Fear and roaming in the Gulf

The Gulf’s telecommunications giants are once more pushing ahead with ambitious expansion plans into some of the world’s frontier markets, but not everything is going as smoothly as they would like
By Daniel Shane
Sat 08 Mar 2014 02:28 AM

Second to oil, mobile phone operators in recent years have been one of the Gulf region’s biggest exports.

The UAE’s Emirates Telecommunications Corporation, better known as Etisalat, is one of the world’s largest mobile networks, with an estimated 135 million subscribers or so across 18 countries from Indonesia to Egypt.  It is now looking to expand its footprint in North Africa.

Similarly, Kuwait’s Zain Group is also a giant of the regional industry with a presence in eight territories around the Middle East and North Africa, and plans to grow further. Likewise, Qatar’s Ooredoo, formerly known as Qtel, is making strides in some of the world’s least developed telephony markets, such as Myanmar.

If any of this sounds familiar, that’s because it is.

The 2000s were characterised by many of these operators investing billions of dollars in some of the world’s most exotic markets, before being forced to withdraw for a number of reasons.

In 2008, for example, Etisalat was unexpectedly made to cancel plans for expansion into Iran after being led to believe it had won the rights to buy a €300m ($411.9m) licence. It turned out it had not, with Tehran quickly cancelling the agreement without making public any reason.

The company will also be eager to forget its experiences in India, where it was effectively kicked out in 2012 after becoming dragged into a major 2G spectrum sale scandal in the country.

In recent months though, Etisalat appears to have rediscovered its taste for overseas diversification, after successfully bidding $5.7bn to buy French conglomerate Vivendi’s 53 percent stake in Moroccan mobile operator Maroc Telecom.

In what appears in some aspects to be another reversal, Zain is also seeking to increase its presence in North Africa by boosting its stake in Morocco’s inwi from its current 15.5 percent. The operator has also said it is looking at similar opportunities in other countries in the region. This comes four years after the group sold the vast majority of its African assets to India’s Bharti Airtel in a $10.7bn agreement.

To what extent then, have the Gulf’s operators rediscovered their appetite for big-ticket acquisitions in foreign shores?

Scott Gegenheimer, the US executive who took over as CEO at Zain in late 2012, says that the company is actively seeking buyout opportunities both in the mobile space and in complementary markets, such as internet service providers (ISPs).

“We are looking for acquisitions, both large mobile operators and also in adjacent markets,” Gegenheimer tells Arabian Business. “I think maybe over the next 18 months to two years, you’ll see much more in the adjacent markets, looking at ISPs, data centre providers, fibre plays and content. On the larger acquisitions we want to stay in the MENA region. North Africa is interesting for us, but the area that is challenging is valuations.”

Gegenheimer adds that Zain does not have a price bracket allocated for acquisitions, but that any buys have to be “realistic” in terms of cost.

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One territory in North Africa that Zain has actively targeted is Morocco. The telco currently holds a sizeable shareholding in inwi, the kingdom’s third-largest mobile operator, and is keen to expand upon this, Gegenheimer says. “We think it’s a very well-run company, we’d love to increase our stake,” he admits.

Elsewhere in North Africa, Gegenheimer says that Zain would also be interested in management contracts in Libya, after failing in a bidding process for one with one of the country’s operators last year. “If they want to do a management contract we’d be more than happy to move in and do it,” he says.

Egypt could also be on Zain’s radar, Gegenheimer continues, although he suggests that the market is perhaps too mature, as it is already served by three domestic operators.

“Egypt is a very interesting country. It’s a very large population and strong ties to the MENA region. It’s interesting, but they’ve got three strong players there, and they’re talking about a fourth licence there with Egypt Telecom, but it’s hard to say what will happen there in the future,” he explains.

Gegenheimer says Zain is not turned off by the political turmoil facing North African markets post-Arab Spring, including Libya and Egypt. The group does have demonstrable experience of operating successfully in politically unstable countries, being one of the first telcos to enter Iraq following the fall of Saddam Hussein in 2003.

“Generally when you have a large portfolio, we have eight countries that we operate in, it spreads out the political risk across countries,” Gegenheimer claims.

Zain, which in its most recent financial quarter posted near flat profit growth to KD51m ($180.6m), is also seeking to expand more into adjacent services as a way of boosting earnings. Like many industry players around the world, the company has been impacted by the emergence of free online telephony products such as Skype, as well as increasing competition in a number of markets.

One way of diversifying is to increasingly move into more business-focused communications and data services, Gegenheimer says.

“We’re a mobile consumer company today. A very large percentage is purely the consumer side.

“We need to move into the enterprise and the ICT sector, and become an integrated service provider. It’s one of the reasons that when we talk about the M&A, we’re looking at those data centres and fibre plays. We think most of the growth is going to come from that area,” he explains.

Zain is not the only operator looking to sharpen its focus in North Africa.

The UAE’s Etisalat, the region’s largest telecommunications operator by some stretch, recently confirmed a deal to buy a 53 percent stake in Morocco’s Maroc Telecom, after beating off competition from Qatar’s Ooredoo.

According to Matthew Reed, principal analyst for Informa Telecoms & Media in Dubai, the move is somewhat surprising, given the high saturation level of Morocco’s telecommunications market. He highlights that in Maroc’s latest financial results, domestic revenues actually fell 8.4 percent on the back of increased competition, underlining the limited growth opportunities.

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“The difficulties are that in emerging market terms Morocco is relatively mature by some standards. There’s three mobile operators and mobile penetration is relatively high. It’s also very competitive,” Reed says.

He adds, though, that there are “growth opportunities” in the country, mainly in terms of mobile and fixed broadband services.

Reed also points out that Maroc has extensive foreign operations in other parts of Africa, including Mauritania, Burkina Faso, Gabon, and Mali. These continue to show strong revenue growth, increasing by 9.5 percent in the first nine months of 2013, according to Maroc’s financial statements.

Reed says that by buying into Maroc, Etisalat would be indirectly extending its footprint in some of the continent’s other emerging markets.

“Maroc Telecom has these subsidiaries in a number of Sub-Saharan African countries and they’re doing pretty well. Etisalat also has some interest in Sub-Saharan countries and there is talk that they’re wanting to take advantage of this expansion. They might use Maroc as a sort of managing unit for their portfolio in Sub-Saharan Africa,” he believes.

Africa is not the only region on the international agenda. Ooredoo, the larger of Qatar’s two telecommunications providers, earlier this year successfully bid for one of two new mobile licences issued in Myanmar, the South East Asian country known formerly under British administration as Burma.

Ooredoo’s CEO Dr Nasser Marafih tells Arabian Business that the operator plans to launch 3G mobile services in the third quarter of 2014.

The country, which for decades was practically allergic to foreign investment due to long-term military rule, is one of the world’s least developed telecommunications markets. Served by a single state operator, mobile SIM cards were reported to sell for upwards of $250 each. However, following reforms to open up the former military dictatorship three years ago, more than 90 operators were said to have expressed an interest in a tendering process to provide mobile services.

Dr Marafih says that in terms of mobile penetration, the current level in Myanmar is “below 10 percent” and that Ooredoo was aiming to capture “30 percent to 50 percent” of the market in the “coming year or two”.

To achieve this, the company will invest billions of dollars on new-build infrastructure across the country, which will likely be shared with Norway’s Telenor, the other incoming provider.

“We are building infrastructure as we speak. So the plan is in the third quarter that we will launch,” Dr Marafih says. “We will be leapfrogging 2G to 3G, as our strategy is to focus on data and broadband. It makes a lot of financial sense from an infrastructure point of view. We [will] have some discussions with them to try to share as much as possible, which is good. We’re going through that process of trying to share. The idea is to share as much as we can, both the transmission, towers and even power.”

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As a market it can be argued that Myanmar is fraught with difficulties, ranging from stunted economic growth as a result of low consumption, to inter-communal violence in its rural regions. Dr Marafih concedes that the country will have more obstacles ahead, ranging from ensuring power supplies are not interrupted, to sourcing the needed materials to build cell towers.

“Almost any emerging market, whether it’s Africa or Asia, has the same dynamics. But we know that this is an operation that can be justified because of the low penetration, [and] the demand is huge,” he explains. “But of course the challenges are there, like everywhere you build a greenfield operation.”

Informa analyst Reed agrees that Myanmar is still very much a frontier market, and Ooredoo’s decision to expand here represents just how few opportunities there are globally.

“Many so-called emerging markets already have several mobile players. What’s unusual about Myanmar is that it’s a substantial country with penetration of only about 6 percent,” he says. “There are big growth opportunities, but there can also be all kinds of risks [such as] political instability and lack of economic development. There’s often all kinds of infrastructural problems to deal with which can be difficult and costly.”

One of the most lucrative international opportunities for Gulf operators over the last decade has been Iraq. Since entering the country following Saddam Hussein’s ousting in 2003, Zain Iraq has grown to account for almost a third of the group’s total subscribers and around 40 percent of its overall revenue. Domestically, Zain Iraq has close to 50 percent share of the mobile market and in the first half of 2012 generated $855m in revenue. Zain Iraq is expected to raise more than $1bn in an initial public offering on the Baghdad bourse later this year.

Asiacell, majority-owned by Qatar’s Ooredoo, has enjoyed similar fortunes. In February last year, the company raised $1.27bn in a public float, while it holds more than a third of market share in the country.

After decades of neglect, the sector would appear to now be flourishing. Not everything in the garden is rosy, though. Revenue streams have begun to dry up of late as political wrangling has delayed for several years an auction of 3G licences, which would greatly increase the capacity of operators to roll-out more advanced mobile data services.

It is now understood that licences will not be auctioned this year, with the Iraqi government likely to start bidding at more than $300m a piece.

Ooredoo’s CEO Dr Marafih says that the hold-up is not acceptable. “The country needs it, the people need it. We are ready to deploy [it], but it has to be done at the right price. What they’ve put is not reasonable at all in our view,” he believes. “That’s something that we’re discussing with the government.”

For Informa analyst Reed, the 3G situation represents both the best and worst for Gulf operators that have ventured overseas. “Iraq is a very important market for these operators, they’ve been making substantial revenues and profits,” he explains. “[But the 3G issue] is very frustrating for the operators, because they obviously want to maximise their growth, but they’re being held back by the lack of progress on the licensing.”

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