IRAN REVOLUTIONARY GUARDS BUY MAJOR TELECOMMUNICATIONS

C O N F I D E N T I A L SECTION 01 OF 02 RPO DUBAI 000394

SIPDIS

DEPT PLS PASS TO DEPT OF TREAS BRIAN GRANT

E.O. 12958: DECL: 9/28/2019
TAGS: IR PGOV PREL
SUBJECT: IRAN REVOLUTIONARY GUARDS BUY MAJOR TELECOMMUNICATIONS
COMPANY

DUBAI 00000394 001.2 OF 002


CLASSIFIED BY: Alan Eyre, Director, IRPO, State.
REASON: 1.4 (b),(d)

1. (C) SUMMARY: On September 27 the Iran Revolutionary Guards
Corp (IRGC)-affiliated 'Etemaad-e Mobin Consortium' (EMC) bought
a 50 percent plus one share stake in the Telecommunications
Company of Iran (TCI) for an amount equivalent to USD 7.8
billion. The sale, the largest in the Tehran Stock Exchange's
history, is consistent with other recent 'privatizations' under
President Ahmadinejad which have transferred ownership of state
assets from the government to quasi-public sector institutes,
often the IRGC. While there was strong foreign and domestic
interest in this TCI tender, Iran's Privatization Organization
(PO) engineered the pre-sale qualifications such that ultimately
only two IRGC-affiliated consortia were competing. The
government's sale of a majority stake in the country's largest
telecommunications provider to the IRGC serves both to
consolidate control of a strategic sector in IRGC hands while
also assuring it of substantial profits in the years ahead. END
SUMMARY



TELEPHONE MONOPOLY, A PROFITABLE BUSINESS IN IRAN




2. (U) Originally the Telephone Company of Iran, TCI was
re-structured in 2005 and reorganized as a parent company
overseeing 33 subsidiaries including data, mobile, and backbone
communications' providers. TCI has a complete monopoly on the
fixed-line (landline and wired broadband) business in Iran. In
its last annual report (September 2008),TCI reported 24.3
million fixed-lines in service as well as 27.8 million mobile
subscribers (90 percent of the market). As such, it is a highly
profitable company with significant growth potential.




3. (U) In July 2006 Supreme Leader Khamenei decreed that a
renewed effort be made to privatize the economy, and TCI's
privatization has been under discussion since 2007. Since that
time many foreign companies had expressed interest and pursued
the possibility of investing in TCI. However, most foreign
investors ultimately withdrew because of revised privatization
rules intended to prevent substantial foreign and or private
ownership and to favor domestic investors with government
connections.




4. (C) In early September a major Iranian telecommunications
investor told IRPO that PO actions geared to limit
private-sector interest indicted government intent to facilitate
IRGC purchase of TCI. He cited other recent privatizations
where qualifications were structured to limit the pool to only
'qualified' IRGC front companies. This investor cited his own
situation, in which government pressure resulted in his company
losing the right to represent MTN (the only foreign company to
successfully obtain a mobile license to operate in Iran) to an
IRGC front-company.



RIGGING THE FIELD




5. (C) As a result of heavy government pre-qualification of
potential TCI purchasers there were ultimately only three
bidders, two of whom were associated with the IRGC:



- ETEMAD-e MOBIN CONSORTIUM: The winning consortium, composed of
three companies 'Gostaresh-e Electronic-e Mobin' (46 percent),
'Towse'eh Etemad' Company (46 percent) and 'Shahryar-e Mahestan'
company (eight percent). The first two of these companies are
subordinate to the IRGC Cooperatives Foundation ('Bonyad-e
Ta'avon-e Sepah-e Pasdaran'),while the third company is owned
by another parastatal organization, the 'Headquarters for
Executing the Imam's Dictates' ('Setad-e Ejrai-ye Farman-e
Imam').



- MEHR INVESTMENT COMPANY CONSORTIUM: The losing IRGC-affiliated

DUBAI 00000394 002.2 OF 002


consortium, composed of the Mehr Investment Company (affiliated
with the Basij),the Social Security Investment Company
('Sherkat-e Sarmayehgozari-ye Tamin-e Ejtemai,' aka 'Shasta.'),
and 'Sa Iran' a contracting company for MODAFL communications
projects.



- PISHGAMAN KAVIR YAZD COOOPERATIVE GROUP (PKY): The only
non-IRGC-related company involved in the tender, it was
established in 1996 and is composed of 15 investment and
cooperative companies. A few hours before the September 27
tender it was disqualified from competition for undisclosed
security reasons, despite having previously been approved for
competition in the tender.




6. (C) An IRPO contact who invests heavily in the Tehran Stock
Exchange said he and a number of private investors he knows
invested in a five percent TCI offering when it was made
available last year, predicting that future ownership would be
in IRGC hands. Asked why, he said "we have to make money and
government involvement in market manipulation ensures that the
share price will go up." (COMMENT: the TCI tender price was
almost double the current price, giving current TCI shareholders
a substantial bonus END COMMENT). Asked about the impact of
the IRGC purchase on the long-term business environment, he said
that while private-sector investment would be ideal, maintaining
government ownership is preferable to selling to the IRGC,
adding "at least with government, we know who the owner is and
where the money is going. With the IRGC, you don't even know."




7. (C) COMMENT: The government's sale of a majority stake in the
country's largest telecommunication provider to the IRGC serves
to both consolidate control of a strategic sector in the hands
of the IRGC while also assuring it of substantial profits in the
years ahead. While the government has made much of its
privatization effort as the focus of its economic liberalization
policies, this latest effort demonstrates the hollowness fo the
effort. While government institutions and some wealthy
investors will benefit in the short-term from insider trading
that shifts ownership among government-affiliated entities, the
long-term prospect for telecommunications, once considered
Iran's most-promising market, is severely diminished.
Meanwhile, this 'historic' tender is but the latest example of
the IRGC's ongoing expansion into mainstream commercial
activities. To this end, the IRGC is soon set to have its own
bank (upcoming septel). END COMMENT.
EYRE