By akademiotoelektronik, 13/02/2023

When an international expert warned: "Djezzy is an empty shell!"

Mikhail Fridman, head of Veon, ex-VimpelCom. D.R.

We are republishing a quantitative analysis published in Algeriepatriotique in 2013 and signed by the Algerian international financial expert based in Sweden, Noureddine Legheliel, on the Djezzy group, whose shareholder Veon wants, less than ten years after a first "scam », sell its shares to the Algerian State. From loss to loss, from setback to setback, Algeria is paying for the incompetence of those responsible for the telecommunications sector and the sabotage of the national economy by a mafia gang which is currently in prison.

By Noureddine Legheliel – The [deceased] Algerian ICT minister, Moussa Benhamadi, said legal and financial audit firm Scherman and Sterling valued Djezzy at $6.5 billion. This information was taken up at the beginning of April 2012 by the financial news agency Bloomberg. Algerian newspapers have even advanced the figure of 6.9 billion dollars. A few months earlier, another minister, that of Finance, Karim Djoudi, had openly and without any restraint, spoke of a relationship of confidentiality between the Algerian government and the owners of Djezzy, who are OTH (Orascom Telecom Holding of Naguib Sawiris) and the Russian telephone operator Vimpelcom [now Veon since February 2017, editor's note], concerning the acquisition of Djezzy by the Algerian government.

This confidentiality report means clearly and openly that the Algerian citizen does not have the right to know the progress or the outcome of this affair. However, this minister is responsible to the taxpayer and the money used to buy Djezzy belongs to the people. Ironically, this famous confidentiality report is, in fact, an open secret, since the two parent companies of Djezzy OTH and Vimpelcom are two companies listed on the stock exchange and their financial statements are an open book to the public. Whatever the amount paid by the Algerian government for the complete or partial purchase of Djezzy, it is known on December 31 of each year, the day of the publication of the financial report of Vimpelcom.

The intriguing outlines of this case caught my curiosity. Add to that the apparent signs of an overvaluation of Djezzy. All this made me ask myself this question: Is Djezzy really worth 6.5 or 6.9 billion dollars? Through this study-analysis, I offer you a plethora of arguments to affirm that OTA has been overvalued and not not evaluated. But before starting this analysis, I want to highlight the following:

1- British legal and financial audit firm Sherman and Sterling has so far neither confirmed nor denied the valuation figure of $6.5 billion and $6.9 billion.

2- In the calculations I had made to evaluate OTA, I had not taken into account the tax fine of 1.3 billion dollars demanded by the Algerian government from the owners of Djezzy, who are OTH and Vimpelcom. This case is not yet settled.

3- The annual financial reports of OTH and Vimpelcom do not reveal all of the items in Djezzy's annual balance sheets, nor all of the latter's income statements, which did not make my task any easier (a lot of calculations had to be done).

4- Some suspicious figures have been detected in the financial reports of OTH and Vimpelcom. This is the discount rate used by OTH to value Djezzy's cash flows and the value of Djezzy's goodwill recorded on Vimpelcom's balance sheet after Vimpelcom's merger with OTH.

There are several ways to value a business. But I have chosen five methods that are adequate for the valuation of an unlisted telecommunications company, such as Djezzy.

1- The asset method: this is the simplest method and means that the value of a company is equal to the value of its net assets. This amounts to saying that Djezzy is worth $1.6 billion. Admittedly, this method is not valid here because Djezzy, with the weight of his intangible assets, including goodwill, is worth much more than $1.6 billion. However, this method informs us about a fact that many Algerians are unaware of, which fact is expressed by the following problem. First, OTA stands out with an incomprehensible weakness in its assets. Its total assets reported on its balance sheet as of December 31, 2011 were $2.441 billion. But the worst is that among these assets, we find a whole set of immaterial assets whose main component is called “goodwill”. What are these assets? They represent the Djezzy brand, licenses, OTA's dominant position on the market, its relationship with its customers, the competence of its management, the dynamism of its staff, the quality of its products, etc. If we subtract these immaterial or intangible assets from the net assets, what remains of the value of Djezzy? I am talking about the value of other assets and more particularly tangible or material assets. Answer: almost nothing! Everyone knows the business climate that reigns in Algeria and the way in which state companies are managed. This amounts to saying that, most likely, once Djezzy would be bought out, its immaterial or intangible assets would enter into a process of depreciation and even perdition, and it is only on this great day that we will realize that we had bought an empty shell.

2- The performance evaluation method: a fairly practical method. We take the net profit for 2010 and multiply it by a coefficient which, in turn, is the ratio between the number 1 and a risky rate (the rate of return for investors between 12% and 15%). According to the calculation by this method, Djezzy is worth 4.1 billion dollars.

3- The method of multiple earnings: this method will show us if the price of 7.9 billion dollars proposed by Naguib Sawiris, boss of OTH (the parent company of OTA) and by the Russian Vimpelcom to sell OTA to the Algerian government is reasonable or not. We'll also see if Sherman and Sterling's assessment of Djezzy is accurate. Sawiris' asking price ($7.9 billion) is 18.8 times or 19 years of Djezzy's net profit for the year 2010 and the OTA price set by Sherman and Sterling is 16.4 times that same profit. . Can we defend or justify such earnings multiples? The answer is no. For what ? For several reasons :

1- Earnings multiples (or PER) are always a function of the rate of earnings growth and, by the standards and following the concept of Peter Lynch, this means that to justify a PER of 18.8, OTA's anticipated earnings growth rate must be between 17%-25% per year. However, if we refer to the net profits of OTA for the past 5 years, we are certain that this is not the case for Djezzy. A PER of 16.4 requires an earnings growth rate of around 15%-20% per year. However, this is not the case with the Djezzy. Reality shows us that the profit growth rate of Djezzy for the past 5 years has not exceeded 7%.

2- If we compare the PER of OTA with those of other companies in the same branch, public opinion would be surprised to find that Djezzy is highly overvalued. Let's start with Djezzy's parent companies, which are OTH and Vimpelcom. Naguib Sawiris' OTH traded on June 1, 2012 at 3.47 times earnings and Vimpelcom at 5.89 times. Look how perverted the world is and see the respect the Egyptian Sawiris and the Russians of Vimpelcom have for us. Here are now the PERs of other companies: France Telecom 7.73; Telefonica (Spain) 9.14; Morocco Telecom 12.85.

3- The average PER of telecom companies or telephone operators belonging to emerging countries is 12 and 10.45 for their counterparts in developed countries.

4- The Modigliani and Miller method: this method is based on operating income. The value of Djezzy is obtained through a mathematical formula which takes into account the following elements: the operating result, the tax rate, the capitalization rate corresponding to the cost of capital and the financial debts. The result of the calculation of this method gives us an estimated valuation of 3.85 billion dollars for Djezzy.

5- The method of comparables: through this method, we will reveal the great bluff of Naguib Sawiris and the Russians of Vimpelcom. Public opinion would be surprised, even shocked by what follows. The market value of Orascom Telecom Holding (OTH) as of June 1, 2012 was 16.42 billion Egyptian pounds, the equivalent of 2.72 billion dollars (1 US dollar equals 6 Egyptian pounds). Question: have you ever seen a subsidiary that costs almost 3 times more than its parent company? Sawiris is asking $7.9 billion for the sale of Djezzy, while his own company OTH is worth just $2.72 billion. It is true that OTH is undervalued. But you have to know why. The reason is that investors do not trust Naguib Sawiris and OTH is heavily indebted; its debts represent 76% of its liabilities.

Now let's move on to the second bluffer, the Russian Vimpelcom. This company is now worth $11.77 billion on the market. But Vimpelcom stands out with total assets worth $56.26 billion. This means that his asset is 22 times greater than that of Djezzy. Its EBITDA (the equivalent of gross operating income) which is 8.258 billion dollars is 8 times greater than that of Djezzy (1.051 billion dollars). Its turnover of 22 billion dollars represents 13 times that of Djezzy which is 1.747 billion dollars. Its book value is 10 times greater than that of OTA. Djezzy said he has 17 million subscribers, while Vimpelcom has 205 million from 19 different nationalities. Like OTH, Vimpelcom is crippled by huge debts. The company had, in fact, made a bad strategic investment choice. Through its countless acquisitions abroad, its expansion proved to be too costly, watched very closely by the three financial rating agencies. Vimpelcom recently embarked on a vast austerity and savings plan aimed at rationalizing expenditure. Several of its subsidiaries would be put up for sale.

Let's continue with the method of comparables and now move on to other valuation instruments with a reference in Anglo-Saxon finance and which are in the form of a ratio.

1- Price/Book value: for the sale price of 7.9 billion dollars proposed by Vimpelcom, the ratio or multiple would be 5.3 and for the price fixed by Sherman and Sterling the ratio is 4.6. The Price/Book of OTH on June 1, 2012 was 0.92 and that of Vimpelcom 0.81, that of France Telecom 0.96, Telefonica 1.85 and Maroc Telecom 3.36. These figures helping, the overvaluation of Djezzy is obvious.

2- Price/Sale (price/turnover): for the price of 7.9 billion dollars offered for sale by Vimpelcom, the Price/Sale would be 4.5 times and for the price set by Sherman and Sterling this ratio would be 3.9 times. The Price/Sale of OTH is 0.79 and that of Vimpelcom 0.50, for France Telecom the ratio is 0.59, for Telefonica 0.64 and for Maroc Telecom the ratio is 3.1. Djezzy's ratio is therefore excessive.

3- Price/EBITDA (price/gross operating profit): for the price of Djezzy requested by Vimpelcom (7.9 billion dollars) the ratio is 8, and for the valuation of Sherman and Sterling the ratio is 6.6. The Price/EBITDA of OTH is 1.5, that of Vimpelcom is 1.4, for France Telecom 1.8, Telefonica 2.1 and Maroc Telecom 5.7.

4- PEG: the PEG represents the ratio between PER and the projected growth rate for the coming years, multiplied by 100. If we are optimistic and anticipate a growth rate in Djezzy's earnings of around 10 % per year, OTA's PEG would be 1.88, if we accept the price proposed by the Russians. This same PEG would be 1.64 if we accept the evaluation made by Sherman and Sterling. But in both cases, the observed PEGs turn out to be too high, since they far exceed the number 1, which is the neutral point separating overvaluation from undervaluation. Another proof of the overvaluation of Djezzy.

As this analysis was carried out on June 1, 2012, the figures indicated in it must have undergone a very slight change, therefore insignificant. However, I must inform the Algerians that this assessment of Djezzy was offered to several national newspapers (Arabic and French), but none of them wanted to publish it. This refusal was justified by the existence of commercial contracts with the firm Djezzy which would have been compromised by the publication of these truths.

N. I.

Stock market analyst at Carnegie, a Swedish investment bank.