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For Sale: Iraq's Cell-Phone Franchises

The contracts are lucrative but hazardous: Employees at the three existing Iraq cell phone operations have been kidnapped, and U.S. military forces have had to jam service to prevent insurgent cell phones from detonating bombs.

The licenses to operate Iraq's three cell phone companies are running out and potential new operators are assembling in the United Kingdom this week to sort out the risks and rewards involved in what is one of the world's most dangerous, but lucrative business opportunities.

The risks are clear. Employees at the three existing Iraq cell phone operations have been kidnapped, according to published reports, and U.S. military forces have had to jam service to prevent insurgent cell phones from detonating bombs along convey routes. But the operations are profitable and offer unbridled growth possibilities to companies willing to take the risk.

"You can actually make handsome returns in Iraq despite the risks," said Jonas Lindblad of Pyramid Research in an interview Wednesday. "There's a lot of money chasing around a few deals in the [Middle East] region. In one way or another, they are linked to oil money." Lindblad, senior analyst Middle East for Pyramid, believes the initial licensees probably have already made money on the existing franchises.

"This is a very rare occurrence--three brand new, fresh licenses," he said, noting that cell phone services and infrastructures have been built in most populated parts of the world. Saddam Hussein had banned cell phones, but after his demise three monopoly cell phone licenses in separate regions were awarded.

There was initial controversy over the awards two years ago, because they went to operators using the European GSM standard, excluding the U.S. CDMA standard developed by Qualcomm. Congressman Darrell Issa (R-Calif.) protested the favoritism granted to the GSM suppliers, but the awards nonetheless went to GSM suppliers. Lindblad, who noted that most cell phones in the Middle East operate under the GSM aegis, said it is unlikely that advanced CDMA technology could be installed in Iraq, given GSM's strong toehold in the market there.

A query to Qualcomm on the situation in Iraq was not answered.

Lindblad believes the auction--expected to be completed by the end of the year, when the current licenses are scheduled to expire--could attract bidders in addition to the current operators. Asiacell has the license in the northern, relatively safe part of Iraq dominated by Kurds. Atheer operates the cell phones in the southern part of the country, while Iraqna has the central portion, which includes Baghdad.

Iraqna, majority-owned by Egypt-based Orascom Telecom, is the largest. Iraqna reported a 60 percent EBITDA margin for its first quarter, fueling speculation that the profits could attract additional bidders to the auction.

Lindblad believes that equipment suppliers could be interested in the auction, because Iraq's cell phone infrastructure is scheduled for a massive build out. Several U.S. firms including Motorola and Lucent Technologies already participate in infrastructure build out there.

Even companies from countries that didn't join with the U.S. in the Iraq war have been able to a piece of the cell phone pie in Iraq. For instance, Germany's Siemens AG and France's Alcatel have supplied equipment to the networks.

"Any new operators would have to bring in their own people," said Lindblad. "Some will get killed. The major issue is still security."

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