Gulf dynamos

As key strategists of four dynamic Gulf operators keynoted in Dubai for the Telecoms World conference, it became clear that the past two years have been instrumental in defining their respective organisations. Reflecting on significant highlights over these defining years, Michelle Mills reports the strategic directions of Qtel, Etisalat, STC and Du as communicated by senior representatives from each organisation

Before Qtel does any acquisition, we always ask ‘why don’t acquisitions work?’ Plenty of things have been bought by plenty of people that have not worked out,” stated Qtel’s chief strategy officer, Jeremy Sell. “With that in mind, then how has Qtel come to expand and bought 10 companies in two years?”

Sell believes it is the Qatari operator’s prudent approach to expansion that has revolutionised the company into a regional success story. At the beginning of 2005 it was a monopolistic operator in a tiny Gulf nation of less than 800,000 inhabitants, but now serves 55.7 million subscribers in 13 countries across the MENA, Indian subcontinent and Asia Pacific regions. It has invested more than US$7 billion in the process.

“Back in 2006 we had a mandate to expand. There was a risk of being consolidated, which might have been good news for shareholders, but our belief was that it was better to be a consolidator not a company that is consolidated, at least until we were a certain size and had achieved a certain amount of value,”

Sell recalled. “Risk minimisation was a key strategic imperative. It’s not all about money and what you buy, but what it does for the rest of your business, and creating value.” Sell says the investment in Nawras has been one of Qtel’s most successful, where in March 2005, the second mobile operator launched in Oman through a partnership with Danish operator TDC. Nawras now enjoys a healthy 43 per cent market share. The Omani operator’s market position is set to be further bolstered by its recent award of the country’s second fixed-line concession.

However, Sell believes it is the acquisition of Kuwait-based Wataniya Telecom in 2007, and Qtel being given the green light to raise its stake in Indonesia’s Indosat from 40.8 per cent to 65 per cent in October, which have been the defining deals in the company’s history.

“When Wataniya was available and ready to move, we acquired that at an acceptable price. We have done better deals financially, but we’ve never done such a good deal strategically. This transaction has been the driver of the transformation of the Qtel Group,” Sell asserted.

Qtel also acquired a strategic stake in managed data services provider NavLink in partnership with AT&T, and has launched WiMAX services though Wi-tribe in Jordan, Pakistan and Philippines; a partnership with Middle East conglomerate ATCO and global broadband provider, Clearwire International.

Qtel’s rapid, yet carefully staged expansion strategy has also paid significant dividends for its stakeholders, with the company’s board having approved the distribution of a cash dividend of 100 per cent of the nominal value per share last month.

Comparing Qtel’s growth rate in terms of subscriber numbers, revenue and EBITDA from first half 2007 to first half 2008, the telco significantly outperforms its peers – Orascom Telecom, MTN, STC, Etisalat and Zain. Subscribers grew 446 per cent from nine million to 51 million during the period, revenue grew 102 per cent from US$1.1 billion to US$2.2 billion, and EBITDA grew 92 per cent from US$600 million to US$1.1 billion.

“What we have done though is spent a lot more money than them, so we have bought these results,” Sell acknowledged.

Sell also accepts there were several acquisition opportunities that Qtel did not take, such as the acquisition of Investcom, the mobile provider in countries across Africa and the Middle East, whichwas acquired by MTN Group instead. Qtel also missed out on the acquisition of V-Mobile in Nigeria, a WiMAX licence in Bahrain, the third mobile licence in Egypt, Hutchison in India, and fixed and GSM licences in Saudi Arabia.

Looking ahead, Qtel has set itself the target of a net present value of US$1 billion within five years for its investments to date, as well as its longer term goal of becoming a top 20 telecommunications company in the world by 2020. Qtel is betting on both WiMAX and HSPA technologies. Its acquisition targets remain in emerging markets, with a focus on consumer mobile, consumer broadband and corporate managed services.

“Vodafone has now received a fixed and a mobile licence and is coming at us with all guns blazing. We know exactly what to expect, they are absolutely a class act. Vodafone, with Orange, are the reference companies in the world,” conceded Sell.

Qtel’s Jeremy Sell says that despite the prudent acquisitions and exponential growth of the company, these factors are yet to be reflected in its market capitalisation

However, Qtel’s challenge remains to have its acquisitions and growth prospects reflected in its share price. Despite an enterprise value of US$9.2 billion, the telco’s market capitalisation stood at just US$6.4 billion as of August 28.

“It doesn’t matter how good you are post-acquisition, if you buy the wrong thing at a wrong price, you won’t gain value,” Sell warned. “And secondly, if the market doesn’t believe you, whatever you buy, you will not receive value.”

Saudi Arabia’s STC has also been active in acquisitions since belatedly joining the overseas investment game in June 2007. In that time it has managed to retain its value, said Sa’ad Ahmed Demyati, vice president of the wholesale business unit. He said even after the significant drop in stock markets globally, STC’s market capitalisation remains around the US$30 billion mark. The telco’s investments now see the company represented in Malaysia, Indonesia, India, Turkey, South Africa, Lebanon and Jordan. STC also owns a 26 per cent stake in the Kuwait’s third mobile company, Viva, which will launch officially on December 4.

“Interest is beyond our expectations,” claimed Demyati. “We introduced the service unofficially, and intend to launch it officially on December 4. Our customers are encouraged, because we have started with a distinguished company, and even with the lack of an [independent] regulatory body, we are in a good shape.”

Demyati is a strong believer in customer-centricity, recounting how from 2006, customer focus had become a core strategy. STC has experienced extraordinary growth since 1998 when it counted 600,000 mobile subscribers and two million fixed-line users. The telco now boasts a combined 23 million mobile and fixed subscribers and one million ADSL users across the kingdom.

STC has also laid 80,000 kilometres of fibre optic cable, rolled out 10,000 base station towers and its mobile coverage reaches 98 per cent of the population. STC’s network in Saudi Arabia is also moving quickly towards IP and next generation network.

“We handle hundreds of millions of calls and SMS each day during the busy period of Hajj,” Demyati said.

Etisalat’s chief corporate affairs officer, Nasser Bin Obood, believes that future growth will be driven by the demand for mobile broadband, electronic and mobile financial services, and optical networks laying the foundation for smarter homes and offices. This would be in addition to Etisalat’s aggressive inorganic growth programme; with Bin Obood reaffirming that Etisalat would seek further acquisitions during the difficult financial times ahead.

“Thanks to the good financial position that Etisalat is in we are exploring new opportunities. These conditions reduce the cost to enter markets, and to acquire and to seek new opportunities, with costs that are far below what they were a few months ago. We hope we have enough cash because the opportunities here are unlimited,” Bin Obood said. 

Etisalat’s Nasser Bin Obood would like the UAE’s regulator to relax some of the regulatory constraints, now that second operator Du, is posting a profit

In the first nine months of 2008, Etisalat achieved the same profit as for the whole of 2007, amounting to AED7.3 billion (US$1.8 billion). The telco’s revenues topped AED19.1 billion over the same period.

Etisalat’s most recent acquisition was in India, a US$900 million acquisition of a 45 per cent stake in GSM licensee Swan Telecom. Bin Obood believes this investment will be well placed to continue Etisalat’s growth story, with the world’s second largest market in terms of population looking like a strong prospect for solid progress. These factors are a prerequisite for successful operations and the deployment of a network will be far easier under such conditions, Bin Obood suggests.

“We would love to have a more supportive regulatory regime. Our competitor Du is making a profit, so now the time has come to release some of the constraints,” Bin Obood stated, with respect to competition development in the UAE.

Du became profitable in just 19 months of operation, having launched in February 2007, and by the third quarter of 2008, counted 2.6 million mobile customers representing a 27 per cent market share.

Osman Sultan says Du is continuing to build its own backbone in the UAE and is contemplating WiMA X as a complement to AD SL in less populated areas

“We announced a net profit of AED31 million in the third quarter,” stated Osman Sultan, CEO of Du. “What about financing? Because of the faster than expected growth, in April of this year we secured a AED3 billion debt facility. Imagine what shape we would be in if we had to go and secure that AED3 billion now.”

“Du was perhaps the first telecoms start-up that was launched without the backup of an existing established operator. The major challenge was at the level of the human capital, finding the right resources and building the proper modus operandi in rolling out the necessary operations,” Sultan said.

Sultan attributes Du’s success to operational excellence and attractive pricing propositions, combined with the trends of strong population growth, macroeconomic growth, and the increasing appetite for telecommunications services in the UAE.

“We wish to have a real unbundling of the local loop. We are building our own backbone. Having two backbones [in one country] is not really a luxurious thing from a disaster recovery point of view; from a risk management point of view it makes sense. In addition, we are contemplating WiMAX as a complement to ADSL in rural areas,” Sultan said.