Gulf Arab states, which generate hefty returns from their stakes in regional telecoms firms, will need to reduce those ties so the industry can consolidate, generating greater income in the long run, analysts said.
Slumping earnings, stiff competition and ever more disgruntled minority shareholders characterise the Gulf telecoms sector where state bodies own controlling stakes in ten of the fifteen regional mobile licence owners.
"Middle East operators are facing an erosion of their traditional revenues, with prices falling in most countries," said Marc Biosca, principal at AT Kearney. "Telecoms is seen more and more as a yield industry, rather than a growth industry.
"Shareholders - governments - will realise operators will gain competitive edge and therefore deliver higher profitability levels by being part of a larger telecom group."
Regional telcos serve about 39 million people in the six Gulf Co-operation Council (GCC) states - two-thirds of whom are in Saudi Arabia - and most governments have a protectionist bent, a stance that is harder to sustain as revenues sag.
Annual profits at four of the Gulf's six former monopolies - UAE's Etisalat , Saudi Telecom Co (STC), Omantel and Bahrain's Batelco - fell by more than ten percent last year and first-quarter earnings were also downbeat.
"The ultimate trigger [for consolidation] will be the absolute necessity to cut costs in an industry with revenues and margins under pressure from different angles," said Pedro Oliveira, partner at consultants Oliver Wyman.
Mobile penetration rates in the Gulf are among the highest in the world, ranging from 130 percent in Kuwait to more than 230 percent in the UAE.
While Gulf telcos have sought licences in other Gulf markets - STC has licences in Bahrain and Kuwait, Etisalat is in Saudi and Qatar Telecom is in Oman and Kuwait - there have been few mergers. Outside of the Gulf, STC, Etisalat and Qtel operate in more than 30 countries combined.
Etisalat, the Gulf's largest operator by value, withdrew a $12bn bid for Kuwait's Zain in March and analysts forecast Etisalat, Qtel and STC will likely be acquirers in any consolidation.
"Companies that don't have a big footprint or operate in a single market could be potential takeover targets," said Irfan Ellam, telecoms analyst at Al Mal Capital. "What's up for grabs? Maybe Omantel and du , while Batelco is not that big."
Rising dissent from minority shareholders will be another trigger for consolidation, together with a shift away from a public sector culture at incumbent players.
Governments, which use telecoms firms to implement state policy such as building out national ICT infrastructure, will likely be reluctant to scale back their ownership of the telcos.
"Etisalat is a flagship of the UAE," Nasser Bin Obood, acting chief executive of Etisalat, told a conference last week.
Consolidation would also aid acquisitions outside the Gulf.
"They end up competing against each other and pushing M&A prices up. Premiums on M&A transactions are 30, 40, 50 percent above the market price," said Amersi. "There are too many people with too much money chasing too few things."For all the latest tech news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
Subscribe to Arabian Business' newsletter to receive the latest breaking news and business stories in Dubai,the UAE and the GCC straight to your inbox.