With the exception of the recent internet disruption caused by the damage to an underwater cable in the region, telecommunications services to the Middle East and Africa have been continually improving and giving increased choice for consumers over the past five years. For various reasons, including deregulation, privatization, and strong economic growth in the region, this is expected to continue and the telecommunications sector will offer significant opportunities to investors. Credit Suisse expects the six largest GCC telecom companies to achieve robust profitability growth in the next couple of years, with estimated net income CAGR of 21.8% in 2007–2009.
While it is not clear who the winners will be, it is likely that a small number of large players will eventually come out on top, leaving some losers among the existing regional firms. Also, even the perceived winners run the risk of overpaying for assets that they acquire in some of their most recent M&A transactions and license acquisitions.
As noted in a recent Credit Suisse research piece, until recently, the largest four telecoms in the region (Saudi Telecom, Etisalat, Zain and Qatar Telecom) have enjoyed long-standing monopolies in their domestic markets. When liberalization began, these companies began to implement overseas expansion strategies into the wider MENA region in order to capitalize on their substantial balance sheets and to offset their decreasing local market share.
The third mobile license in Saudi Arabia was won by Zain of Kuwait (formerly MTC), for example. The $6 billion price exceeded expectations and represented the highest amount paid to date for a license, on a per capita basis, for any telecoms asset anywhere. In a three to four year time period, Zain has evolved from a single market mobile operator offering services only in Kuwait to one of the major players in the Middle East and Africa.
Today, Zain is a $29 billion market cap mobile and data services operator with licenses in seven Middle Eastern and 15 sub-Saharan African countries including Iraq, Nigeria, Sudan, Tanzania, Zambia, and Uganda, with over 15,000 employees providing services to over 42.4 million individual and business customers. Zain’s strategy employs strong organic growth as well as an aggressive acquisition effort.
Qatar Telecom started its operations in Qatar in 1987 as the country’s exclusive integrated telecom operator before expanding — through a series of acquisitions — into the MENA region. Qatar Telecom now has 14 million subscribers in more than 15 countries in the Middle East and Asia Pacific and has been aggressively tapping the Middle East markets, especially for managed data services and fixed wireless sectors. Qtel CEO Nasser Marafih, has announced a strategy of becoming one of the top 20 world telecom operators by 2020. Qtel has been aggressively implementing this strategy. It’s early 2007 $3.8 billion acquisition of a 51% controlling stake in Kuwait’s Wataniya Group, with operations in six countries, was the largest telecom acquisition in the Gulf region.
Etisalat’s highly regarded management has implemented a strategy that has enabled the company to become the second largest telecom company in the MENA region, with a $30 billion plus market cap and 30 million subscribers in the fast-growing markets of Pakistan, Saudi Arabia and Western Africa. In Egypt, Etisalat was awarded the third mobile license for $2.9 billion, indicating the company’s confidence in the potential growth of the market. According to IE Market Research, Egypt will be the fastest growing wireless market in the Middle East and North Africa over the next three years with a subscriber growth rate of about 84% over the next three years from 2007 levels. Etisalat also owns 35% of Mobily, the second mobile operator in Saudi Arabia with an estimated subscriber base of over 7 million.
With a market capitalization of $41 billion, 15 million mobile subscribers and 3.9 million fixed-lines, Saudi Telecom (STC) is the largest telecom operator in the Middle East in terms of market capital, and among the largest in terms of subscriber base. STC has lagged behind the other big regional players in its international expansion. It was not until June 2007 when the company started its overseas acquisition spree by acquiring a stake in Maxis of Malaysia. This was followed in December 2007, when it won the third mobile license in Kuwait, paying $910 million for a 26% stake, implying a total license value of $3.5 billion. In January 2008 STC offered $2.56 billion for a 35% stake in Oger Telecom, the majority owner of Turk Telekom.
Predictions are that telecommunications companies in the Middle East’s may spend an estimated $30 billion on acquisitions and licenses over the next few years, with some of the world’s largest deals are taking place in the region. As deregulation proceeds, big operators will increasingly try to sell customers integrated packages, the so called ‘four play’ services (mobile, fixed-line, broadband internet, and cable TV). To be able to offer these services, big operators will look to buy single offering companies or firms operating in a small number of countries. For investors like us, the question is whether companies will overpay as they try to build out their franchises, or whether the high acquisition prices will be offset by operational savings of scale and by growth in subscribers and sales.
A. Shabu Qureshi is director of EMP Global.
