Gulf telecoms operators struggle to grow

27 October 2009

The Gulf’s mobile phone market has become increasingly saturated as more licences are granted, with operators forced to move into higher-risk markets if they wish to expand

Gulf telecoms companies have endured a tough year, as investment has dried up at home and the global recession has eroded profits abroad. Yet a bullish statement from UAE telecoms services provider Etisalat on 18 October suggests there may be reason for optimism.

Etisalat, the second-largest telecoms company in the region after Saudi Telecom, posted a 5 per cent increase in profits to AED2.25bn ($613m) for the third quarter of 2009 and unveiled two new acquisitions.

“Etisalat is studying opportunities for growth in markets across Africa, the Middle East and the wider Arab world,” said Mohammed Omran, Etisalat’s chairman, when announcing the company’s nine-month financial statement in October.

Whether acquisitions are part of a trend among Middle East telecoms companies is unclear. Telecoms operators in the region had already reached an impasse before recession struck in 2008. Many telecoms markets in the Middle East were becoming saturated, with competition for customers increasingly fierce.

Companies such as Etisalat and Du, both of the UAE, Zain of Kuwait, Saudi Telecom and Egyptian operator Orascom Telecom have chosen to hunt further afield, into Africa and Asia in particular.

“There are still virgin markets, where the more sophisticated players can bring their more efficient business models to bear,” says Philip Brazeau, associate partner of Al-Tamimi & Company, a Dubai-based law firm specialising in telecoms.

However, many of these new markets are proving hard to crack and there are growing concerns that some companies might have overstretched themselves. 

There is no doubt that telecoms companies have come a long way in a short time. Most Middle East telecoms markets were monopolies a decade ago and, while many of the big-hitters today are former monopoly-holders, newcomers like Zain have chased overseas opportunities with verve.

Zain now operates in 22 countries and has 64 million customers. In May this year, it had built up a $5bn war chest to fund further acquisitions. “Our ultimate mission is to cement Zain as a top-10 leading global mobile phone operator by 2011,” says Saad al-Barrack, deputy chairman of Zain.

With most countries’ second and third operator licences now awarded in the region, the scope for further acquisitions in the Middle East is limited. The few licences that remain are often in frontier markets, which may offer considerable rewards but pose high risks.

One example is Etisalat’s brief venture into Iran. After winning the country’s third mobile phone operator licence in January, it lost the permit four months later when the Iranian Communications Regulatory Authority decided the company had failed to live up to its commitments.

Most Gulf operators can rely on comparatively strong home markets, which provide some immunity against the downturn. Yet as these markets mature, the high yields of two or three years ago are dwindling.

This year, the picture has remained patchy. Etisalat’s results in October were a significant improvement on the second quarter, when it posted a 19 per cent drop in profits. Yet its $1.25bn profit for the first half of the year constitutes a 9 per cent drop on the first six months of 2008. Saudi Telecom, similarly, enjoyed a 22 per cent year-on-year fall in second-quarter profits. Zain was the only company to buck the trend, albeit marginally, with a 5.5 per cent rise in second-quarter profits to $538.3m.

Raising funds

Telecoms operators face a range of financial pressures. Those that keep their accounts in currencies tied to the dollar have had their margins squeezed as a result of the weakening of the dollar on world currency markets. The tightening of financial markets has also made it more expensive to raise new debt and service existing loans.

That said, most of the big Gulf telecoms companies are better placed than many to raise funds. In September last year, Zain, which is listed on the Kuwait Stock Exchange, managed to raise $4.4bn in capital after 99 per cent of its existing shareholders subscribed to a rights issue. A year later, Qatar’s Qtel defied the downturn with a $1.5bn bond, raised to $2bn following a good response from banks.

“To have a truly competitive market, you need to have at least three operators, but governments need to be credited with the progress made so far,” says Brazeau. “There are also substantial regulatory issues still to be addressed to liberalise markets further, such as interconnection rates between operators and shared infrastructure. The Gulf markets are saturated, but they are evolving rapidly.”

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