Telecoms giants struggle for Saudi market share

22 August 2008

Saudi Telecom is the most profitable telecoms firm in the region with net profts of $1.8bn in the first half of 2008, but its dominance is set to be challenged by Zain and Etisalat.

Saudi Telecom seems to make a point of being enigmatic. Earlier this year, the kingdom’s state-run telecoms operator contacted a major regional bank to ask if its analysts would cover its share performance. Considering that the bank in question already covered its two main rivals - the UAE’s Etisalat and Kuwait’s Zain - it said it would be willing to take on the job. But since then, the analysts have heard no more from Saudi Telecom.

Its behaviour is frustrating for those wanting to analyse the relative performance of the region’s main telecoms operators. But it does not hide the fact that Saudi Telecom is a regional giant. It is the largest operator in the Middle East and the region’s second-largest floated company, with a market capitalisation of $34.8bn.

It is also by far the most profitable telecoms business in the Middle East, with net profits for the first half of this year of $1.8bn. Etisalat and Zain generated net profits respectively of $1.4bn and $552m in the first half of this year, making them among the most successful Middle East operators by profitability. They are also the second and third largest by market capitalisation. Etisalat, the largest company on the Abu Dhabi Securities Exchange, is worth $29.8bn. Zain, the largest stock on the Kuwait Stock Exchange, is worth $24.5bn (see charts page 33).

Profit sources

After Zain, the next largest companies in terms of market capitalisation are Maroc Telecom, at $20.9bn, and Egypt’s Orascom Telecom, at $9.8bn. The Egyptian telecoms company generated $1.4bn of net profits during the second half of 2007, the last half-year period when it reported results.

Although Orascom made as much money in the second half of 2007 as Etisalat did during the first half of 2008, the bulk of that profit came from the sale of its Iraqi business, Iraqna, to Zain at the beginning of December last year.

Orascom was forced to sell Iraqna after it failed to win one of three long-term licences in Iraq at an auction in August 2007 (see Telecoms Special Report, pages 36-37). The company is returning the $920m earned from the sale to shareholders through a succession of share buyback schemes.

Remove the proceeds of the Iraqna sale from Orascom’s accounts and its net profits amount to about $451m, placing it fifth among the regional telecoms firms in terms of profits.

In terms of net profitability, Maroc Telecom breaks into the top three. The Rabat-based operator generated more net profit than Zain during the first half of the year - it earned $587m compared with Zain’s $552m (see bar chart page 35).

However, with its imminent entry into the Saudi Arabian market, Zain is likely to start generating more net profits from its mobile phone operations.

The bottom half of the top 10 are far less profitable. Qatari operator Qtel is the sixth most profitable business, with $240m of net profits during the second half of 2007.

Etisalat’s Saudi subsidiary, Etihad Etisalat, which is a separate listed company on the Tadawul, Saudi Arabia’s stock exchange, is the seventh most profitable with $211m in net profits during the first half of 2008. Its UAE parent company has a 26.25 per cent stake in the business and retains management control.

Penetration rates

Orascom’s Egyptian subsidiary Mobinil is a separate company in the Case 30 of the Cairo & Alexandria Stock Exchange index. It is the eighth most profitable, with profits of $165m in the first half of 2008.

Mobinil’s high standing is impressive because many view the Egyptian mobile market as a poor relation of the market in Saudi Arabia. Egypt still has a penetration rate of less than 50 per cent, compared with about 100 per cent in Saudi Arabia, so Mobinil could catch up with the likes of Etihad Etisalat in a few years.

Palestinian Telecommunications Company (Paltel) is ninth with an impressive $60m net profit in the first half of 2008, although it has been helped by the continuation of its mobile phone monopoly in the West Bank. The tenth-placed operator, Telecommunications Company of Iran, reported net profits of $100m in the year up to 20 March. Looking forward, the company, whose market capitalisation of $7.4bn rates it the sixth-largest in the region, will become far more profitable because it will no longer have to pay a 40 per cent tax on its earnings following its flotation on the Tehran Stock Exchange on 9 August.

While Saudi Telecom’s financials make it the clear regional leader, it remains difficult to understand.

The bank that was asked to cover Saudi Telecom's shares believes that the company failed to help it because its investor relations team is too tied down by competing factions.

There is no doubt that the size of the firm’s workforce makes it unwieldly.

It employs more than 30,000 people, many of whom view their position at the company as a job for life - an attitude not renowned for maximising efficiency.

Network suppliers and media outlets have been frustrated by the company’s lack of transparency. One infrastructure company that supplies equipment to Saudi Telecom says that it has yet to speak to a manager at the company, instead being forced to deal with the middlemen that it uses as a matter of course in its negotiations with suppliers.

MEED is still waiting for a reply to four questions that it asked the firm on 1 July, including how far Saudi Telecom is complying with rules from the telecoms regulator that oblige it to allow customers to move to another operator without losing their mobile phone numbers.

Saudi Telecom’s reluctance to engage with the outside world is significant because in the next two years it will face competition in its home market from a third operator, Zain.

Operators elsewhere in the Middle East have been through this process, with differing degrees of success. Maroc Telecom still holds a 66 per cent share of Morocco’s mobile market despite the sale of a licence to Meditel, in which Portugal Telecom and Spain’s Telefonica both have a stake, in 1999.

In Algeria however, state-owned Algerie Telecom’s claims it is still the largest operator in its market, despite Orascom launching a mobile firm there in 2004, are dismissed by rival operators and independent analysts. The GSM Association’s Wireless Intelligence estimates that Algeria Telecom’s mobile phone business has at most 33 per cent of the market.

Telecommunications Company of Iran has seen Irancell, which is owned by South Africa’s MTN, gain 28 per cent of the market in the 18 months since it launched mobile phone services. Opinion is divided on how Saudi Telecom will cope with a second competitor.

Marise Ananian, an analyst at Egyptian investment bank EFG-Hermes, is relatively upbeat about its prospects. “By 2015, we expect Saudi Telecom to still have the highest market share at 50 per cent followed by Mobily [Etisalat’s brand name in Saudi Arabia] at 35 per cent and Zain Saudi Arabia at 15 per cent,” she says. EFG-Hermes forecasts that by the end of 2009, Zain’s first full year of operations in the country, Saudi Telecom will have 21.5 million customers, Mobily will have 13.9 million and Zain will have 3.5 million.

Saudi Telecom’s detractors think that Zain, which has operations in 20 other countries, will use its experience to overpower the sluggish incumbent. “Zain will absolutely kill Saudi Telecom in the Saudi market,” says Shrouk Diab, the senior telecoms analyst at Beltone, another Egyptian investment bank. “They [Saudi Telecom] are used to being the sole operator and that is it,” she says. “They are not market savvy and not sophisticated in terms of marketing and promotion.”

Saudi Telecom itself has remained silent in the months leading up to Zain’s launch. The firm’s management team made no appearance when its financial results for the April to June 2008 quarter were published in July.

Nor has it complied with a new rule from the Communications and Information Technology Commission requiring it to disclose its number of active customers alongside its quarterly financial update.

Selling services

Etisalat, which has been selling mobile services in Saudi Arabia since the spring of 2005, has also chosen to ignore the regulator’s ruling.

Arguably Etisalat’s Saudi business has more reason to be reticent about its number of active customers than Saudi Telecom. While Saudi Telecom’s customer numbers have tallied with Wireless Intelligence’s forecasts for the past few years, Etihad Etisalat’s announcement in March that it had 11.1 million customers at the end of 2007 - its first customer update for a year - was inconsistent with analysts’ predictions. Wireless Intelligence had expected it to announce a figure of 7.2 million.

Although he did not say so at the time, what Khaled al-Kaf, chief executive officer (CEO) at Etihad Etisalat was presenting was not the company’s current number of customers, but the total number that his company had signed up since in its launch in 2005.

Hamoud al-Ghobaini, a spokesman for Etihad Etisalat, admitted in June that the company would have “several million” fewer clients if it could only count paying customers. When it finally discloses customer numbers according to the new rules, Etihad Etisalat is likely to show a decline, or a sudden halt, in last year’s growth.

Zain is just as dependent on success in Saudi Arabia as its two larger rivals. The Kuwaiti group continues to generate greater revenues across its whole business than Etisalat, but Zain’s net profits are much smaller. In the first half of 2008, Zain generated net profits of $551.5m, compared with Etisalat’s $1.4bn.

The gap is getting wider: Zain’s net profits grew by just 7 per cent, compared with 37 per cent at Etisalat. Saudi Telecom’s position as incumbent operator in the mobile and fixed-line markets in the region’s biggest economy enabled it to generate net profits of $1.8bn during the first half of this year, up 18 per cent on the first half of 2007.

Some analysts and competitors believe that Zain has overvalued the Saudi market. When the Kuwaiti company bid $6.1bn for Saudi Arabia’s third licence in June last year, the competing bidders were surprised.

Oger Telecom, the telecoms arm of construction group Saudi Oger, bid just $4bn for the licence. At the time, Paul Doany, CEO of Oger, said: “We believe the price the Saudi licence went for is unsustainably high in terms of shareholder value.”

Zain is relying on Saudi Arabia to increase its rate of net profit growth. Etisalat’s Saudi business contributed 18.5 per cent of group net profits in 2007. Until now, Zain has lacked having a subsidiary that can make such a big contribution to its profitability. The company needs a successful launch for Zain Saudi Arabia just to keep pace with Etisalat and Saudi Telecom.

Valuing markets

However, the launch has already been postponed from June this year to allow Zain more time to test its new network.

The operator has given thousands of mobile phones to the local companies that are shareholders in its Saudi subsidiary. It also needs the telecoms regulator to force Saudi Telecom and Etihad Etisalat to allow their highest paying customers to switch networks.

Like Saudi Telecom, the regulator has yet to answer questions that MEED sent on 1 July, about the effectiveness of its mobile number portability scheme.

The key reason why Etisalat makes more money than Zain is not Saudi Arabia, but its home market of the UAE, where it generated 67 per cent of its net profits last year.

Both the Abu Dhabi and Dubai governments have been generous to Etisalat. Abu Dhabi created the company and gave it a monopoly over the fixed-line and mobile phone networks. When Dubai auctioned a second mobile licence it insisted that a start-up company listed on the Dubai Financial Market should get the licence.

As a result, Etisalat has been allowed to compete with Du, a loss-making spin-off from the landlord of Dubai Media City, rather than an experienced operator such as Zain or the Qatari company Qtel.

The Abu Dhabi Stock Exchange, where Etisalat is the largest company, even allows it to ban foreign investors thereby minimising the chance of an activist shareholder making life uncomfortable for management. But while Etisalat has based its success to date on its home market, the barometer for its future achievements, as for those of Zain and Saudi Telecom, will be how well it performs in Saudi Arabia.

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