Political uncertainty hits Middle East telecoms sector

22 March 2011

Popular uprisings in the region are making the telecoms sector wary, but in the long-term, the industry could open up as governments start to be democratically elected

The UAE’s Emirates Telecommunications Company (Etisalat) has become the first major operator to shelve investment plans because of the political unrest in the region. It ended its bid for a 46 per cent stake in Kuwait’s Zain on 19 March.

It is still difficult to quantify the full effect of protests, particularly before first-quarter results are released

At $6.1 a share, the $12bn deal would have been the Gulf’s largest acquisition since 2007, when petrochemicals company Saudi Basic Industries Corporation bought the US’ GE Plastics for $11.6bn.

The political unrest may only have been one factor in its decision. There were many obstacles during the due diligence process and although Zain shareholder disputes were the main reason, the decision also reflects current investor sentiment in the region. There is uncertainty and investors are unwilling to make major decisions while markets are weak.

Unpredictable telecoms markets

Zain’s operations in the emerging markets of Iraq, Morocco, Sudan, Jordan, Kuwait and Bahrain were the most attractive assets to Etisalat. All of these countries have seen some level of unrest in the past few months and the political situation remains unpredictable.

Etisalat is mindful of the fact that since the Tunisians overthrew President Zine el-Abidine Ben Ali in mid-January, the domino effect of these protests appears to be having consequences for the telecoms sector in the region.

When Egypt’s then President Hosni Mubarak made the decision to close down communications in the country, the mobile operators suffered a five-day loss of revenues.

It is still difficult to quantify the full effect of the protests before first-quarter results are released. State-owned telecoms provider Telecom Egypt is the only firm to have released a figure on the impact – it says the cost of damages was $3m to just 0.12 per cent of its fixed assets.

So far, the financial impact has been small across the region. “Compared to other industries, the impact on the telecoms sector has been small. People are still able to make phone calls and revenue generation continues,” says Martin Mabbut, telecoms analyst at Japanese investment bank Nomura. “There are several levels of impact, including operational issues. In Egypt, there was small-scale damage to networks and distribution point, but the costs incurred have been small.” 

Much of the impact has been on state plans to develop the sector and network upgrades. “Egypt’s telecoms industry is unlikely to undergo many changes in the near future,” says Sherine Fouad, head of strategy at Vodafone Egypt.

Plans to launch mobile virtual network operators (MVNO) have been put on hold. While the country is undergoing political reform and adjusts to a new parliament, all new licences and spectrum awards have been put on hold for at least another six months.

Vodafone Egypt, part-owned by Telecom Egypt has frozen major investment plans including long-term evolution trials, the first step to high-speed mobile broadband, until there is greater stability. The operator, which recently acquired Tele Tech, one of two firms to hold a triple-play licence to provide internet protocol television services to gated communities in the country, has also put these plans on hold. The main reason has been the rights to the land, as the communities are alleged to have been built on corrupt deals, headed by officials linked to the previous regime. Until the land rights are resolved, it is unlikely Vodafone Egypt can enroll this technology.

Libya’s mobile operators Libyana and Al-Madar al-Jadeed faced similar issues when the country’s leader Muammar Qaddafi took all services offline. While there had been promises of another licence and plans to open up the market with initial public offerings (IPOs) for both firms in May 2010, these plans did not come to light and are unlikely to do so in the near future. Both of Libya’s telecoms operators are state-owned, controlled tightly by Muhammad Qaddafi. If the regime falls, the likehood is the telecoms sector will too.

Concerned by the security situation in Libya, French equipment vendor Alcatel-Lucent has suspended its operations in the country including 3G renovation for both operators.

Sense of optimism for telecoms sector

Tunisie Telecom, the state-owned mobile operator, cancelled its plans for an IPO in early February. The firm has since faced further obstacles with about 60 members of its senior staff going on strike over fears they will not be paid. Protest fever seems to have caught on with Saudi Telecoms Company (STC) workers, who also went on strike over poor pay. “This is an internal issue, which has been sorted out by the management,” says an STC spokesperson.

The impact has not been uniform. Nokia Siemens Networks, one of the largest vendors in the Middle East, say none of its projects have been affected or delayed in light of the protests.

In many cases there is an increasing sense of optimism as the region heads towards more democratic forms of government. “The lack of clarity will be removed,” says Foaud, which could pave the way for a more open telecoms markets in the region.

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