By Edward Attwood
Batelco group CEO Peter Kaliaropoulos lists the challenges facing one of Bahrain’s biggest listed firms
Who has the toughest job in the Gulf? Is it the CEO of a real estate developer with a heavy concentration on Dubai property? Or might it be the head of a local finance house with exposure to certain family-owned businesses in Saudi Arabia? Competition may be fierce, but it’s possible that Bahraini national Rashid Abdulla may have just been handed that role. At the end of this month, Abdulla will become the first local to take the top spot at Batelco Bahrain, the home division of the former incumbent telco. His predecessor, Gert Rieder, held the job for about eighteen months, but resigned for personal reasons in October. In an interview with Arabian Business last year, Rieder spoke candidly about the difficulties the firm faced in a market that is saturated with both users and competition.
But that’s really only half the Batelco story. While the company may be fighting to hold its end up at home, the focus for group chief executive Peter Kaliaropoulos has been abroad. At the end of 2010, Batelco had won just under ten million subscribers, an astonishing rate of return considering the firm had around five million at the beginning of the year. But when introducing first-half results for 2010, Kaliaropoulos claimed that the Bahraini market was ‘ex-growth’, which sounded alarmingly like the firm was throwing in the towel. Naturally, of course, the CEO doesn’t see it like that, but he does acknowledge that tough challenges lie ahead.
“If you look at the saturation levels [in Bahrain], it’s 160 percent for mobility, and broadband at around 110-115 percent per household,” Kaliaropoulos points out. “What you’re also seeing in the market is price erosion due to extra competition so even if more customers take up services, the overall prices are coming down, so revenue growth for the telecoms operators like us in that market at best is flat.”
That process isn’t helped by the Telecommunications Regulatory Authority (TRA)’s plans to introduce number portability for both fixed and mobile lines in Bahrain during the course of this year. Telecoms analysts tend to see the launch of portability — where customers can switch operators without losing their numbers — as bad news for the biggest telco, but Kaliaropoulos says this is only true to an extent. In fact, the company might even be helped by the plethora of competition in the mobile space, especially given the launch of third licensee VIVA early in 2010.
“When Zain [the second operator] came to Bahrain, there were 300,000 customers, and when VIVA came here there were about 1.2 million customers,” he says. “The point is, we do not expect a lot of movement on the mobile side — if someone was unhappy with one brand, they would have taken another. Also, the growth on the mobile side is coming from pre-paid. Business customers over the last five or six years have had choices, so they would have moved on. And if you look at what happens when a new entrant comes in, it’s the second telco’s customers who shop around for a better deal and then move again.”
However, it’s on the fixed-line side — where the choice has been Batelco lines or nothing — that the CEO does see some future impact. Even then, those customers will be moving to another licensed operator which itself is a wholesale customer of Batelco. So the telco won’t lose that customer completely, although it will concede some of the margin to the competition. “So yes, we do expect an impact six months from now for mobiles and eight months from now for fixed lines,” Kaliaropoulos says. “You will see any impact towards the final quarter of 2011 and it will not be material in our results for this year.”
As for the relationship with said regulator, the CEO describes it as “maturing”.
“I’ve got to say there is a golden rule — at the end of the day, regulators always win,” he says. “The regulation and telecoms law – we have challenges with the regulator and will always have. It is not about the law — which is very similar to many other countries — it’s the interpretation.”
As the incumbent, every new rule introduced by the regulator is bound to hurt Batelco, especially in a market that is not growing. Kaliaropoulos describes the relationship between the two sides as being “like a boxing game” at times over the last two or three years, but adds that they are debating issues more professionally, submitting very detailed papers, and that the “tone of communication has improved greatly”. In addition, he points out, almost every regulatory hurdle that can be implemented has already been introduced.
“From that point of view, we’ve accepted all of that — we know these decisions are being implemented so we’re getting on and focusing a lot more on the customer because we can’t delay any of those decisions,” the CEO says. “There’s nothing more, there’s no more reason to fight the regulator. The only long-term issue may be structural separation [which requires an operator to separate its network infrastructure from its units offering services on the same infrastructure], but again, in a small market like Bahrain, we don’t believe structural separation makes sense.”
It is some consolation for Kaliaropoulos that the other Gulf markets will now have to go through the regulatory process that Bahrain has already completed. While he may have criticisms of the way reform at home has been carried out, he’s in no doubt that the market is better off as a result.
“We operate in some of the other markets, such as Saudi Arabia and Jordan, and the regulatory regime in Bahrain is far more advanced,” he says. “If I’m critical of something, it’s that they [the regulator] has cherry-picked all the latest regulatory initiatives and dropped them in the marketplace. What that has done is make the marketplace a lot more competitive but at least there’s a lot more transparency in Bahrain.”
But it’s those overseas markets on which Batelco’s hopes for the future rest. With smaller pockets than other Gulf rivals such as Zain, Etisalat and Saudi Telecommunications Company (STC), the Bahraini firm has had to target acquisitions and entry into other markets extremely carefully. What may have seemed like a hindrance a couple of years ago is now looking rather like a piece of good fortune. Zain, for example, invested heavily in obtaining licences in sixteen African countries, gaining access to 42 million subscribers along the way. But last year, the Kuwaiti giant opted to sell those assets for $9bn to Indian major Bharti, effectively ending the company’s pretensions to be a global player. While Zain might have a got a decent price for its African operations, the divestment has led some analysts to question whether the expansion was really necessary in the first place.
UAE incumbent Etisalat has also used its sizeable wallet to open up doors elsewhere in the world, especially in India, where subsidiary Etisalat DB has been slow to roll out second-generation mobile services. India was seen by many as the great white hope of the global telecoms market, but exorbitant licence costs and extremely low revenue per user due to hefty competition have led some firms to revise that view. However, Batelco’s interest in the country is on a slightly smaller scale than that of its Gulf counterparts. The firm has a 42.7 percent equity interest in S Tel India, and Kaliaropoulos sees the country as a long-term bet, despite the short-term cost.
“India is a very tough market — if you look at our operating profits in the third quarter, these were pretty steady quarter-on-quarter, but out net profits were impacted because we’re booking losses from our India operation,” he says. “It’s a start-up operation and will take four to five years to break even. So profits will be challenging for the next four years, and I’m going to be saying this every quarter.”
S Tel India is licensed to provide services to 230 million customers in several Indian states, its potential is underlined by the fact that penetration in those regions only amounts to around 30 percent. Kaliaropoulos says that the venture has contributed around 2.3 million customers in 2010, so not far off a quarter of Batelco’s entire consumer base.
“We believe if you go for a national licence in India, there is no business case,” he adds. “We didn’t and some other carriers, including one from this region, paid a lot of money, got the licence, and then decided that it doesn’t make sense so they’re not rolling out the network. We went for a niche strategy instead.”
In Jordan, Kaliaropoulos believes the firm will end up with just over two million customers in 2010, despite the comparative weaknesses in the economy. And despite the geopolitical issues in Yemen, the CEO says the country is also doing well. One area which is proving slightly more difficult is Saudi Arabia, where Batelco holds fifteen percent equity in broadband and voice provider Etihad Atheeb. Subscriber numbers are growing, but Kaliaropoulos says that the regulatory environment has, again, not been particularly favourable.
“In Saudi Arabia, we’re delivering broadband customers through WiMAX growth,” he says. “But competitors can do a lot more — they can bundle, for example — and we’re funding it a little bit tougher than we expected. But again we’re delivering.”
But Batelco has no plans to halt its overseas acquisitions, especially given the decline in its home market. Kaliaropoulos freely admits that the only way the firm will grow in the next three to five years is via buy-outs.
“To deliver to our shareholders some of the targets that we as a management team have set ourselves — almost double the enterprise value five years from now — we can’t do this organically,” he says. “We’re looking to invest, predominantly to acquire companies that are operating or that are about to start.”
What that means, effectively, is that Batelco won’t be looking to acquire new licences, which rules out Syria and Lebanon. Elsewhere, the firm is looking at North Africa and Asia Pacific for further growth. For now, Batelco has no plans to tap to take the Zain route and tap the sub-Saharan Africa region.
“We are finding a lot of distressed assets in Africa, companies that are really need more cash, are not growing, and that really does not fit with our strategy,” he says. “We don’t mind paying a premium for a solid company that keeps growing, but to pick up distressed assets in markets we don’t really know — it would be asking for trouble.”