The telecoms industry across the Middle East and Africa (MEA) region is at a turning point, according to Kristoff Puelinckx, managing partner of Delta Partners.
"More competition is coming in, new services, new players, but still in a high growth environment, which is why this region is getting a lot of attention from international investors and operators," he says. As part of a series of white papers entitled Trends in Telecoms, Delta Partners - a combined advisory and investment company - is advising some of the biggest regional players in the Middle East and Africa, on a range of topics from expansion to commercial and business strategies. It has also put together a research paper discussing the emergence of global industry titans and implications for emerging market players.
Markets like the Middle East and Africa have become the centre of the industry, where people are looking because they are some of the future growth engines.
"What's happening today is that the global brands in their local markets, mainly in Europe and the US, have matured, and growth has flattened off, but they still have shareholders who continue to expect high growth, and still see the telecom industry as a dynamic sector. Because of this they are increasingly forced to look for new growth drivers," says Puelinckx.
A case in point is Vodafone. The European operator - that exited Japan after its venture into the market proved premature - decided recently to move into Turkey and India. "Vodafone clearly shifted its strategy from consolidating its position in mature markets to moving into emerging markets, and pushing for higher growth there," Puelinckx explains.
Delta's paper divides global telecom players into three main categories: Global titans, European players, and Emerging challengers. Global titans are limited to four or five European-based companies that have expanded beyond their regions and that are growing increasingly global. These include the likes of Vodafone, France Telecom, Deutsche Telecom, and Telecom Italia. The forecast predicts that these titans will continue to grow and expand with even bigger deals on the horizon. The total cash available to these global titans in the next two years is estimated at over US$170bn. Puelinckx says titans are the "potential consolidators" of some of the local and regional players especially the MEA region, parts of Asia, and the former Soviet and Eastern European countries. Latin America is also a highly-targeted growth market.
"Markets like the Middle East and Africa have become the centre of the industry, where people are looking, because they are some of the future growth engines," he says, adding: "If you look at the subscriber division right now, two thirds of it is in mature markets, one third is in emerging markets.
"If you look at where the growth is going to come from new subscribers in the next three to four years, 60% to 65% will come from emerging markets and the rest from mature markets," he continues.
When it comes to regional players, Delta's research points to five major regional companies including MTC, MTN, Etisalat, Orascom, and Q-Tel. According to the report, the tremendous growth witnessed in the MEA region has been driven by the "understanding of the potential of the region when no one foresaw the explosive growth to come."
The report adds that highly committed boards and aggressive shareholders are driving the expansion, in addition to highly ambitious CEOs and management teams. The telcos will have further room to grow and enter new countries in their regions.
Currently, leading players in MEA have a presence in only 20 out of 70 countries, covering a maximum of 30% to 40% of the population. Puelinckx says it will be interesting to see what materialises in Africa in the next year, and which one of the regional five will dominate in that space. Before that happens, however, regional market leaders need to find growth and invest in growth markets, he explains.
"If you look at the cash they have available, cash sitting in the bank but also access to further debt, you'll find that a lot of these players will have US$30bn to US$50bn, which is above the market capital of some of the regional players," he says. Puelinckx also believes this capital could be put into the acquisition of some of the region's smaller players.
So what does the future hold for the region's big five? Puelinckx lists three possibilities. Firstly, a titan could emerge and buy one of the big five. Secondly, two regional players could team up and create a titan with a price to match that of a global giant. Lastly, regional players could continue to expand and grow aggressively via acquisitions in order to finally turn into global giants themselves. This final option is the most difficult, explains Puelinckx.
You need to make sure you bring the right products and services to the market, so then it becomes a scale issue.
"It goes step-by-step and you need the money to achieve that. They have some of the money but this can't be done overnight. For any of those regional players, given the league of the titans, it would need at least until 2010 or 2011." Puelinckx adds that "the name of the game" at a global level is "increasingly about size". In the last few years, one of the key drivers for regional players has been expansion, which has in turn led to repetitive buyouts of companies and licences in high growth markets.
However, despite having strong fundamental growth, regional players need to do more in order to compete effectively.
"They need to start to focus more on being efficient, on how they procure their equipment and manage costs," insists Puelinckx. "The largest groups have more scale potential to quickly develop new products and services and roll them out across a large number of countries.
With the growing number of acquisitions in the regional markets, it has also meant that deals have become more expensive. Examples include Q-Tel's hefty price for Wataniya Telecom and MTC's staggering US$6.1bn sealed bid for the third mobile licence in Saudi Arabia. The question, says Puelinckx, is not why they have become expensive, but why they were cheap to begin with. Now, however, the tables have turned. These markets have proven that they can sustain high growth, which raises more interest and breeds competition, subsequently pushing up the price.
Puelinckx believes that the telco market used to be cheap, but that as competition has grown, people have realised that the underlying potential in these markets is much greater than anyone had imagined. It is this that has pushed up the price, he argues.
He adds that companies want to consolidate and create bigger groups, therefore prices will continue to rise, but only to a certain level where valuations make sense. Otherwise, at some point, the bubble will burst. A clear trend these days, he says, is the commitment of senior management teams to some of these companies. He cites MTC as an example, saying this year the company made a commitment of US$3bn into Africa.
MTN is another player with a presence in Africa, however, it is playing a slightly different game. Instead of moving into Africa, it is moving further away from the continent into the Middle East countries and beyond.
UAE telecoms operator Etisalat has also shown African interest, buying more shares in Atlantic Telecom. Interestingly, a number of international titans have also started moving into the vast continent.
"Vodafone, through its partnership with Vodacom, expressed several times it wanted to strengthen its position in Africa. Also, France Telecom has recently made several smaller licence acquisitions, again selecting day one to further consolidate its position in Africa, after years of not being really sure of what to do with it," Puelinckx explains.
Among Middle Eastern telcos, however, the biggest investor has been MTC followed by Etisalat, with both seemingly intent on dominating the sector.
"They have been very explicit in terms of their global ambitions," says Puelinckx, adding: "I think both have clearly defined strategies on how to become a global player by 2010.
"Their actions show that they are on track. They continue to grow, acquire and expand in size and scope.
"I think those two will be the front-runners in the race. Q-Tel has started later with expansions, while Orascom has certain financial limitations so these two are at a different level," he says.
For Middle Eastern players like the UAE, Puelinckx believes it is becoming a "balancing act". While players need to continue to expand and grow, and either be acquired or merge with other companies, they also have to balance this with the challenge of increased competition at home, which requires that they become more efficient and competitive.
"Translating that to the UAE market, Etisalat had no competition at home which made it quite comfortable for them to look outside at the right opportunities to invest management time, people and resources in those expansions," he quickly says.
The UAE's fresh-faced second telco, du, is an interesting case, according to Puelinckx. Although experiencing a long start-up period, the operator is just beginning to pick up the pace.
"It's been complex. Du has tried to do many things at the same time such as fixed-mobile, internet and mobile," he says.
du has some high-tech services but so far it has been more of a marketing positioning strategy.
Puelinckx explains it will take time for things to settle down for du, adding that the company is learning from the market as it goes along. He predicts that in the next six to 12 months du will have a clearer strategy and is highly likely to become a good competitor in the market.
"Etisalat's position is very dominant. The big challenge for du is there is almost no growth in the market; no new subscribers and whatever subscribers they get they need to change from Etisalat.
"That's much more difficult than just being in a market with 20% penetration, where by merely growing the penetration, you get customers yourself," explains the Delta managing director.
Puelinckx stresses that as markets mature, operators need to have a much more segmented approach.
He says this is the right time for du to align its products and services portfolio, and have "very specific propositions", rather than a "blanket" approach to the market. "It [du] has some high-tech services but so far it has been more of a marketing positioning strategy rather than a real products or services portfolio."
Another regional trend that Puelinckx anticipates is the convergence between fixed and mobile lines.
When these two worlds come together, Puelinckx believes the customer's experience is enriched and more value for money is found in the market. He expects the broadband push to be the next big thing in the region.
"The big challenge has been the lack of extensive fixed-line infrastructure in most of the countries, except some of the smaller rich ones in the Gulf. Their WiMAX can play an important role because it's a fixed mobile technology that can provide fixed-line services through a wireless technology, which is much cheaper to deploy and can actually bring much more broadband to the market," he says.
He says this will get more people connected as well as using broadband in a much more aggressive manner. Puelinckx is convinced this is the way forward as a lot of attention is diverted towards mobile at present. And although mobile is still a very high growth market, the next wave will no doubt be broadband with WiMAX included as an enabler.
"WiMAX much more than 3G but the operators here haven't really figured out how to use that technology and bring interesting products to markets that leverage that," he says.
Overall, Puelinckx predicts further consolidation in the regional market along with three more powerful regional groups who will, by sheer size, become players on a global level.
This will lead to stronger competition and a more developed telecoms market similar to what Europe witnessed two years ago.
"You will see four or five players really consolidate the market, focusing not just on expansion but also on their own operations, driving more value from their existing customers, bringing new products and services to the markets and as such enriching the industry as a whole.
This will happen very soon. Then the market will really change."
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