Flash Report /
Egypt

STC offer for Vodafone Egypt is double our valuation

    Al Ahly Pharos Securities Brokerage
    29 January 2020

    Vodafone Group confirmed it is in talks to sell its 55% stake in Vodafone Egypt to Saudi Telecom (STC). The two companies will apparently be signing a memorandum of understanding that could lead to an acquisition.

    STC offered a preliminary US$2.39bn for Vodafone’s Egypt unit stake (c55.0%), implying cUS$4.34bn valuation of Vodafone Egypt (cEGP68.14bn), which is almost double our valuation of Vodafone Egypt of cEGP35.0bn-37.0bn. The transaction is expected to close by the end of June 2020, subject to due diligence and regulatory approvals.

    ETEL’s c45.0% stake should accordingly be worth an implied cEGP30.66bn, or EGP17.96/ETEL share, compared to EGP9.31/share implied in our valuation. This theoretically brings our valuation for ETEL to EGP24.8 (EGP6.91 ETEL’s operations + EGP17.96 Vodafone potential transaction share). ETEL will probably pay income taxes on the capital gains to be booked on its income statement, if it did sell its stake to STC.

    According to a release by Vodafone Group, the transaction implies EV to adjusted EBITDA of 7.0x and EV to adjusted OpFCF of 11.2x (OpFCF deducts capex from adjusted EBITDA). Transaction multiples are based on the contribution of Vodafone Egypt to Vodafone Group of an adjusted EBITDA of EUR565 million (c.USD621.7 million) and adjusted OpFCF of EUR354 million (c.USD389.6 million). Our comment on the offer implied multiples of EV to EBITDA 2018 of 11.4x and TTM of 9.3x, P/E 2018 of 13.9x and TTM of 10.8x accounted for deducting capex of c.EGP4.1 billion in 2019 and c.EGP3.74 billion in 2018 from EBITDA.

    ETEL is weighing all options

    ETEL announced that it has met with Vodafone group’s representatives and Vodafone clarified that the company is in the process of signing a non-binding memorandum of understanding to begin assessing the Saudi Telecom Company's potential acquisition of Vodafone Group's stake in Vodafone Egypt. Telecom Egypt is closely following the aforementioned procedures to consider all the possible ways it may deal with its investment in Vodafone Egypt given its rights that are stipulated in the shareholder agreement. Any decision taken will be based on the final form of the potential acquisition.

    What Happens Now?

    Questions with no definite answer:

    1. Will ETEL sell?
    2. If ETEL sells, will it distribute a mega dividend?
    3. How will ETEL look like post the sale if it happens?

    Scenario 1: ETEL sells its c45% stake

    ETEL’s 45% stake in Vodafone is worth EGP30.6 bn, or EGP17.94/ETEL share which is higher than the EGP9.31/ETEL share that we include in our FV of EGP16.22.

    “If” ETEL decides to sell its 45% stake, we believe it could use the EGP30.6bn proceeds to:

    • Pay off all its outstanding debt of EGP15.12bn (as of September 2019)
    • Finance 2020’s capex plan of c8.1bn (c30% of sales)
    • It can repeat its 3000 employee ERP that took place in 2019, with an estimated cost of EGP1.5bn

    Bringing the total “possible” use of proceeds to EGP24.72bn, which accordingly “might” leave cEGP5.88bn available for distribution. This implies DPS of cEGP3.44/share, implying DY of 33.7% based on yesterday’s closing price of EGP10.2.

    “If ETEL sold its stake”, it might be positive for the holder of the stock, only in the case of distributing the remaining proceeds after paying off the debt, financing 2020 capex plan and repeating 2019’s ERP. However, it is not positive for the future of ETEL post transaction, since they would be selling the Jewel of their crown, which represents c60-70% of ETEL’s net attributable profits.

    Scenario 2: ETEL keeps its c.45% stake

    If ETEL keeps its c45% stake in Vodafone, it could theoretically bring our valuation for ETEL to EGP24.8 (EGP6.91 ETEL’s operations + EGP17.96 Vodafone potential transaction share) assuming that ETEL’s operations value is constant. We favor ETEL keeping its stake in Vodafone Egypt, since Vodafone contributes 60-70% of ETEL’s attributable profits (see table 1 in full report).

    We have done a quick “theoretical” exercise by assuming that ETEL had no debt historically to test the impact of paying off all debt on ETEL’s bottom line and what would Vodafone have contributed to ETEL’s attributable net profits in the case of debt absence. Even with a debt-free capital structure, investment income from Vodafone could have contributed c.45-55% of ETEL’s net attributable bottom line (see table 2 in full report). Accordingly, if ETEL sells its stake in Vodafone, it will lose c50.0% of its annual net profits.