Gulf telecoms companies have reached an interesting crossroads in their development. The era of rapid expansion has come to end, partly because of the global economic crisis but also because the growth in market penetration rates is slowing down. Current interest in taking over Maroc Telecom shows the money is still there for the right sort of strategic acquisitions but the focus has now switched to increasing average revenue per user (ARPU) and the introduction of new technology.
Many firms in most countries are now focusing on rolling out 4G infrastructure in order to boost their ARPU through increasing smart phone penetration and data charging. The era of common cross border 4G roaming is not yet here but Saudi Telecommunication Company (STC) and Viva of Bahrain have signed an agreement to offer a 4G roaming data service covering Saudi Arabia and Kuwait. In this case, however, the deal is eased by the fact that STC owns Viva.
Penetration rates are generally around 100% to 200%, with many adults holding two or three SIM cards or handsets in order to delineate different parts of their life, including work and home life. In contrast with many other sectors, most Gulf governments have made real progress in liberalising their telecoms markets. Although some companies remain fully or partly state owned, most countries now have at least three significant players and restrictions on access to some forms of online information do not appear to have slowed investment. Indeed, the Middle East as a whole is outperforming most other parts of the world for telecoms operators. The revenue of the world’s 10 biggest telecoms companies increased by a combined 2.8% in the final quarter of 2012, to $240.5bn. This broad figure hides wide variations, including falls in Africa and western Europe and growth of 7% in the Middle East. Jake Saunders, the vice president for core forecasting at ABI Research, said: “As the underlying lift from accumulating subscribers has matured, carriers are starting to cast around for additional revenue streams that don’t just boost revenues but also profitability,”
Despite the region’s high level of market penetration, the introduction of new devices and services continues to drive sector growth. Peter Sondergaard, the global head of research at IT consultants Gartner, told journalists: “The growth rate in the Middle East is higher than the global average. There is a high level of spending on consumer based technology and on subscription based services for mobile voice and data. That is essentially what is driving the market.” All analysis of the region’s telecoms prospects also point out its demographic structure. High fertility rates over the past few years mean that the Middle East and North Africa region has one of the youngest populations in the world, while young people are likely to spend a greater proportion of their income on telecoms products.
According to the Cellular Competition Intensity Index for 2012, Saudi Arabia remains the most competitive mobile phone market in the Arab world. Produced on an annual basis by the Arab Advisors Group, the index rates the number of licensed operators; the market share of the largest operator; the level of services available; and the cost of packages offered, among other factors in each country. A mark is awarded in each category and the results collated to give a final mark. All results are relative to the outcomes of other countries, so greater competition would not result in a better rating if all other markets had improved to a greater extent over the previous year. Perhaps unsurprisingly, Libya is the least open market in the region, but Kuwait, the United Arab Emirates and Qatar also all rank very badly. Oman ranks the best of the other Gulf states but still lags behind previous winner Jordan, plus Palestine and Egypt. Mohammed Al Shawwa, the country’s senior research analyst, said: “Saudi Arabia hosts four operational and licensed operators. Consumers have a choice of 24 prepaid plans and 26 postpaid plans. Saudi Arabia’s score benefited from the availability of smart phone plans, corporate offers, 3G services and ILD [international long distance] competition.”
There are currently three operators in Saudi Arabia: STC itself, Zain and Mobily, all of which now offer 4G services. According to figures from Saudi Arabia’s telecoms regulator, the Communications and Information Technology Commission (CITC), market penetration stood at 181.6% in 2012. Mobile broadband penetration reached 42.1% last year, overtaking the size of the fixed line broadband sector, with a penetration rate of 40.5%, for the first time. A spokesperson for STC said: “Broadband has become part of our daily life and the Saudi market is expected to grow by 8% by 2015. The infrastructure will be an ongoing process by the telcos around the world and increase the broadband speeds and offer different packages.”
STC, which previously held a sector monopoly, now has a market share of 48%; with Mobily behind on 41% but closing the gap quickly. Competition from newcomer Zain is helping to drive down costs for consumers, particularly for new services, but the Kuwaiti firm holds just an 11% market share. More competition is likely to come from an auction for three mobile virtual network licences, whereby operators would have to lease capacity from existing operators. It remains to be seen whether existing operators will be forced to offer capacity by new regulation, but such an arrangement has worked well in other markets.
Operators in the UAE also face a changing investment environment. The UAE ministry of finance has introduced a new royalty regime for Dubai’s two telecoms operators: Etisalat and Du Telecom, although still at different rates because of the government’s view over their varying financial strength. Du previously paid 17.5% on profits and 5% on revenues, but these figures will be gradually ramped up to reach 30% and 15% respectively in 2016. Etisalat, which is still 60% owned by the government of Abu Dhabi, will continue to pay 35% on profits and 15% on revenues. Etisalat’s post-royalty income from its Gulf operations reached Dh32.95bn ($8.97bn) last year.
Du has been in the process of establishing itself as a commercial competitor to Etisalat, since it secured the country’s second mobile operating licence in 2007. It now has a 48.1% share of the UAE mobile market by subscriber base. The company recorded a profit of Dh 467.9m ($127.38m) in the first quarter of this year, up
40.5% on the Dh333.13m ($ 90.69m) achieved in the same period last year. However, revenue grew far more slowly, up from Dh2.45bn ($0.66bn) to Dh2.63bn ($0.72bn). Chief executive Osman Sultan commented: “Efficiency and cost control will remain a strategic driver throughout 2013 and beyond. Growth in mobile data revenues reflects the ongoing shift in network traffic from voice to data, a trend we expect to continue.” Income from mobile data rose 32.8% over the year, to Dh520m($ 141.5m), although this suggests that there is still plenty of scope for growth.
Etisalat and Omantel are part of the consortium that is developing the new 100 Gbps Bay of Bengal Gateway (BBG) cable system, which will connect the UAE and Oman, with India, Sri Lanka, Singapore and Malaysia. Other investors in the project, which will greatly increase telecoms capacity between the Gulf and South and Southeast Asia, include Vodafone and Alcatel-Lucent. The BBG, which is expected to come into use in late 2014, is the latest link in the global telecoms network that should provide much greater capacity for operators.
Etisalat and other Gulf telecoms companies had made a series of large acquisitions during the telecoms boom but have adopted a far more conservative commercial position over the past few years. However, Etisalat and Ooredoo of Qatar are currently competing to take over Itissalat Al Maghrib (Maroc Telecom). Both submitted offers in late April after majority shareholder Vivendi decided to divest some of its assets as part of a large restructuring programme. A spokesperson for Ooredoo said: “Etisalat firmly believes that Maroc Telecom fits within its international expansion strategy and would complement its existing West African portfolio.”
French firm Vivendi currently holds a 53% stake in Maroc Telecom, which had a market value of $5.9bn at the end of April. Another 30% is retained by the government of Morocco, which also has the right to approve any sale of Vivendi shares and their acquisition by any third party. Potential suitors to take over the firm must therefore take Rabat’s position into account. The remaining 17% is traded on the Casablanca and Paris stock exchanges, but any company that buys Vivendi’s stake would also be required to make an offer for these shares. It remains to be seen whether the government would also seek to cash-in some of its own holding during the shake-up.
Another potential suitor is South Africa’s MTN, which operates in 22 countries in Africa and the Middle East. Many of its licences are in countries with great potential but a variety of difficult operating environments, including Afghanistan, Iran, Syria, South Sudan and Sudan. Morocco would therefore provide a more secure source of earnings. Chief executive Sifiso Dabengwa commented:
“Growth through M&A is still an important part of our strategy, anything between $4bn and $8bn is something we can look at.” In May, Bharti Airtel announced that it would sell a 5% in itself via a new share issue to the Qatar Foundation Endowment (QFE) for $1.26bn. The 199.9 m new shares will be issued at a 7.3% premium above the share price on the day that the deal was announced. The Indian firm bought the African operations of Kuwait’s Zain Group for $10.7bn and expanded its African operations in April with the purchase of Warid Telecom Uganda from Abu Dhabi’s Warid Telecom.
Bharti, which is already partly owned by SingTel, it therefore is keen to reduce its debt. The company’s chairman, Sunil Mittal, said: “This agreement exemplifies further strengthening of the already deep economic and cultural relations between Qatar and India.” The acting chief executive of Qatar Foundation Endowment, Rashid Al Naimi, added: “As a long term global investor, our shareholding gives us exposure to a high growth sector in key emerging markets. QFE looks forward to supporting Bharti in realising the full potential of this world class business.”
Qatar’s Qtel, which was renamed Ooredoo in February, remains 68% owned by the government of Qatar, although it is now forced to compete with foreign firms in its domestic market. In response, it has begun to expand its overseas operations, increasing its stakes in Tunisiana, Wataniya and Asiacell of Iraq. Each of the company’s overseas operations, including Nawras in Oman and Nedjma in Algeria, will be rebranded as Ooredoo during the course of this year and 2014. Ooredoo’s market capitalisation increased sharply during 2012 to reach $12.3bn at the start of this year.
It seems improbable that there will be any return to the telecoms industry’s heady expansion around the turn of the millennium. Market penetration rates are high in most countries, so there is simply not the scope for such rapid expansion. Moreover, the fear of missing out is no longer as great. Yet the bidding war over Maroc Telecom does seem to signal renewed optimism in the sector after the shocks of the global economic crisis. Future expansion is likely to be steady rather than spectacular and although there is room for mergers between the biggest operators in the region, government involvement makes this unlikely in the short term at least.
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