Have the GCC telcos turned a corner?

Last week, Etisalat — the UAE’s former incumbent telco — announced that it was planning to sell off most of its stake in PT XL Axiata, Indonesia’s third biggest phone operator. The firm is hoping to sell off the stake for roughly half a billion dollars, making a slight profit on the $440m it paid for the investment around five years ago.

The move represents just the latest in a long line of retrenchments by Gulf telcos, which spent big to move into far-flung markets during the boom years, but have since found it tough to extract profits from those investments. There’s no better example of this retreat than Zain Group, which sold its operations in thirteen African countries to India’s Bharti Airtel for $10.7bn two years ago.

Since then, question marks have been raised over Zain’s long-term strategy, particularly after a shareholder revolt prompted the collapse of Etisalat’s plan to take a 46 percent stake in the firm, and the inability to sell its troubled Zain KSA unit.

Etisalat, too, has had to rethink its overseas plans. According to Reuters calculations, the firm spent $12.6bn between 2004 and 2009 buying up a range of international licences, stakes and companies. Other than the move out of Indonesia, the telco has also been forced to withdraw from India (due to a licensing scandal that forced the firm to write off $827m) and Etisalat’s new group chief executive, Ahmad Julfar, has indicated that it will look long and hard at existing assets to ascertain whether they are worth keeping.

Meanwhile, Bahrain’s Batelco has exited its investment in India, and is also facing blistering competition at home, as three mobile licence holders compete for a slice of the 1.3 million strong population.

However, there is evidence to suggest that Gulf operators are turning a corner. All of these companies have the resilience to overcome these short-term difficulties. Of the six former incumbent GCC telcos — Etisalat, Zain, Saudi Telecom (STC), Batelco and Omantel — none are projected to have an EBITDA margin of less than 35 percent at the end of this year, while Qtel and Etisalat are expected to top 45 percent.

And after a tough year and a half, Etisalat posted a seventeen percent increase in profits in the second quarter. At the time, the firm said it would concentrate on operations existing in high-population, high-growth markets like Saudi Arabia, Egypt and Nigeria. Zain’s recently struck deal with Vodafone could provide the Kuwaiti firm with access to the latter’s phones and services. In addition, Zain could also tap into Vodafone’s vast experience in international markets.

Meanwhile, after roughly three years of consolidating its investments, Qtel returned to the market in a big way last month. In what could well be the biggest M&A deal this year, the Qatari firm received regulatory approval to buy the 47.5 percent stake in Wataniya that it does not already own for $2.2bn.

Challenges, however, still remain. With only two mobile licence holders in both Qatar and the UAE — compared to three in Kuwait, Saudi Arabia and Bahrain — the jury is still out on whether the level of competition in the former countries is high enough.

In the UAE’s case, Etisalat has already lost significant market share to du. The introduction of new licences in either country would put a severe dent in current operators’ revenues. And while mobile number portability in the UAE and Qatar has long been promised, it has still not been implemented.

But, in comparison to many of the world’s other big telcos, Gulf operators are still sitting in a relatively solid position. When the next period of international expansion begins, they should have the experience and the know-how to more effectively manage their investments.

Ed Attwood is the Editor of Arabian Business.