assumptions: intense


EGP billion

Retail
broadband
market share
(%)

2008

2014

2020

60.0

50.0

50.0

60.0

55.0

55.0

45.0

43.0

44.0

45.0

52.0

53.0

3.0

3.0

4.0

4.0

Base case
w/ program
Delta

Base case
Retail ARPU
(EGP/mo)

w/ program
Delta

Base case
Advertising
costs as % of
revenue (%)

w/ program
Delta

1.0
1.0

McKinsey & Company

| 28

Sensitivities on personnel cost: EBITDA


EGP billion

2008

2014

2020

5.1

3.6

2.3

5.1

4.8

4.4

1.2

2.1

2.3

0.5

5.1

3.5

2.6

1.2

2.1

w/ personnel cost CAGR 9%


Low
competition

w/ personnel cost CAGR 5%


Delta

5.1
w/ personnel cost CAGR 9%
Moderate
competition

w/ personnel cost CAGR 5%


Delta

5.1
w/ personnel cost CAGR 9%
Intense
competition

5.1
w/ personnel cost CAGR 5%
Delta

1.9
3.1

-0.1
2.0

1.2

2.1
McKinsey & Company

| 29

Sensitivities on personnel cost: EBIT


EGP billion

w/ personnel cost CAGR 9%


Low
competition

2014

1.9

0.2

2020

-1.6
w/ personnel cost CAGR 5%
Delta

w/ personnel cost CAGR 9%


Moderate
competition

2008

w/ personnel cost CAGR 5%

1.9

1.4

0.4

1.2

2.1

-1.1

-3.3

1.9
1.9

0.1
-1.2

Delta

1.2

2.1

-1.5

-3.8

-0.3

-1.7

1.2

2.1

1.9
w/ personnel cost CAGR 9%
Intense
competition

1.9
w/ personnel cost CAGR 5%
Delta

McKinsey & Company

| 30

TE be negatively impacted if the government awards international


gateways to all operators
EGP billion
2008

2014

2020

10.1

8.6

9.3

Revenue
Low
competition

EBITDA
Net income

5.0

Revenue

EBITDA
Net income

5.0

Revenue
EBITDA
Net income

-0.1

-0.9

7.2

7.3

0.3

2.8

10.1

Intense
competition

0.8

2.8

10.1

Moderate
competition

1.7

TE would lose
more than
EGP 2bn in
domestic
transmission
and mobile to
international
wholesale

-1.0
-1.6

-3.0

6.6

6.6

-0.1

-1.6

-2.2

-4.0

5.0
2.8

McKinsey & Company

| 31

Communications Egypt vs. Turkey side-by-side comparison


Penetration of population (%)
Egypt

Turkey

Access
lines

14,6

15,0

15,3

15,5

27,4

26,9

25,8

24,5

Personal
computers

2,5

3,5

6,5

9,3

7,2

9,2

13,4

22,5

Broadband

0,1

0,3

0,6

1,0

2.3

4.0

6.4

8.7

61,1

83,6

89,0

54,5

71,7

2008

2005

2006

2007

2008

Mobile

18,1

24,9

2005

2006

40,8

2007

There seems to be a 3 year lag


between Turkey and Egypt in the
penetration of communication services

SOURCE: Government data; Pyramid

McKinsey & Company

| 32

Comparing key telecommunications trends in Egypt and Turkey


Turkey

Teledensity evolution 2004-08

Mobile penetration evolution 2004-08


100

30

Voice

Egypt

25

80

20

60

15

40

10

20

5
0
2004

05

06

07

2008

Broadband penetration evolution 2004-08

0
2004

05

06

07

2008

08

2009

PC penetration evolution 2005-09


30

25

Data

20

15
10

2
0
2004

05

06

07

2008

0
2005

06

07

McKinsey & Company

| 33

Overview of mobile growth scenarios assessment


EGP billions
1 Evolution of existing (As Is) company structure under different market conditions
Way to
achieve

Options
to enter

Base Case
Low
competition

Moderate
competition

18.1
As is

Buy
stake

2 Mobile
market
entry for
Telecom
Egypt

31.8

Vodafone
Mobinil
stake

3G
Entry
to mobile
Green
Field

Universal
CDMA/
MVNO

CDMA

Virtual
Operator

SOURCE: Team analysis

MVNO

Comm

Moderate +
program

13.3 -4.8
24.4

Intense
competition

16.6 -1.5
27.8

Intense
+ program

11.6 -6.5
20.6

14.6 -3.5
23.6

13.7

11.1 -2.5

11.1 -2.5

9.0 -4.7

9.0 -4.7

35.5 19.6
15.9
40.1 4.5

27.3 14.4 -5.2


12.9 -3.0
30.4 3.1 -1.4

31.0 18.1 -1.6


12.9 -3.0
36.3 5.3 0.8

23.0 12.6 -7.0


10.4 -5.5
24.4 1.4 -3.1

26.2 15.8 -3.8


10.4 -5.5
28.7 2.5 -2.0

31.8 18.1
31.8
13.7
33.3 1.5
33.3

24.4 13.3 -4.8


11.1 -2.5
25.5 1.0 -0.5

27.8 16.6 -1.5


11.1 -2.5
29.5 1.7 0.2

20.6 11.6 -6.5


9.0 -4.7
21.1 0.5 -1.0

23.6 14.6 -3.5


9.0 -4.7
24.7 1.1 -0.4

30.3 19.4
10.9
32.6 2.3
32.6

25.1 14.2 -5.2


10.9 0.0
26.3 1.2 -1.1

28.7 17.8 -1.6


10.9 0.0
32.3 3.6 1.3

23.4 12.5 -6.9


10.9 0.0
23.5 0.1 -2.2

26.5 15.6 -3.8


10.9 0.0
28.9 2.3 0.1

23.9 13.0
23.9

19.9

9.0 -4.0
10.9 0.0
22.1 2.2 -0.8

22.8 11.9 -1.1


10.9 0.0
26.8 4.0 1.1

18.6

7.7 -5.3
10.9 0.0
20.1 1.5 -1.5

21.1 10.2 -2.8


10.9 0.0
24.2 3.1 0.2

30.6 19.6
30.6

25.4 14.4 -5.2


10.9 0.0
28.5 3.2 -1.2

29.0 18.1 -1.6


10.9 0.0
33.4 4.4 0.0

23.6 12.6 -7.0


10.9 0.0
25.6 2.0 -2.4

26.8 15.8 -3.8


10.9 0.0
29.9 3.1 -1.3

30.3 19.4
30.3

25.1 14.2 -5.2


10.9 0.0
27.0 1.9 -0.8

28.7 17.8 -1.6


10.9 0.0
32.4 3.6 1.0

23.4 12.5 -6.9


10.9 0.0
24.6 1.2 -1.5

26.5 15.6 -3.8


10.9 0.0
29.3 2.7 0.1

32.3 19.6
32.3
12.7
35.5 3.2
35.5

24.7 14.4 -5.2


10.3 -2.4
27.2 2.5 -0.6

28.3 18.1 -1.6


10.3 -2.4
32.1 3.8 0.6

20.9 12.6 -7.0


8.2 -4.5
22.8 1.9 -1.2

24.0 15.8 -3.8


8.2 -4.5
27.1 3.0 -0.2

32.3 19.6
12.7
33.0 0.7

24.7 14.4 -5.2


10.3 -2.4
25.1 0.4 -0.3

28.3 18.1 -1.6


10.3 -2.4
29.2 0.9 0.2

20.9 12.6 -7.0


8.2 -4.5
21.0 0.2 -0.5

24.0 15.8 -3.8


8.2 -4.5
24.6 0.5 -0.2

10.9
26.9 3.0
26.9
10.9
35.0 4.4
35.0
10.9
33.0 2.7
33.0

McKinsey & Company

| 34

Discounted Cash Flow model overview


Mechanics

Retail revenue
Inputsfee
Access: connection
Subscriptions: subscription fee
Voice1: tariff, usage
Internet: BB subs, fee

Different forecast inputs are


based on views on growth
trends and contribution as
a percentage of revenue

Trends are supported by both


historical performance and
international benchmarks

Wholesale revenue
Domestic: tariffs, volumes
International: tariffs, volumes

For each scenario, the


model considers a different
set of assumptions to build
the forecasts and provide a
valuation

Market data
Penetration (lines, BB)
Market share

Operating expenses
Personnel, operating costs
Interc. fees, G&A, S&D
CapEx and Working capital
Vodafone Egypt KPIs,
EBITDA and CapEx

TEs and Vodafone Egypts


assumptions and KPIs are
linked to provide a
combined valuation

1 Includes local calls, long distance, fixed to international and fixed to mobile

BACK UP

Output

Yearly cash flows until


2020, after which a
normalized terminal value
is applied
For each scenario, the model
provides a value of TEs
fixed line business
operations and a value of
Vodafone Egypts operations
Apart from operational cash
flows, other factors affect the
current value of TE, namely
the financial
considerations around the
45% stake in Vodafone

McKinsey & Company

| 35

Overview of Vodafone-TE: potential EGP 11 bn value of synergies


EGP billion
Vodafone
standalone

TE-Vodafone
integrated

Expected
synergies
(EGP bn)

1 TE fixed
revenue
synergies (%)

N(A

1%

1.3

10% reduction in disconnections

2 Market share
(%)

40%

45%

2.0

Additional 5% market share through


cross-selling and bundle offers

28% increased ARPU as an


integrated operator based on
innovative pricing and incumbent
advantage (higher value customers)

3 ARPU
(EGP/mo)

47

52

Rationale

3.5

ARPU differential between incumbent and third operator:

In Spain (2008):
TEF: EUR 30.40
Orange: EUR 23.13
= 26%

4 Opex savings
(%)

0%

In Greece (2008):
Cosmote: EUR 23.60
Wind: EUR 18.12
= 30%

7%

4.0

In Netherleands (2008):
KPN: EUR 27.75
Orange: EUR 20.58
= 35%

TEF 02 Cesky integration resulted in


27% of savings in FTE
McKinsey & Company

| 36

Acquisition of Vodafone: financial overview

BACKUP

EGP billion, average of moderate + program and intense + program scenarios

Base case assumptions

Market share: increasing


to 45%

ARPU: EGP 52

EBITDA margin: 50%

Revenue
EBITDA
Taxes
Capex
FCF

2010

2015

2020

14.7
6.8
1.0
2.8

21.9
10.9
1.7
3.2

27.0
14.3
2.2
2.7

3.0

6.7

9.4

Synergies assumptions

Market share: Vodafones standalone case assumes a flat market share, while for an integrated
operator we assume that market share will increase by 5% (bundles and cross-selling promotions)

ARPU: Todays ARPU of EGP 50 is expected to drop to EGP 47 in the standalone case base;
however, as an integrated operator TE will be able to better target high-end customers and keep or
increase the current level

OPEX: the integrated case assumes savings of 7% (i.e. TE O2 Cesky integration)


McKinsey & Company

| 37

3G license: sensitivities on license cost vs. Market share and ARPU


EGP billion, average of moderate and intense competition scenarios plus profitability program
License cost

1.3

3.4

4.4

20

26

% of Etisalats
License cost1

Discount equivalent to
French 4th license

Etisalats price + inflation


(9.5% in 08 and 18.3% in 09)

3G break-even curve:

License: EGP 4.4bn


License: EGP 3.4bn
License: EGP 1.3bn

Market share (%)

40
30
20
10
0
20

25

1 Without inflation factored in

30

35

40

45

50

55

60

65

70

ARPU
(EGP)

McKinsey & Company

| 38

Fourth entrant 3G: Free Mobile


Key country facts
2008

Population 64,1
Mobile penetration
million
End of year, percent, 2011
GDP/cap. 33.300
USD
+5% p.a.
Age profile
88 92 94 95 96
>14
18,6
78 83
73
69
64
<15-64 65

<65

CAGR

Mobile market overview and evolution


2002-2011

16,4

Mobile players

Market shares
End of year, percent, 2011
1

Orange

Other
2002 03 04 05 06 07 08 09 10 2011

44

43

43

36

36

35

34

34

34

34

33

16

17

17

17

17

17

17

17

17

2002 03

04

05

06

07

08

09

10

11

35
15

35

Free mobile a subsidiary of the broadband


provider Illiad was the only company to bid for
the fourth license
Competitor reactions

Orascom Telecom had earlier shown interest


in bidding for license but pulled out at last
Orascom chairman reportedly said that
regulatory conditions were too difficult
French MVNO Kertel too had expressed
interest in 3G license but withdrew from the
race as it was hoping to strengthen its
position in the prepaid market.
Bouygues Telecom was not satisfied with the
price of the fourth mobile license and filled
two complaints with France's highest
administrative court the Council of State

SOURCE: EIU Country Report, EMC World Cellular Database, McKinsey

32.75
35.46

44

Outcome

44

48

Free Mobiles action

45

49

Situation and market dynamics


France mobile market
dominated by three MNOs
and some MVNOs
4th 3G license was auctioned
in August with very specific
conditions (obligation to cover
a quarter of the population
with its own network in the
first 3 years) while allowing
the fourth entrant to use rivals
network to complete its
coverage
Orange, SFR and Bouygues
Telecom each had to pay
EUR 619 million for their 3G
licenses

47

50

SFF
Bouygues

Blended ARPU
USD, 2009

42.18
7

Free mobile paid EUR


240 mil for the fourth
license
The license will be
awarded this January
Modest market
position assumptions
rumored for the 4th
entrant

McKinsey & Company

| 39

International experience shows that entry as a 3rd or 4th player becomes


3 operator
increasingly difficult with higher penetration
rd

4th operator

Penetration in Egypt
High 50
45
Cosmote (Greece)

40
35

Idea (Poland)

30
Market
Shares
(2004)

Tele2 (Lithuania)

25
Orange (UK)

Amena (Spain)

20
Base (Belgium)

15

One (Austria)
Wind (Italy)
Orange (Switzerland)

DNA
(Finland)

Tele ring
(Austria)

10

Infoquest
(Greece)
Western wireless
(Slovenia)

Meteor (Ireland)
5
Low

0
0
Low

10

20

30

40

50

60

70

80
High

Penetration at launch
1 Gained market share through acquisition of Telia
SOURCE: EMC; McKinsey analysis

McKinsey & Company

| 40

Fifth operators enjoy low market share and are usually consolidated by
4 Entrant
stronger players
th

5th Entrant

Mobile penetration evolution

Market share evolution for fourth and fifth player

+5% p.a.

UK

85

91

117 122 126 129 130 131


103 112

T-Mobile

25

25

24

23

22

22

22

21

04

05

06

07

08

09

10

11

2002 03

04

05

15

14

24

25

3 (Hutchison)
2002 03 04 05

06

07 08 09 10 2011

2002 03

+14% p.a.

Mexico

26

37

30

45

54

65

73

78

84

88

Unefon
Nextel Intl

2002 03 04 05

06

07 08 09 10 2011

5
2

0
4

0
4

0
3

06

07

08

09

10

11

+6% p.a.

74

119 126 127 128


98 100 104 112

83

Netherlands
2002 03 04 05

06

07 08 09 10 2011

Ben

12

Orange

10

2002 03

11

04

14

12

05

15
27

27

26

26

25

07

08

09

10

11

12

06

A fifth entrant is usually able to enjoy only limited market share due to the already strong position of
other players and especially the first three ones
In many cases the entrance of a fifth player will lead to consolidation in the market mainly focused on
the fourth or the fifth entrant

McKinsey & Company

| 41

CDMA and MVNO: Scenario overview


Key assumptions
CDMA for mobile
broadband

2G MVNO deal for mobile


data and voice

CDMA
ARPU of EGP 62
EBITDA margin of 70%
Network roll-out x3 (additional 800
sites for a total of 1.200)

MVNO
Market share: increasing up to 10%
ARPU: from EGP 45 decreasing to
EGP 35
Wholesale contribution to MNO of
70%
SAC 6% of revenue (10% intl
benchmark, 4% o/w is handset)

Strategic considerations

Inability to offer wide


range of mobile voice
offers due to nature of
MVNO

Low future prospects


of CDMA technology
as LTE becomes the
dominant technology

McKinsey & Company

| 42

CDMA and MVNO: considering a potential hybrid solution, applying


sensitivities on operational assumptions
EGP billion, average of moderate + program and intense + program scenarios

Base case assumptions

MVNO
Margin of 70% (intl
benchmark), and 55%
to account for
increased value from
Vodafone
Overall market share
of 10%
CDMA
Subscribers reaching
750k-1,350k in 5
years, implying a
mobile broadband
penetration as % of
mobile of 8-15%
ARPU of EGP 62
Basic coverage 3x
and full blown
coverage 5x existing
infrastructure

Standalone, CDMA data would


break even assuming 1,050 k
subscribers and a rollout of 5x

MVNO margin: 70%


Value Creation

4,2

5,3

4,7

Coverage 3x

MVNO margin: 55%


Value Creation

A more widespread roll out


(5x) would reduce EGP 0.7
Bn in value

6,6

7,1

7,7

750

1,050

1,350

Coverage 3x

CDMA Subs (000)

McKinsey & Company

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CDMA and MVNO: considering a potential hybrid solution,


applying sensitivities on license cost

Current
assumption

EGP billion, average of moderate + program and intense + program scenarios


License cost

0.025

0.1

1.7

3.4

5.1

17.0

% of Etisalats
License cost

10

20

30

100

750k CDMA subs


Value Creation

4,2

4,2

4,1

2,5

0,8
-0,9

1,050k CDMA subs


Value Creation

4,7

4,7

4,6

3,0

-12,7

1,3
-0,4

1,350k CDMA subs


Value Creation

5,3

5,3

5,3

-12,3

3,6

1,9

0,3
-11,7

In Romania, upgrading the license to provide mobile


data cost $1 mn for a population of 30 mn equivalent
ratio for Egypt would imply a license cost of EGP 22 mn
McKinsey & Company

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CDMA and MVNO: considering a potential hybrid solution,


financial overview

BACK UP

EGP million, average of moderate + program and intense + program scenarios


Base case assumptions

MVNO
Market share:
increasing to 10%
ARPU: from EGP 45
decreasing to EGP 35
Wholesale
contribution to MNO:
70%
SAC: 6% of revenue
(10% intl benchmark,
4% o/w is handset)
CDMA
ARPU: EGP 62
EBITDA margin: 70%
Network roll-out x3
(additional 800 sites
for a total of 1.200)

2010

2015

2020

76
5
2
3

3.779
806
158
4

4.356
1.021
203
4

643

814

56
39
0
807

629
441
68
63

695
486
84
69

-768

310

333

150

950

1,050

MVNO
Revenue
EBITDA
Taxes
Capex
FCF

CDMA
Revenue
EBITDA
Taxes
Capex
FCF
CDMA Subs (000)

McKinsey & Company

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