GTH’s regulatory filing (form 48) for the EGP11,182mn (cUSD625mn) capital increase was approved by the Financial Regulatory Authority (FRA); the latter reiterated that majority shareholder Veon must abstain from voting on the proposal. Below are the use of proceeds from the company’s filing:
        Paying current interest on the USD500mn and USD700mn bonds issued by GTH Finance, which mature in 2020 and 2023, respectively (we calculate this interest at cUSD118mn annually);
        Repaying some of the USD-denominated liabilities, including:
-          Outstanding credit facilities from Veon obtained in 2016 and 2018; (the sum of both RCFs is cUSD300mn, as per previous company filings);
-          Outstanding liabilities owed to Veon since 2015;
-          Future funding needs, including possible debt refinancing for subsidiaries, potential legal obligations and general corporate purposes.
 
What we make of it: We are somewhat skeptical about the absence of figures for each of the abovementioned uses; our calculations indicate that the company would need around USD418mn to pay interest to bondholders in FY19 (USD118mn) and repay the outstanding RCFs to Veon (cUSD300mn). If we assume GTH wants to raise more to fund FY20 bond interest as well, then it would need a total of USD536mn, still short of the USD625mn the company is looking to raise. The difference (cUSD89mn), we suspect, could be possibly aimed at settling the ongoing tax dispute with Egypt’s Tax Authority, which currently stands at cUSD50mn. One particular point in the filing caught our attention, namely the last one, which mentions future funding needs for potential legal obligations, amongst other things. We believe this could hint towards progress on the pending tax case, which – if our theory is right – could pave the way for Veon to file a new tender offer. We remain of the view that GTH will be eventually bought out, and we reiterate our Buy rating on the stock. Next step: GTH will invite shareholders to vote on the rights issue in an ordinary general assembly (date not set yet).
 
We see two main risks to our view:
        The time element, as there is no visibility at all on when such a scenario might materialise; this could leave investors exposed to share price pressure as a result of negative sentiment on the stock from the ongoing deadlock between Veon and minority shareholders.
        Veon could squeeze minority investors further, as the issued rights will be tradable, meaning that Veon could buy some from the market (up to an additional 5% stake per annum without the need for an MTO) and/or oversubscribe the issuance (in the event of minority investors undersubscribing), causing a dilution of minority investors.. 

Omar Maher
 
Global Telecom Holding (GTH): EGP3.08 as of 5 Dec. 2018, Rating: Buy, TP: EGP6.50/share, MCap: USD814mn, GTHE EY/GTHE.CA