Reports in April that Etisalat was seeking an $8bn loan to finance the acquisition of an interest in Maroc Telecom immediately prompted speculation among investors that the UAE operator could end up overpaying for the 53 per cent stake.

Coupled with a rival bid by Qatar’s Ooredoo, which was later withdrawn, rumours that France’s Vivendi was set to make a huge profit from the potential deal went into overdrive.

Contrary to Etisalat’s purchases in the past, however, an outrageously high offer was never on the table. The company’s E4.2bn ($5.5bn) bid turned out to be slightly lower than Maroc Telecom’s current market price. Still, it has caught the interest of Vivendi, which is now in exclusive talks with Etisalat over the stake.

“In the past, they seemed to indiscriminately buy what was available… now strategy is clearly outlined”

Petr Molik, Mena Corp

The tougher negotiations mark a clear shift in Etisalat’s acquisition strategy, which has seen its key management completely revamped over the past two years, partly in response to the view that its acquisition strategy was not working.

“In the past, they seemed to indiscriminately buy what was available, but now their strategy is clearly outlined,” says Petr Molik, chief financial officer and managing director of research at the local Mena Corp. “They’ve divested in Indonesia, and with the potential acquisition in Morocco they could strengthen their markets in Egypt, Nigeria and west Africa.”

Lessons learnt

All eyes are now on how Etisalat will continue to roll out its international operations. Most of its revenues at the moment still come from the UAE market where it faces increased competition from newer player Du. This has put pressure on the company’s financial results in recent years, although revenues have risen slightly this year, reaching AED9.88bn ($2.6bn) in the second quarter of 2013.

Because of the need for expansion abroad, investors are hoping the company has learned its lessons from unsuccessful international forays over the past decade.

Etisalat’s disastrous venture into India was shut down after the government cancelled 122 second generation (2G) mobile licences last year, causing the company to pay a hefty price for its lack of understanding of the market – the Indian arm generated more than $1bn in losses.

In 2005, Etisalat bought a 26 per cent stake in Pakistan Telecommunications for $2.56bn, higher than its estimated worth of $2bn. So far the operations in Pakistan have not generated the returns the operator initially hoped for, although it still sees potential and is now reportedly eyeing another acquisition to help raise its game in the country.

Expansion in the GCC has been more successful, with a stake in Etihad Etisalat (Mobily) leading to solid growth. “Etisalat wants to increase its stake in Mobily, but can’t as the latter is officially independent,” says a source.

Success levels of overseas acquisitions by other regional telecoms operators Ooredoo, Saudi Telecom Company (STC) and Kuwait’s Zain – have varied.

During the 2005-08 boom, many operators went on a shopping spree as credit was readily available. The idea was to follow the model of European operators, which in the 1990s (when the first 3G licences were awarded) were able to grow by being the first to enter markets and slashing prices to lure customers. Their hope was subscribers would remain loyal and make up for the initial costs.

Early setbacks

In following that model, not all of the expansions by regional operators worked out, either because required capital expenditures proved too high or they simply did not understand the foreign environments and regulations.

While GCC acquisitions have generally gone well, Asian and African ventures posed bigger challenges.

Other markets in the wider Middle East and North Africa (Mena) region such as Tunisia have been approached with caution, although Ooredoo in January increased its stake in its subsidiary Tunisiana to 90 per cent.

Of the Middle East’s largest operators, Ooredoo is seen as the most solid performer when it comes to international deals. It receives the most of its growing revenues from international operations. During the first half of 2013, its revenue rose 4.7 per cent year-on-year to QR17.1bn ($4.6bn).

Ooredoo’s disciplined approach has meant that it has timed its acquisitions to avoid overpaying. Targeting established players in markets with room for growth such as Iraq’s Asiacell (it owns a 64 per cent stake) and Kuwait’s Wataniya Telecom (92 per cent) meant the risk it took on was limited compared with other markets. A majority stake in Indonesia’s Indosat (65 per cent) allows the company to have control over its interests there.

The firm’s licence win in Myanmar, where analysts say it will be spending up to $3bn over the next few years, is seen as a good opportunity as the market is not yet developed, but it is not without political and economic risks.

At the other end of the spectrum are Zain and STC, both have been hindered by internal struggles and investments overseas that either involved start-ups, intense competition or high regulatory risks. STC’s disappointing financial results in recent years are from continued provisions it has booked related to international operations, says Abdulelah Babghi, equity research analyst at Jeddah-based NCB Capital.

“I believe the GCC expansions [Bahrain and Kuwait] are doing well, while the Turkish operations are okay, maybe slightly to the negative but not a major concern. The major concerns are some of the Asian ones, mainly Indonesia’s Axis and India’s Aircel.”

STC is reportedly looking at divesting its interests in Axis, with analysts expecting the firm to sell at a loss. The struggles abroad have led to discontent among shareholders, as well as within the company, which is now having to reorganise its domestic and international investment strategies, according to analysts.

“STC was the latest to decide to go international and has done that while facing quite a bit of turmoil,” says a telecoms analyst.

“It has been grappling with how to cope, being an incumbent they have quite an internal ethos to the public sector, have been quite overstaffed, and so on, so they have found it hard to react when the market opens up and are faced by more nimble, aggressive rivals such as Mobily.”

The relatively smaller operator Zain has not announced plans for international fresh expansion after it divested its operations in Africa in 2010. The following year a merger with Etisalat was under discussion, but according to sources the offer was not taken up as Zain wanted to remain independent.

“Some operators coming in to Africa have struggled, thinking their tactics elsewhere worked and so they tried to transplant those across Africa,” says Shiv Putcha, an emerging markets analyst at London-based Ovum Telecom.

“For some, that has been far tougher than originally anticipated, not to mention more expensive. Zain wasn’t doing well in Africa and sold its assets to [India’s] Bharti Airtel, which has not been doing terribly well either due to some legal issues.”

Like STC and Etisalat, Zain too is having to cope with higher competition in its home market. In the second quarter of 2013, it registered a 7.6 per cent year-on-year drop in revenues to KD612m ($2.15bn).

Future plans

The region’s telecoms companies have now realised it requires a lot of capital expenditure to become a player in a greenfield market or an already saturated market abroad.

“There is a shift to investing in profitable, well-established firms, which is less risky than being greenfield, or the fourth or fifth operator in the market where they may already have 100 per cent penetration rates,” says Jawad Abbassi, general manager of Amman-based Arab Advisors Group, a research subsidiary of Arab Jordan Investment Bank.

“The hype is gone – global and regional operators are facing more pressure on their bottom lines; it is not carefree growth and profits like it used to be. They have to focus on operational efficiencies, streamlining operations and making sure costs are under control.”

Indonesia, India and Pakistan already have highly competitive markets and are likely places where more divestments will be taking place, says Mena Corp’s Molik.

He expects large-scale consolidation in India between local operators, and, coupled with widespread reports of bribery, he says it is unlikely GCC operators will want to move into the territories until those problems have been sorted out.

Aside from going for strategic acquisitions and network upgrades that strengthen their existing footprint, the next stage for GCC operators will probably involve more strategic alliances with operators abroad, which could involve sharing networks to avoid having to roll out their own. While the preferential scenario is to enter markets with few players, those opportunities are becoming increasingly rare and as history shows require careful approach.