Mature Gulf markets offer slim pickings in telecoms sector

26 June 2009

The large, regional telecoms operators have reached a difficult stage in their development, with the most attractive licences already auctioned off and the global recession eroding their profits.

Iran’s third mobile phone licence was the most attractive telecoms asset in the region when it was auctioned off in January this year. Unfortunately for the UAE’s Etisalat, which won the auction, the licence proved as hard to hold on to as it did to win. On 11 May, the Iranian Communications Regulatory Authority stripped Etisalat of its licence, after saying it had failed to meet its commitments.

On 16 May, Etisalat chairman Mohammad Hassan Omran said he was hopeful of getting the licence back. However, the Iranian authorities have opened talks with the runner-up, Kuwaiti operator Zain.

The Middle East’s largest operators have reached a difficult stage in their development, where most of the new licences on offer are in the region’s least transparent countries. The Iranian licence is the most high-profile example of an auction round where the bidders cannot be sure that the licence will go to the company that offers the most money.

On 3 February, Morocco approved the award of a mobile phone licence to Wana, a subsidiary of Groupe ONA, which is partly owned by Morocco’s King Mohammed VI. Of the other telecoms assets up for sale this year, Algeria, Iran again and Tunisia all have the potential to confound the expectations of bidders.

The global recession has also made life harder for regional operators. The largest, including Saudi Telecom, Etisalat, Maroc Telecom and Zain, are all profitable, unlike many large companies in other sectors. However, their profits have largely fallen since last year (see chart right).

Saudi Telecom was the first to surprise shareholders when it reported a 69 per cent fall in net profits in the final quarter of 2008. Etisalat followed its larger rival by reporting a 20 per cent drop in profits. Maroc Telecom and Zain, which both report in currencies that have fallen against the dollar, have suffered less. The global slowdown did not affect Maroc Telecom until the first quarter of this year, when it reported profits up by just 2.7 per cent. Zain’s profits fell by 3 per cent in the fourth quarter of last year, before returning to growth of 2 per cent in the first three months of this year.

Saudi Telecom won Bahrain’s third mobile phone licence after submitting a bid of BD87m ($230m) on 11 January, the final day of bidding. The following day, Bahrain’s Telecommunications Regulatory Authority revealed that Saudi Telecom was the only bidder, and on 22 January, the authority’s general director, Alan Horne, confirmed that, with no competition for the licence, Saudi Telecom would have won it even if it had bid just one dinar.

Zain is the only other local operator to buy stakes in other operators in the region. On 14 March, it acquired a 31 per cent stake in Wana for MD2.85bn ($355m). And on 18 May, it used a share swap to acquire a 56.53 per cent controlling stake in Paltel - the monopoly operator in the West Bank and Gaza.

No money changed hands in the deal, the first example of a successful asset swap in the region’s telecoms sector. It could be a template for future deals by operators that need to balance their desire to expand against their need to maintain healthy cash positions.

Zain is not rated by any of the major credit ratings agencies, but its management has revealed that it used debt to finance a series of acquisitions between 2003 and 2007.

Exchanging assets

Asset swaps only work where the seller is happy to keep equity, however. On 7 May, Portugal Telecom revealed that it had appointed US investment bank Morgan Stanley to help sell its 32 per cent stake in Meditel, Morocco’s second mobile phone operator. The European operator is expected to want cash, rather than shares in a different asset.

Egypt’s Orascom Telecom will probably be one of the bidders, according to Marise Ananian, a telecoms analyst at Egyptian investment bank EFG-Hermes, who met Naguib Sawiris, Orascom’s chairman and chief executive officer, in April. “He said his next acquisition could be Meditel,” says Ananian. “Orascom is interested to buy it if Portugal Telecom is willing to sell.”

The recession has made it more expensive for telecoms operators to raise new debt and service existing loans. Operators that calculate their accounts in currencies pegged to the dollar have suffered dwindling profits.

However, some say that core operations remain immune to the downturn. “Most of the markets in the Middle East now have a relatively high level of maturity,” says Joss Gillet, an analyst at Wireless Intelligence, a UK-based industry data provider. “The poor first-quarter results are more due to the markets being mature than to the recession.”

If the big regional markets really are approaching saturation, the region’s operators will not be able to repeat their performance of the past five years, regardless of whether the recession eases.

A MEED Subscription...

Subscribe or upgrade your current package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications