Telco Mergers On The Rise As Market Intensifies

The last few years have seen competition spike and profit margins dwindle in the GCC’s telecoms sector.

Rampant population growth has left companies fighting for customer loyalty, while the arrival of new entrants into the market has intensified rivalries between operators.

Telecoms firms are reaching saturation point at home, so are looking to maximise their influence on foreign markets.

M&A activity is rising, according to Thomson Reuters, which last month released its latest report on investment banking movement in the region. In the first nine months of 2012 telecoms deals beat all other sectors, racking up $6.4 billion of the overall $15.7 billion of transactions, the report said.

Qtel grabbed the headlines with the $2.2 billion purchase of the remaining 48 per cent of Kuwait-based Wataniya Telecom that it did not own, in August.

But M&A momentum in telecoms is not what it was two or three years ago, says Jawad Abbassi, founder and general manager of research group Arab Advisors. “Deals like the Qtel-Wataniya one highlight that companies are looking to further their control in existing subsidiaries. It’s about making sure you can affect change in the companies you’re buying into as well as align the strategy with the corporate group.”

Abbassi says the number of smaller early-stage investments has dropped as the major telecoms players have solidified their positions in recent years.

More firms are searching for control of overseas assets, whereas previously minority stakes sufficed.

The government of Qatar made clear its intentions to enter the Turkish telecoms market earlier this year. It reportedly made a takeover approach for the majority owner of Oger Telecom, which owns a controlling stake in Turk Telekom.

Qatar directly approached Saudi Oger for its approximately 55 per cent stake, sources said.

By acquiring the Oger Telecom stake, Qatar would also get Turk Telecom and its mobile unit Avea as well as South African operator Cell C in which Oger holds a 75 per cent stake.

Turk Telekom is one of the biggest listed companies in Turkey with has a market cap of $15.6 billion.

Meanwhile, the Bahrain Telecommunications Co (Batelco) said it is searching for big game in international telecoms.

Batelco group chief executive Shaikh Mohamed bin Isa Al Khalifa said he is going after a “brownfield business, not a greenfield as we did before”.

He told Gulf Business: “With telecommunications services being such an integral part of any growing economy today, the global industry in general is growing rapidly including in Bahrain and the GCC region. Accordingly, competition for customers in the local and regional markets continues to intensify.

“A key focus of the Group’s strategy for 2012 to 2015 is on overseas expansion and investment. In terms of growing the Group’s customer base and therefore increasing its scale, we continue our active search to acquire another telecom business.”

Batelco owns Jordanian operator Umniah, 27 per cent of Yemeni mobile firm Sabafon and minority stakes in internet providers in Kuwait and Saudi Arabia, and it is also active in Egypt.

It is in talks with Cable & Wireless Communications to buy its assets in Monaco and a host of island nations, a deal potentially worth around $1 billion.

Most GCC operators have capital and ambition to execute larger deals. The flip side of this strategy is about reducing their minority holdings in foreign units, for instance Etisalat’s sale of a 9.1 per cent stake in Indonesia’s PT XL Axiata in September.

Consolidation is also driven by the arrival of new entrants into domestic markets. Incumbent operators have faced an increasing threat from mobile challengers and mobile virtual network operators.

There has been continued speculation around the introduction of a third telecoms operator in the UAE, although this is something the country’s Telecommunications Regulatory Authority has played down.

In March, Arabic language website Alitihad reported the TRA’s deputy director general HE Majed Al Memsas as saying that in 2015 the regulator would open the UAE’s market.

But the regulator defended incumbents Etisalat and du, saying they were currently meeting the needs of the UAE’s market and that the media report suggesting otherwise was “misleading”.

One area in which the two do compete is the UAE’s mobile telecommunications market, which has one of the highest penetration rates in the region.

Outside M&A, some GCC players are also exploring the option of forming lucrative international partnerships with successful operators in non-competing markets. These ‘strategic partnerships’ allow companies to share technology, services and know-how. A good example of this being du’s tie-up with Vodafone in February 2009.

Du secured access to Vodafone’s range of products, devices and services in the UAE and has since benefited from Vodafone’s experience in supply chain management and tech development.

As dealmaking rejuvenates in the region, the size of transactions has generally shrunk, even as Qatar bucks the trend. Qatar Telecom’s purchase of Wataniya was the largest Middle East telecoms deal since September 2009, in a sector that once dominated acquisition volumes.

One analyst, who preferred to remain anonymous, said operators in the GCC have been scared half to death by Etisalat’s ill-fated experience in India, which earlier this year saw the UAE firm write off investments worth $827 million following a court’s decision cancelling 122 mobile licenses.

India’s Supreme Court cancelled licenses belonging to 10 mobile operators in early February following an investigation into corruption in the allocation of second- generation mobile licenses in 2008.

Etisalat, which has subsequently quit the country, entered India following the 2008 licensing process, via the acquisition of a 45 per cent stake in Swan Telecom for $900 million, later renamed Etisalat DB, as part of a joint venture with DB Realty, an Indian real estate company.

Despite investing an estimated $1 billion in its network by the end of 2011, the group had won only about two million customers in India’s ferociously competitive mobile market, a share of about 0.3 per cent.

“The focus is on profitable growth and avoiding the mistakes of the past and the dangers of a global slowdown,” says the analyst.

For the time being then, GCC telecoms operators will continue to leverage what they already have by bulking up stakes in their subsidiaries. As competition rises and past lessons are learned, M&A power plays will likely intensify over the coming years.