Missed Call?

Equity Research

March 25th, 2007

Following the hotly contested third mobile license in Egypt and the relatively high
price paid for it (Etisalat of UAE won with a bid at USD 2.9 bn – please refer to our
equity note dated 5th July 2006), the third GSM license in the Kingdom of Saudi
Arabia (KSA) was expected to be even more disputed. The stage was set to make it a
landmark event in the race for international expansion pursued by several regional
telecoms operators: profile of the market (young and large population, largest
economy in the Middle East, mobile penetration of 79%, relatively high ARPU of USD
37/month), prominent bidders (MTC, MTN, Turkcell, Oger Telecom, etc.) set against the
scarcity of opportunities in the region.

Sector Coverage Team Just as in Egypt, the staggering winning bid of SAR 22.91 bn (USD 6.11 bn) that was
offered by the MTC-led consortium came as a surprise, and well above our expectations.
Marc Hammoud The second and third largest bids stood at USD 4.6 and USD 4.3 bn, respectively.
+9714 3199 753
[email protected] Given the constraints on foreign investments in KSA, MTC’s holding in the consortium is at
50%, with the remaining 50% in the hands of local partners. Local partners include Saudi
Plastics Factory, Almarai Company, Rakisa Holdings and Al Jeraisy Development Company.
However, the company will have to float 40% of its shares before the start of operations
and allocate another 10% to the Public Pension Agency and the General Organization
for Social Insurance - 5% each. No further share sales will be allowed until two years after
licensing.

With a 25% stake after the Initial Public Offering (IPO), MTC will consolidate its stake in the
company as an associate but will have full operational control over the business.
MTC Consortium Post-IPO Shareholding Structure
Saudi
Investors MTC
25% 25%

Organization
for Social
Insurance
5%
Public Pension
Agency
5% Free Float
40%
Source: MTC, SHUAA Capital

We believe that one the reasons that pushed the price of the third mobile license in
Saudi Arabia to USD 6.11 bn is the shareholding structure of the consortia enrolled in the
bidding process. Indeed, local Saudi investors are cash rich and are looking for investment
opportunities, in particular in the telecoms industry. On the other hand, local Saudi
investors should ease the burden of financing the acquisition. MTC will have to fund
USD 3.05 bn (50/50 equity/debt), representing its initial stake in the consortium until the
company sells 40% of its shares through an IPO, which is expected to take place sometime
in Q3 07, and 10% to the pension and social funds in the KSA.

The third mobile license will be valid for 25 years, and includes an international gateway
and the right to provide 3G services.
 Missed Call?
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Saudi Arabia mobile market overview

There are currently two GSM and one iDEN operator in Saudi Arabia.

2004 2005 2006

Market Market Market
Mobile subscriber base Mobile subscriber base Mobile subscriber base
share share share
STC 9,146,000 100% 11,845,182 83.6% 13,800,000 69.2%
GSM
Mobily - 0% 2,315,000 16.3% 6,073,000 30.5%

iDEN Bravo - 0% 11,806 0.1% 68,191 0.3%

Total 9,146,000 100% 14,171,988 100.0% 19,941,191 100.0%

Mobile penetration 38.2% - 57.6% - 78.9% -

Source: STC, Mobily, Wataniya, SHUAA Capital

In June 2006, the Communications and Information Technology Commission (CITC) - the
country’s telecoms watchdog - introduced Mobile Number Portability (MNP), allowing
mobile phone subscribers to switch their mobile number from one service provider to
another at no cost. In our opinion, MNP should also help to bring service charges down
and improve the quality of service as competition is expected to further intensify. MNP
should also help the third mobile operator to grow its subscriber base and gain market
share.

How expensive was the price compared to other similar transactions in the
region?

If we were to assume that Mobily, the second mobile operator in Saudi Arabia, had paid
the same price for its license, and if we value the company’s estimated 6.7 million mobile
users as at Q1 07 by taking the average price of the eight latest transactions involving
mobile operators in the region, we would reach a ‘market’ value for Mobily of SAR 39.82 bn
(USD 10.62 bn) or SAR 79.6/share.

Total transaction price Number of subscribers Price/subscriber

Date Name of operator Acquired by % of acquisition
(USD mn) at time of acquisition (USD)
Apr-05 Celtel - Africa MTC - Kuwait 100 3,360 5,658,000 594

Dec-05 Madacom - Madagascar MTC - Kuwait 100 97 250,000 388

Dec-05 Telsim - Turkey Vodafone - UK 100 4,550 9,700,000 469

Feb-05 Mobitel - Sudan MTC - Kuwait 61 1,332 2,050,000 1,065

May-06 Investcom - Africa and ME MTN - South Africa 100 5,526 6,144,000 969

May-06 Vmobile - Nigeria MTC - Kuwait 65 1,005 5,000,000 309

Jun-06 Umniah - Jordan Batelco - Jordan 96 415 505,000 856

Mar-07 Wataniya - Kuwait Qtel - Qatar 51 3,720 9,992,461 730

Average - - - - - 673
Source: SHUAA Capital

USD SAR

Mobily’s license value based on the amount paid by 6,109 22,910

MTC for the third mobile license (mn)
Mobily’s value based on the average market price 4,509 16,909
of each subscriber (mn)

Total (mn) 10,618 39,819

Value per share 21.2 79.6

Source: SHUAA Capital

March 25th, 2007 2

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Another way to assess the price of this transaction is to compare it with other green field
licences in terms of license fee per capita. As shown in the table below, the license fee per
capita for this transaction was 67.2% higher than the previous most expensive transaction
(Mobily), which in turn was by far more expansive than any other green field license
award.

License cost Population at year of License fee per capita at

Country Licensee Year of license
(USD mn) license award (mn) year of license award (USD)
Algeria Nedjma - Wataniya 2003 421 31,900,000 13.2

Jordan Umniah 2004 5.6 5,630,000 1.0

Oman Nawras - Qtel 2004 105.3 2,710,000 38.9

Saudi Arabia Mobily - Etisalat (including 3G licenses) 2004 3,451 23,900,000 144.4

Egypt Etisalat 2006 2,904 75,430,000 38.5

Saudi Arabia MTC 2006 6,109 25,300,000 241.5

Source: SHUAA Capital

We also compared the third mobile license in Saudi Arabia to the third mobile license in
Egypt and to the second mobile license in Saudi Arabia:

Saudi Arabia - 2nd mobile license Egypt - 3rd mobile license Saudi Arabia - 3rd mobile license

Population at the time of license 24.3 74.0 25.5

award (mn)
GDP/capita at the time of license award 12,560 4,060 13,587
(USD at PPP)
Mobile penetration at the time of 40% 20% 79%
license award
Average ARPU at the time of license 55.0 12.8 37.5
award (USD)

Price (USD mn) 3,250 2,897 6,300

Source: SHUAA Capital

The main difference with the third mobile license in Egypt lies in the validity of the license
- 25 years in Saudi Arabia vs. 15 years in Egypt, which gives the MTC-led consortium a
longer period to maximise its return on investment. If we were to simulate a price for a 15-
year license based on the USD 6.11 bn paid for 25 years, we would arrive at USD 3.67 bn.

Three possible market scenarios to assess the return on investment

We took into account three different scenarios to assess the time it will take for MTC to
pay back its investment.

Scenario 1 - Worst Case Scenario 2 - Base Case Scenario 3 - Best Case

Mobile penetration Increased gradually to 121% Increased gradually to 121% Increased gradually to 121%
Decreased from 27.2 in 2008 to 22.1 in Decreased from 25.3 in 2008 to 21.3 in Decreased from 23.2 in 2008 to 20.0 in
Monthly blended ARPU (USD)
2011 and 23.2 from 2014 onwards 2011 and 22.1 from 2014 onwards 2011 and 21.1 from 2014 onwards
Market share Increased gradually to 20% Increased gradually to 25% Increased gradually to 30%
Number of years required to 15.5 13.5 12
breakeven on investment
Source: SHUAA Capital

We expect MTC to start commercial operations in January 2008 and to invest USD 1.2 bn
in Capex by 2010.

According to a survey conducted by the Arab Advisors Group, 39.6% of mobile users
have more than one line, of which 20.3% have the second line from a different network
operator. Separate business and personal lines and cost savings were the two main
reasons for having more than one line (53.9% and 22.8% of respondents with more than
one line, respectively). This would mean that mobile penetration could actually go up to
around 120% in the medium to long term if we assume the same ratio of people having
more than one line in the country.

March 25th, 2007 3

 Missed Call?
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The monthly blended Average Revenue per User (ARPU) declined to around USD 39/
month and USD 34/month at the end of 2006 for STC and Mobily, respectively, from over
USD 50 when Mobily entered the market. The sharp decline in ARPU can be attributed
to increased competition that resulted in rate reductions and increased discounts from
both operators. We see mobile telephony tariffs declining further as cost of calls are at
best within regional call charge averages. Cheaper services combined to the fact that
new subscribers (who belong to lower segments of the population) have less disposable
revenues should in turn result in lower ARPU going forward, in particular for the third
mobile operator.

In Saudi Arabia, STC and Mobily have been offering On-net and Off-net rates. By offering
cheaper On-net prices, MTC could attract a significant number of low income subscribers
and create what we call a ‘network effect’, with friends, relatives and peers in general
subscribing to the same network in order to reduce their bills.
The more aggressive MTC will be, the more ARPU is expected to decline as it would mean
that competition would be primarily based on prices.

Base Case Scenario 2005 2006 2007E 2008E 2009E 2010E 2011E

Population 24,600,000 25,260,000 25,942,020 26,642,455 27,361,801 28,100,569 28,803,084

Addressable population 18,204,000 19,197,600 20,494,196 21,846,813 23,257,531 24,166,490 24,770,652

Mobile Penetration rate 57.6% 78.9% 96.5% 106.4% 112.9% 116.5% 119.1%

Number of mobile STC - Mobily STC - Mobily STC - Mobily STC - Mobily - MTC STC - Mobily - MTC STC - Mobily - MTC STC - Mobily - MTC
operators
Year end respective 84% - 16% 70% - 30% 59% - 41% 50% - 40% - 10% 45% - 37% - 18% 42% - 35% - 23% 41% - 34% - 25%
market share
Year end total mobile 14,171,988 19,941,191 25,046,136 28,352,226 30,903,926 32,727,258 34,298,166
subscribers
Annual net additions 5,025,988 5,769,203 5,104,945 3,306,090 2,551,700 1,823,332 1,570,908

YoY Growth 68.7% 27.2% 25.6% 13.2% 9.0% 5.9% 4.8%

Year end MTC subscribers - - - 2,835,223 5,562,707 7,527,269 8,574,542

Annual net additions - - - 2,835,223 2,727,484 1,964,563 1,047,272

YoY Growth - - - - 96.2% 35.3% 13.9%

Monthly blended ARPU - - - 95 87 83 80
in SAR
Monthly blended ARPU - - - 25.3 23.2 22.1 21.3
in USD
Source: STC, Mobily, SHUAA Capital

We have not included Bravo, the iDEN-based technology mobile operator, as our focus is
on GSM mobile operators. Moreover, we do not expect Bravo to capture more than 1%
market share in the medium to long term.

March 25th, 2007 4

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The table below presents the results of our Base Case scenario.

(USD ‘000) 2007E 2008E 2009E 2010E 2011E

Revenues - 430,954 1,168,992 1,738,349 2,061,032

EBITDA -107,000 16,700 327,318 764,873 865,633

EBITDA margin - 3.9% 28.0% 44.0% 42.0%

Other costs -3,000 -21,548 -46,760 -52,150 -61,831

PBT -110,000 -4,848 280,558 712,723 803,802

Tax (Zakat) - - -7,014 -17,818 -20,095

Capex -348,000 -306,000 -292,248 -225,985 -185,493

Capex/Revenues % - 71.0% 25.0% 13.0% 9.0%

∑ Capex -348,000 -654,000 -946,248 -1,172,233 -1,357,726

Change in working capital - -38,786 -93,519 -104,301 -103,052

FCF -458,000 -349,634 -112,223 364,619 495,163

Source: SHUAA Capital

MTC’s international gateway, a recent reduction of interconnection rates (fixed line and
mobile) and synergies with other existing operations in the Middle East (MTC is already
present in four direct neighbours to the KSA) should help MTC to grow both its subscriber
base and its profitability (margins) in the short term.

Why MTC?

MTC’s success in securing the third mobile license did not come as a surprise. Indeed,
MTC, in our opinion, needed to add another large market such as Saudi Arabia to its
existing operations in the Arab world. Apart from Iraq, MTC was only present in relatively
small markets such as Kuwait (home market), Jordan, Lebanon, and Bahrain. Moreover,
this was not MTC’s first attempt to enter Saudi Arabia. The company lost the tender for
the second mobile license in August 2004 that was won by Etisalat of UAE with a winning
bid of USD 3.25 bn. MTC also failed to win the third mobile license in Egypt that was also
secured by Etisalat with a final bid of USD 2.9 bn.

In our opinion, MTC fancied a market such as Saudi Arabia in order to be able to meet its
ambitious new plan to reach an EBITDA of USD 6 billion (USD 1.97 bn at the end of 2006),
double its market capitalisation to USD 30 bn (currently hovering around USD 20 bn) and
have over 70 million customers (27.04 million subscribers at the end of 2006) that was
announced in January this year.

MTC is rapidly expanding beyond its domestic market, which has a mobile penetration
rate of 80%. MTC now operates in 15 African countries through its subsidiary Celtel
International, which it acquired for USD 3.36 bn in April 2005. More precisely, MTC
acquired 85% of Celtel for USD 2.84 bn, with a pledge to buy the remaining 15% by the
second anniversary of the closing date of the deal for USD 520 mn. The company also runs
networks in Kuwait, Iraq, Jordan, Lebanon and Bahrain and is considering bidding for a
stake in state-run Algerie Telecom.

March 25th, 2007 5

 Missed Call?
Equities research

Telecoms operators’ debt level under scrutiny

This latest acquisition once again raises our concern on the level of debt that telecoms
operators are accruing in order to achieve their expansion strategy. Though operations are
still highly profitable and generate strong cash flows, the staggering premiums paid for
existing operations or green field licenses have obliged operators to take on substantial
levels of debt. Over the past two years, most telecoms companies’ cash has melted away
as a result of the increasing pace of the consolidation and the technological shift in the
sector.

Most telecoms operators that adopted an acquisition-based strategy saw their solvability
(net debt level) and profitability deteriorating.

Net Debt (Cash) – USD mn Dec-04 Latest available

*
MTC (135) 4,666*

Etisalat (2,124) (486)

Orascom Telecom (OTH) 868 3,433

Qtel (377) 4,289

Wataniya 550 543

* Including the financing required for the third mobile license in Saudi Arabia

Source: MTC, Etisalat, OTH, Qtel, Wataniya, SHUAA Capital

Interest expenses as a % of Net Profit Dec-04 Dec-06

MTC 4.4% 28.9%

Etisalat 0.0% 4.5%

Orascom Telecom (OTH) 31.7% 47.2%

Qtel 0.0% 1.1%

Wataniya 25.1% 21.4%

Source: MTC, Etisalat, OTH, Qtel, Wataniya, SHUAA Capital

March 25th, 2007 6

 Missed Call?
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Research
Head of Research Heavy Industries and Utilities

Walid Shihabi Mohamed El Nabarawy, CFA

+9714 3199 750 +9714 3199 756
[email protected] [email protected]

Strategy and Economics Munir Shahin

+9714 3199 754
Walid Shihabi [email protected]
+9714 3199 750
[email protected] Telecommunications, Media and
Technology
Ahmad Shahin
+9714 3199 742 Marc Hammoud
[email protected] +9714 3199 753
[email protected]
Ryan Ayache
+9714 3199 758 Transportation and Logistics
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Kareem Murad
Commercial Banks and other +9714 3199 757
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+9714 3199 756 Construction Materials
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[email protected]

March 25th, 2007 7

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