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Wed 4 Feb 2009 04:00 AM

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Taking stock

Despite plummeting business and consumer confidence in the region, telecom operators that make the right moves stand to emerge stronger from the downturn.

Despite plummeting business and consumer confidence in the region, telecom operators that make the right moves stand to emerge stronger from the downturn.

The effects of the global economic downturn on telecom vendors has been brutal, with some of the world's major equipment makers, such as Motorola and Ericsson, shedding thousands of jobs in a bid to cut costs and avert a similar fate to that of Canadian telecom equipment maker Nortel, which filed for bankruptcy in January.

But while job losses among vendors may have grabbed the headlines and heightened concerns about the effects of the credit crisis on the wider telecoms sector, most telecom operators in the Middle East and Africa remain optimistic about the sector, despite signs that the global economic downturn is increasing its grip in the region.

Indeed, most operators and telecom analysts are convinced that telecom operators in the region have a certain level of immunity to recession and that growth will continue, if slightly slower than in previous years.

Most analysts agree that demand for telecom services will remain strong, mainly because people need to talk, and would rather cut back spending on areas other than telecoms. "Ultimately consumers aren't going to be changing their behaviour significantly," says Ghassan Hasbani, a partner with analysts Booze & Co.

"They might cut down on eating out, holidays and property, but telecom is essential. In fact at times like these when they cut down on other things they tend to spend more on telecoms. Even on the enterprise side, when business people travel less, they tend to spend more time on conference calls and video calls."

But Hasbani admits that the financial crisis could affect the behaviour of telecom operators, whose boards are likely to exercise greater caution in their expenditure and expansion plans.

"There may be a slowdown in capital expenditure...it's like a ‘wait and see' period, but this kind of slowdown is not really justified. It's a predominantly psychological caution," he adds.

 But whatever their financial position, regional operators should use the downturn to take a step back and evaluate their current position, as a slowing economy affords companies space to take stock of their operations, according to Hasbani.

This is particularly important for the fast growing operators in the region, such as Etisalat, Zain, and Qtel which are on the cusp of becoming global operations.

Hasbani says that these regional operators - which he views as being at an earlier stage of development compared with some of their truly multinational Western counterparts - can turn the slowdown to their advantage by using it as "breathing space" to look at internal processes such as management structures, and systems to share best practice throughout their organisations.

This is particularly important for regional operators that have undergone rapid expansion in the past few years, not least because they may have neglected to implement important internal checks and procedures, partly because they were so focused on growth.

Some regional operators that have bought assets around the world need to ensure that they operate as global organisations rather than what Hasbani terms "clusters of assets".

And while operators with the financial clout should continue to invest in their networks and operations, Hasbani says that this is the ideal time to focus on maximising efficiencies and developing best practice across the group.

"It is the right time now to work on the synergies, the global network, and the global services and bring the international organisation together,' he says.

"This is a golden opportunity now for them, since M&A activity is slowing down. It is a good opportunity to consolidate the portfolio globally and make sure it is working well as one organisation."

While Hasbani stresses that companies don't necessarily need to centralise everything, he says that they can ensure they operate as one entity in coordination with their customers, vendors, and also internally with human capital. "They can make sure they have one global management group, one talent group that can be shared across the operation."

"This crisis gives operators a chance to slow down a bit and take stock of their position locally and globally. The winners are going to be those who will do this exercise and not shy away from investing networks and services."

Operator perspective

Qtel is just one regional heavyweight that intends to make use of the slowdown to focus on developing best practice across its rapidly expanding group. "Our strategic focus for the coming year will be consolidation and building synergies between the different national operations within our business," Dr Nasser Marafih, CEO, Qtel, told CommsMEA.

"We have made some very important acquisitions in recent months - including our investment in Indosat - which offer tremendous potential for value creation, particularly if we can drive operational efficiencies. In addition, there are shared synergies and learnings that we can transfer across the group to make us more competitive and ultimately more profitable."

Kuwait-based operator Zain is taking a similar approach. The company's CEO, Dr Saad Al-Barrak has already put together a "task team" that has multifunctional representation and is charged with boosting efficiency throughout the group, according to Ibrahim Adel, group communications chief at Zain Group.

"[The task group] is going through the operations one by one, with the biggest markets getting the first look. They are trying to find ways to extract synergies, to introduce more efficiency. That is normal for us. It is something we have anticipated doing and we are doing it now," Adel says.

Adel also confirms that Zain is refusing to cut back on important internal investments, such as implementing corporate social responsibility programmes.

"Sometimes organisations have a tendency to cut back on corporate responsibility type projects. We are not cutting back on anything. It was confirmed when we had our budget review that we will fulfill all of the programmes and continue with them because we believe that is an excellent long term investment.

Furthermore, despite the problems affecting some operators in the West, such as the UK's BT Group - which made its second profit warning in less than three months in January owing to difficulties at its Global Services division - most of the Middle East's bigger operators remain bullish about 2009.Zain's Adel agrees with many analysts that the region's telecoms sector has a degree of immunity from the economic downturn. But he also points to Zain's broad geographical footprint as stabilising factor that should help ensure continued growth for the company.

"We are working in markets in the Gulf that are very affluent, all the way to some of the poorest countries in the world such as Sierra Leone and Chad. There are some markets that are slightly more affected than others."

But Adel is under no illusions about the severity of the financial crisis and admits that Zain's board is monitoring the situation closely. He points to currency fluctuations - which KSA operator STC recently blamed for a 62% fall in its Q4 profits - as just one challenge facing multinational operators.

"At a macro level we are monitoring any currency fluctuations as much as we can. [The falling value of Pound Sterling] is having global implications but it is spilling over into a number of other markets. We are mitigating that impact because as you would expect, our services are pegged in local currencies and we report our results in Kuwaiti Dinars and US dollars," he adds.

In terms of funding, Adel says Zain is in a strong position, although he admits that credit is more difficult to gain. "On the bank lending side, things are difficult but we have some very strong relationships with banks and we are relying on that."

He adds that Zain raised US$4.49 billion from a recent capital increase, and that it also recently repaid a US$1.2 billion loan. The company has also paid for its share of Iraqna assets in Iraq - a sum of about $500 million - using funding from its recent capital increase.

With the company's finances on an even keel, Adel is confident that Zain will be able to continue with its planned investments in 2009, and even that the company will meet its growth targets this year.

But while some of the regional operators may be cash-rich enough to continue with significant network investments during the downturn, others are less fortunate.

Milan Sallaba, partner at international management consultancy Oliver Wyman, stresses that the ability to expand in a global down-turn should be viewed as a luxury.

"For operators with high leverage, and particularly those with significant short-term debt, the main issue will be higher debt repayments going forward eating up cash flow as new credit facilities prove to be more expensive than the ones they replace.

"Second, revenues may fall as growth slows and consumers watch their wallets. Those carrying a lot of debt in a situation of stagnating revenues are in trouble and will feel the pinch much more than those with excess cash that can easily adjust their expansion plans to deal with any revenue shortfalls if they have to," he adds.

Indeed, smaller operators, including new entrants in emerging markets, may take a bigger hit from the financial crisis, not least because they are likely to be more dependent on bank credit.

While Wilson Varghese, CEO of Iraqi fixed wireless operator Kalimat Telecom, remains upbeat about the coming year, he fears that other new operators may have a tough time.

"New operators can be affected due to the slowdown or no support from banks and organisations like IFC due to the turmoil. This could slow the rollout process and also could affect IPO and investor potentials," he says.

But on the upside, Varghese concedes that the downturn could also bring some benefits to operators, as the costs of rolling out networks could fall while demand is likely to remain strong.

"Its simple, in good times and bad times people have to talk, and the current economic climate can be beneficial for both operators and customers. The sector will have to consider how to offer the best value for money, with innovative product bundling, and better value added services," he adds.

Acquisition trail

The telecom sector in the region has experienced huge consolidation in the past few years, with the larger operators buying up smaller players and licences in new markets.

But the number of acquisitions peaked in 2007, and many people close to the sector think this decline in deals will continue in 2009, although a more difficult financial climate could also lead to a rise in under-priced assets, according to Booze & Co.

Certainly the economic downturn already appears to have dented investor confidence in the region, with falling asset prices and waning interest in new licences.

For example, a tender for Egypt's a second fixed line licence met with a lacklustre response, and was postponed indefinitely from its December 2008 deadline, while licences in Jordan and Lebanon have also been delayed.

Meanwhile, the auction for Bahrain's third mobile license also attracted little interest. Three of the companies that registered to bid for the licence withdrew from the competition, leaving STC the only bidder.

Zain's Adel insists that his company will continue to look at good opportunities as and when they arise, although he admits the deal making landscape has undergone a huge change owing to a lack of credit.

"The re-evaluations that occurred and impacted the world's equity markets obviously make it seem like there are some really attractive acquisition markets, but there is no financing available to take advantage of that," he says.

Adel adds that many telcos interested in selling their business "are still thinking in terms of last year's valuations and don't want to sell at these prices."

Qtel's Marafih is also adamant that his company will continue to look for "strategic investments" that fit with the operator's broader plans for growth. "On the international side of our business, we are hopeful that, with the global recession, acquisitions will become more affordable and we will be able to continue to capitalise on opportunities to increase the footprint that we already have achieved," he said.

For Booze & Co's Hasbani, operators that plan to continue with their expansion plans are likely to be making the right move.

"Just sitting back and not thinking about getting out of this situation will be disastrous for some companies, so it is the time to think ahead,' he says.

Hasbani also thinks that there will be significant acquisition "before the end of the second quarter of 2009", as more realistic asset prices give an added impetus to deal making.

"A transaction is bound to happen. Sellers have been more reluctant than the buyers at this stage. There are a few companies with good cash position able to buy, the question is whether the seller is ready to sell at a lower cash premium than they are used to," he adds.

Forging alliances to beat the downturn

Telecom operators could better position themselves to succeed during the economic downturn by collaborating with rivals, according to a new report from consulting firm Oliver Wyman. The report, "Beyond Cost-Cutting: Born Competitors Learn to Collaborate", says that traditional cost-cutting methods are insufficient to give companies an edge over their rivals.

Instead, companies should consider forming "innovative alliances" to share infrastructure and expand without the need for major capital investments. The report highlights Bharti Airtel, India's leading mobile carrier, which formed an independent wireless tower company with competitors Vodafone India and Idea Cellular. The new joint venture, Indus, will lower overall tower development and leasing costs by pooling them across the three companies, the report claims.

While Bharti will transfer 30,000 of the 52,000 towers it owns to the new entity, it will gain access to 40,000 of its competitors' towers, increasing its total number of towers by 75% and improving its access to rural markets. An expansion of that scale would have cost Bharti up to $2.4 billion on its own, according to the report.

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