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Thursday, July 06, 2006

More Egyptian Fallout

There is a real interesting twist in the Egyptian auction. The press today reveals some absolute gems within the auction rules: Vodafone Egypt and Mobinil (Orascom/France Telecom) will now have to pay 20% of the auction fee (+ royalties) to get a 3G license. In other words, Vodafone and Mobinil have just acquired a US$578m call option to build a network in a third world country with potentially two competitors with uncertain demand for the end product. The option was for free ;-)

Vodafone’s 22% local partner the fixed line incumbent, Telecom Egypt, actually bid in the auction with Telecom Italia. As a loser, they said they are not worried, because now they will work with Vodafone developing a fixed-mobile strategy. You wouldn’t wish a partner like that on your worst enemy.

In a normal auction scenario, the incumbents watch nervously wanting the price to go as high as possible to weaken the competition and improve their asset value. In this case, Vodafone and Mobinil must have been praying for an early end to the auction. For me, this means that the side effect of betting big is that Etisalat will probably get to build its’ 3G network first and have a go at churning all those heavy users wanting advanced services. Either someone really smart designed the auction or the Egyptian government got lucky. I wouldn’t be surprised at all if this man had a hand in it. I actually quite enjoy studying auction theory and practice and have been thinking overnight what the Etisalat strategy was.

I came up that Etisalat was trying to deter future bidders at future auctions. The most basic rule of auction theory is that in order to be efficient they have to attract a decent number of bidders. Etisalat is signaling to the rest of the wireless asset buyers world that they will outbid anyone, witness the Pakistan example, and therefore it is pointless even paying a deposit and sending a team to bid, because you are going to lose. For example, it might save Etisalat a lot of money in forthcoming Algerie Telecom auction. However, today’s revelation might mean there is deeper rationale. And, also don’t rule out last night’s theory that Dubai has more cash than sense at the moment.

One final point on the Egyptian auction before I bid goodnight is the report in today’s press that Telenor losing the auction is actually beneficial for Telenor shareholders. I think this fundamentally misses the point – what is Telenor doing bidding on Middle Eastern Assets in the first place? After their recent purchase of a licence in Namibia, I feel they must have a team running around bidding on anything and everything around the globe. This would worry me as a Telenor shareholder. In fact, I’d put my foot down and say nothing more until they sort out one way or another their Russian problem.