Etisalat became the largest telecoms company in the Middle East when its market capitalisation surpassed that of Saudi Telecom in April. Since then, it has been under greater scrutiny that at any time in the 14 years since the mobile phone part of the business was established in Abu Dhabi. The telecoms regulators in both Egypt and Saudi Arabia - Etisalat’s two Arab operations outside the UAE - have imposed tougher financial disclosure regulations on the operator.

Etisalat is slowly opening up. On 1 April this year, it held its first ever analysts’ briefing. For a listed company that generated more than $2bn in net profits in 2007, outsiders know remarkably little about how Etisalat works.

Structure

During Etisalat’s evolution into the region’s largest operator, its senior managers split the business between themselves. Mohammad Hassan Omran, the chairman, has responsibility for the company’s operations outside the UAE. Mohammed al-Qamzi, its chief executive officer (CEO), is responsible for the continued health of the fixed-line and mobile phone operations in the emirates.

The domestic market still accounts for the majority of the company’s revenues. In 2007, it generated AED13.5bn ($3.7bn) in revenues from the UAE, some 64 per cent of overall revenues of AED21.3bn.

Despite focusing on the domestic market, Al-Qamzi occasionally makes statements about the firm’s overseas expansion. In February, he said Etisalat was close to forming a joint venture with Korek Telecom, a Kurdish telecoms company that owns one of three mobile phone licences in Iraq. “We are now looking at a joint venture with an existing licence holder,” said Al-Qamzi. “We are just waiting for final agreement to get the deal done.”

Etisalat’s 15 operations in overseas markets all report into its Etisalat International business division, which has its own CEO, Jamal al-Jarwan. Investors and analysts are more likely to hear about Etisalat’s overseas aspirations from Al-Jarwan than they are from his boss, Mohammad Hassan Omran.

Operations

Like its smaller competitor, Kuwait’s Zain, Etisalat enters markets with local partners that give it the clout needed to deal with local politicians and regulators. It has just two wholly owned subsidiaries outside the
UAE: Etisalat Afghanistan and Moov, its operation in Cote d’Ivoire. In every other country, Etisalat has settled for the largest stake it can manage.

The Saudi operation under CEO Khaled al-Kaf has the greatest independence from group headquarters in Abu Dhabi. As a condition of the 2005 licence, Etihad Etisalat, its Saudi subsidiary, which trades under the brand name Mobily, had to float on the Saudi stock market (Tadawul) as a separate company.

This spring, Etisalat reduced its stake in Etihad Etisalat from 35 per cent to 26.25 per cent, a further condition of the licence. The sale leaves Etisalat with a similar stake in its Saudi operator to that of the third operator, Zain, which holds just 25 per cent of its Saudi subsidiary.

The region’s other multinational operators, Saudi Telecom, Orascom Telecom from Egypt, Maroc Telecom from Morocco and Qatar’s Qtel, are all overshadowed by Etisalat. Only Saudi Telecom, which has made up some ground since the spring, is close to Etisalat in size. At the close of trading on 29 May, Etisalat was worth $34.1bn, compared with Saudi Telecom’s $34bn, after a recent improvement in performance at the incumbent fixed-line and mobile phone operator.

Ambitions

Etisalat, Zain and Qtel all aspire to be among the top 10 telecoms companies in the world by market capitalisation. The UAE company is further ahead than its regional rivals at the moment, but it remains a minnow in the wider world. The world’s biggest operator, China Mobile, has a market capitalisation of $296bn. The major operators in other parts of the world are also a lot further ahead.

America Movil, the Mexico-based operator, has a major share of most markets in Latin America and a market capitalisation of $104bn. Its main rival in the Americas, Span’s Telefonica, is worth $135bn. Vodafone, the UK company that competes with Etisalat in Egypt, is worth $171bn.

The giants of mobile telephony could soon have a bigger presence in the Middle East. Telefonica has so far been content with its 32 per cent stake in Meditel, the second largest operator in Morocco. Vodafone is being more aggressive. Late last year, the UK company won the second mobile phone licence in Qatar, despite a $1bn-plus bid from Etisalat.

A bigger challenge could come from South African operator MTN, which has held merger talks with both Bharti Airtel and Reliance Communications from India. A combination of MTN and either of the Indian companies would create a business more than twice Etisalat’s size with licences in Iran, Sudan, Syria and Yemen - all markets that Etisalat is investigating.

MEED assessment

Etisalat’s first analyst briefing in April was a welcome break from the company’s secretive past. At the briefing, it broke down the performance of its key international operations for the first time. Most of the overseas subsidiaries are performing well.

Etihad Etisalat in particular had a good 2007, gaining 5 million customers and a 37 per cent share of the mobile market. The losses at Etisalat Misr, however, continue to drain the wider company of its profits. Etisalat Misr lost $463m in 2007.

The parent group can absorb losses on this scale because it generated net profits of more than $2bn last year. Etisalat has also benefited from Zain’s $1.67bn revenues in the first three months of 2008 only converting into $271m in net profits. This situation will not last forever. Etisalat Misr needs to start generating profits.