Cablegate: Orascom Telecom Faces Financial Challenges From Algerian Government Actions

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PP RUEHWEB

DE RUEHEG #2311/01 3511402
ZNY CCCCC ZZH
P 171402Z DEC 09
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC PRIORITY 4469
INFO RUEHAS/AMEMBASSY ALGIERS PRIORITY 0417
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

C O N F I D E N T I A L CAIRO 002311

SENSITIVE
SIPDIS

DEPT FOR NEA/ELA AND NEA/EEB
DEPT OF COMMERCE FOR IT MAS AND NTIA

E.O. 12958: DECL: 12/17/2019
TAGS: ECON EFIN PGOV EINV ETRD EG AG
SUBJECT: ORASCOM TELECOM FACES FINANCIAL CHALLENGES FROM ALGERIAN GOVERNMENT ACTIONS REF: CAIRO 02261 Classified By: Minister Counselor for Economic and Political Affairs Do nald A. Blome
1.(C) Key Points: -- The Government of Algeria claims that Orascom Telecom of Algeria (OTA) owes $596.6 million in back-taxes for the years 2005, 2006, and 2007. -- U.S. investors hold a significant stake in Orascom Telecom. -- The company may face debilitating liquidity issues if it cannot settle this tax dispute with the GOA,

2.(C) Econcouns and Econoff met December 4 with Alex Shalaby, Chairman of Mobinil and close colleague of Naguib Sawiris, Chairman of Orascom Telecom (OT) and an American citizen, to discuss the impact on OT from recent problems in Algeria. While the damage to OT's Algerian properties as a result of vandalism following the Egypt-Algeria World Cup qualifying soccer games has totaled around $62 million (reftel), Orascom is more concerned with the Algerian government's recent claim that Orascom Telecom of Algeria (OTA) owes the $596.6 million in back taxes for the years of 2005, 2006, and 2007. OT holds a 96% share in OTA and OTA accounts for 60% of the parent company's revenues and profits. As a result, a significant financial blow to OTA would have a direct impact on the financial health of OT as a whole. ------------------------------------------ Algerian Action Against Orascom Telecom ------------------------------------------

3.(C) Shalaby told us that OTA had an agreement with the Government of Algeria (GOA) for a five year "tax holiday," which includes the tax years 2005-2007. He asserted that this benefit was secured at a time when investment in Algeria was still considered very high risk. Additionally, according to Shalaby, OTA's accounts were fully audited and approved by both OTA's international and local auditors. About three months ago, however, the GOA began claiming that OTA owned back taxes and on November 16 presented OTA with a bill for $596.6 million. (Note: Shalaby stressed that the timing of the final bill had nothing to do with the first Egypt-Algeria World Cup game. End note.) According to Shalaby, the GOA is now blocking repatriation of OTA profits, although one partial transfer was allowed after OTA agreed to put up $50 million as security. Shalaby stated that hundreds of millions of OTA dollars remain blocked by the GOA.

4. (C) Shalaby said he believes that the GOA has been unhappy with OTA for a number of years, in part because OTA and Orascom Telecom compete with Algerian companies for business. He asserted that the GOA is using the tax accusations in an attempt to force Orascom Telecom out of Algeria. Shalaby highlighted that the GOA has no financial stake in OTA (Note: the GOA does hold a stake in OTA's competitor Mobilis. End note.). Shalaby also mentioned a speech by Algerian President Abedlaziz Bouteflika in July, in which Bouteflika indicated that the GOA was still upset about the Orascom's sale of a cement company in Algeria to the French. Shalaby explained that Orascom Chairman Naguib Sawiris's brother, Nasif Sawiris, who runs the construction and cement companies within Orascom, had originally invested in Algeria by establishing a cement plant, but later sold it to the French company LaFarge. Shalaby believes that the GOA was angered by the sale and then began to turn on Orascom Telecom as a target for revenge. Shalaby claimed that the Algerian media attacks against Orascom companies created a hostile environment for Orascom in Algeria. ---------------------------- Impact on American Investors ----------------------------

5.(C) Shalaby asserted that U.S. investors, by virtue of their shares in OT, hold a majority interest in OTA. (Note: U.S. investors in OT include Weather Capital, Madison Dearborn Capital Partners and TA Associates as well as U.S. institutional investors holding publicly traded shares, according to OT documents. End note.) The GOA's tax levy against OTA and its current prohibition against OTA profit transfers, therefore, may adversely impact U.S. investors. ----------- Next Steps -----------

6.(C) Shalaby noted that OTA could fight the tax issue through international arbitration. However, this process typically takes a very long time to reach a settlement. In the event that this issue is not settled soon and OTA cannot repatriate its profits from Algeria in full, OTA could start defaulting on its loans. Shalaby added that Naguib Sawiris was upset about all of the problems the company is facing in Algeria and is making contingency plans to borrow money. (Note: OT announced December 14 that it is seeking shareholder approval to raise $800 million to ensure OT's liquidity in the event that the dispute with the GOA is not quickly resolved. End note.) Shalaby said Orascom Telecom had already approached the Government of Egypt (GOE) but he was unsure how much the GOE could actually do to help solve the problem. Shalaby told us he had not heard of the GOA going after other international companies for back-taxes. Shalaby said he plans to consult with key U.S. investors and may consider requesting USG assistance to help settle the dispute. Scobey

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