Mergers ahead for Middle East telcos

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For many regional telecom operators, making acquisitions could be the key to survival, but getting the right deal and executing it properly is essential.

With competition intensifying in the MENA region's telecoms sector and average ARPU falling, the sector is likely to see increased consolidation, as operators look to licences, companies, or stakes in other operators in a bid to reduce operating costs and increase their reach into new markets.

Indeed, most of the region's main players have adopted this approach, with Etisalat having bought stakes in a number of companies this year. In January, Etisalat, which is the second-biggest Arab telecom firm by market value, took control of Sudan's Canar Telecommunications Company by almost doubling its stake to 82%.

This came shortly after Etisalat took over Zanzibar Telecom in Tanzania and entered Nigeria through a strategic partnership with Mubadala Development Company, an investment vehicle owned by the Government of the Emirate of Abu Dhabi.

And Etisalat is not alone. Most of other regional heavyweights, such as Kuwait's Zain, Qatar's Qtel and STC of Saudi Arabia have also transformed their companies by buying into foreign assets.

Girish Trivedi, deputy director of Frost & Sullivan's telecom practice is just one telecom analyst who foresees significant deal activity ahead. "In most of the markets there can be only handful of telecom players who can survive profitably," he says.

"Consolidation acts as a tool for companies to come together and rationalise their operations thereby increasing their chance of survival, as well as develop better competencies to compete profitably in the market place."

"As the penetration levels increase and growth plateaus, it will be very difficult to sustain by relying only on traditional expansion, so players in the region will have to look beyond their traditional geographies and undertake cross border consolidation to ensure they survive."

In terms of the type of deals that will take place, Trivedi thinks the most common activity will be larger operators in the Middle East buying smaller operators in Africa.

"Considering that there are more smaller operators in the growing sub-African region, incumbents and large operators will target smaller operators for M&A. Across more mature ME markets we expect big operators to come together for a possible merger or an acquisition. With many large operators present across many countries, cross border M&A might also be in demand," he adds.

For Trivedi, Africa, rather than the Middle East, is likely to be centre stage for M&A activity in the region, partly because significant consolidation has already taken place in the Middle East.

"Though the ME sub-region has seen a high level of M&A activity over the last two years, the growth in some of the key countries is slowing down and the current growth opportunities seem to be limited, whereas the African sub-region driven by the high growth opportunities is expected to witness higher M&A activity over the next 12-18 months," he says.

"The Middle East and Africa region is one the fastest growing as well as the least penetrated regions in the world. The bulk of the growth has come from African sub region, rather than the Middle East sub region. The demand for telecom services continues to be very high and the growth in the revenues has been very attractive, leading to a situation that almost every major player in the world is either already present or have definite plans to expand into the region."

Matthew Glynn, partner and head of telecommunications for technology and media, covering the Middle East, South Asia and Africa, at DLA Piper, agrees that there will be further consolidation in the region, particularly involving African targets, with potential acquirers coming from South East Asia.

"At the moment we have got a good number of South East Asian operators on our books who are looking for acquisition opportunities in this part of the world," he says.

"They have been very successful - in fact they were the pioneers of international expansion for this part of the world - and they have been taking a very prudent and cautious approach so they have kicked the tyres on almost every acquisition opportunity that has arisen but they haven't yet really struck out."

"Increasingly they are looking toward Africa where they can get in to some pretty raw markets where the demographics for growth are pretty sound. Africa has got 25% mobile and fixed line penetration continent-wide and most of that is stacked up in North Africa and South Africa. There are some pretty prime markets throughout Africa, but their attention is going towards those markets."

But Glynn is keen to differentiate between different types of regional operator - from smaller players that could become targets, to the large players that have been very active on the deal circuit, and the "sleeping giants" such as STC that have only recently come round to the idea of making acquisitions.

According to Glynn, some of the telecom players in some of the smaller cash rich Gulf States such as Oman and Bahrain that have failed to make any successful acquisitions could become targets.

"They will have to grow or they will be acquired," he Glynn, without naming any particular companies.

However, the acquisitive activity of the larger regional players is likely to continue. "I think we will continue to see them expand. Etisalat will pick up opportunities in Africa as and when they arise," he says, adding that the UAE incumbent has "used up a lot of money buying assets thus far" and is likely to be quite careful about future deals.

"We have another range of regional operators who really are sleeping giants - STC is an example. They have done nothing for years and then the first thing they do is drop US$3 billion in Malaysia. They will spend but they will probably benefit from the international acquisition experience."

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