Telecom Egypt to Leave Vodafone

Vodafone Egypt, a subsidiary company of Vodafone Group plc ( VOD - Analyst Report ) is likely to see its stakes sold by Telecom Egypt, which owns approximately 45% of its shares. Telecom Egypt faces regulators pressure to dispose its holdings in Vodafone in order to acquire an MVNO (mobile virtual network operator) license.

We fear that the divestiture by Telecom Egypt would bring Vodafone Egypt under direct competition with this biggest name in the Egyptian telecom market, likely affecting its market position.

The reason behind the sell out is the apprehension of regulators towards Telecom Egypt’s growing market leadership. Once the company acquires the MVNO license to start up its own mobile services while owning stakes in Vodafone, it could affect the market scenario on the whole. The act can lead to Telecom Egypt’s complete monopoly over the mobile service market with control over two giant companies, thereby affecting end-users.

Telecom Egypt is considered to have a monopoly over the Egyptian market. According to sources, the company dominates the fixed-line business in Egypt and controls 70% of Internet services within the country. Further, it remains the sole provider of international telecom services. Through Vodafone Egypt, the company dictates the mobile services market. This subsidiary thus remains a significant revenue source for the company.

Given the mammoth market profile of Telecom Egypt, it is most likely that the regulator’s impending decision to disinvest in Vodafone Egypt remains detrimental for Vodafone Group. Currently, Vodafone Group enjoys significant growth momentum in the emerging market, which also includes Egypt. In the second half of its fiscal 2013, the company saw a 4% rise in its revenues from Egypt. In such event, increased competition in the mobile service market would likely temper the growth trajectory of Vodafone.

The decision of Egyptian regulators is yet to be declared. Telecom Egypt recently reported that it is waiting for the regulators to decide whether to sell its total 45% stake in Vodafone or just exit from the active governing body. If the votes favor the former decision, it would also mean hurting revenues for Telecom Egypt given its lion’s share in the company.

Based in Newbury, United Kingdom, Vodafone Group is the world’s largest revenue generating wireless communications operator and the second largest carrier after China Mobile Limited ( CHL - Snapshot Report ) based on subscription.

For the short term (1-3 months), Vodafone has a Zacks #2 Rank, implying a Buy rating. For the long term, we have a Neutral recommendation on the stock.