Bloomberg News

Vodafone Remains Exposed to Egypt Risks After Uprisings

March 27, 2012

Over five days early last year, as the revolution escalated in Cairo, Hatem Dowidar, the chief executive officer of Vodafone Group Plc (VOD)’s Egypt unit, yielded to the regime’s demands to issue pro-government text messages.

While he objected, his focus was to keep his damaged operation running amid the chaos and he considered the “public safety” messages to be harmless. The instructions kept coming until Feb. 2 when security forces ordered Vodafone to announce the time and place of a demonstration in support of then President Hosni Mubarak. That day, clashes between protesters and government loyalists in Tahrir Square hours later resulted in the deaths of 20 people.

A year on, Vodafone is seeking an amendment to the law to curb the state’s control and to protect its Egypt investments. With the European Union set to publish a report this week demanding the company learn from its “past mistakes” when it gave in to Mubarak’s demands, Vodafone’s response and its crisis planning are still under the spotlight.

“We’re lobbying very hard,” Dowidar said in an interview from Cairo during the anniversary of the protests. When demonstrators took to the streets a year ago, “no one in Egypt, not the previous regime, not the revolutionaries, not us, was prepared for what was happening.”

Lobbying

Vodafone wants the law changed to limit control over the network to the president, who would then need endorsement from the council of ministers.

Dowidar said the step would prevent a repeat of the phone call he received from representatives of the security forces, who threatened to come round to Vodafone’s network center if he continued to refuse their request.

Efforts to amend laws have been slow following the popular uprising that toppled Mubarak’s 30-year rule last year. The proposed amendment has stalled and is still waiting to be presented to parliament, according to the Egyptian telecoms ministry. Tensions are also flaring again as more than 70 people were killed last month at a soccer match when crowds invaded the football field, sparking clashes between protesters and police in Cairo.

Vodafone dropped 0.3 percent to 173.80 pence as of 2:59 p.m. in London. The stock has declined 2.9 percent this year.

Vodafone may find itself even more constrained after the European Parliament prepares to publish a report calling for greater scrutiny of telecoms providers. Operators “must learn the lessons from past mistakes, such as Vodafone’s decision to give in to demands from the Egyptian authorities in the last weeks of the Mubarak regime to suspend services, to disseminate pro-government propaganda,” according to excerpts of the report obtained by Bloomberg News.

Managing Risks

To manage risks, companies need to plan for the worst in unstable markets, said Paul Argenti, professor of corporate communication at the Tuck School of Business at Dartmouth College in Hanover, New Hampshire.

“Obviously, Vodafone didn’t,” Argenti said, referring to Egypt. “It ends up costing you more in terms of shareholder value when your reputation gets hit than just about anything else.”

Revenue growth at Vodafone’s Egyptian unit, in which Telecom Egypt (ETEL), the fixed-line monopoly partially controlled by the government, has a 45 percent stake, has slowed since the revolution.

France Telecom

“There’s still a very strong feeling of resentment and people still don’t like the role Vodafone played,” said Amr Gharbeia, an activist at the Egyptian Initiative for Personal Rights in Cairo. Egyptians have not yet seen “practical measures and reforms that guarantee this is fixed.”

Vodafone won about one-sixth of the clients in the quarter that included the ousting of Mubarak compared to the previous period. While service revenue declined amid increasing price competition between the operators, Vodafone gained 4.5 million clients last year in the country. Rival Mobinil added 2.6 million clients.

Political uncertainty hasn’t stopped rivals from increasing investments. France Telecom SA (FTE) may spend $2 billion in a deal agreed last month to buy most of billionaire Naguib Sawiris’s stake in their Egyptian wireless venture Mobinil and delist it.

Mobinil last year also issued pro-government messages, though the operator did not transmit every message that it was instructed to send, said France Telecom spokesman Tom Wright. The company also added a government or armed forces attribution to every text transmitted, he said.

Reputational Impact

Vodafone CEO Vittorio Colao has dismissed the potential for any reputational impact upon the company from its actions last spring. “The population has never been angry with Vodafone, the population was angry with the authorities,” Colao said last year.

At group level, Vodafone has also held preliminary talks with operators including TeliaSonera AB (TLSN) and Nokia Siemens Networks aimed at preventing the potential political abuse of their networks. So far, specific outcomes and timeline are still to be decided, said Cecilia Edstrom, a spokeswoman for Stockholm-based TeliaSonera.

Vodafone’s Egypt crisis-management procedure didn’t include a plan for the potential shutdown of its network, according to a person with knowledge of the company’s preparations. The program focused on safeguarding any expatriate employees, the person said, declining to be identified as the plan is confidential.

Islamist-Dominated Parliament

Vodafone’s license allowed the authorities “to subject to their administration” the operator, its network and employees, according to the local telecommunication law.

Egypt last year held a largely peaceful parliamentary election, its first since Mubarak’s ouster, resulting in an Islamist-dominated parliament. The ruling Supreme Council of the Armed Forces has ignored protester demands since a mass demonstration on Jan. 25 to hold early presidential elections, now scheduled for May, or transfer executive powers to parliament.

Objecting to the messages had not loomed among his largest concerns last year, Dowidar said.

In Cairo, Vodafone had 200 people sleeping in its headquarters to avoid the curfew imposed on the city overnight. About one-sixth of the network had been damaged by fire and vandalism. Members of staff were missing, and at least two senior managers had been arrested while protesting.

Vodafone needs to draw consequences and prepare for worst- case scenarios in other markets to limit risks, said Rajesh Chandy, a professor of marketing at the London Business School.

“Some things are easier to plan for once you’ve actually gone through it,” he said. “That’s why the Egypt experience will have implications for all the other countries.”

To contact the reporter on this story: Jonathan Browning in London at jbrowning9@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net


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