Gulf telecoms companies that spent much of the past decade making headline-grabbing overseas buys are shifting gear as the realities of competition, risk and a maturing industry catch up with them.
Mobile phone operators that emerged as the region’s most high-profile international service export have scrapped some of their grander global ambitions in exchange for a less glamorous but often more profitable strategy of boosting growth closer to home.
The businesses’ changing approach and the international commercial reverses suffered by some of them has highlighted the task facing Gulf states as they try to use petro-riches to diversify their economies.
Karim Sabbagh, global head of the communications, media and technology practice at Booz & Co, says: “What you are seeing, and will see more of, is a much more focused way of approaching the business. There’s a clear pattern of consolidation and there’s an inclination towards managing the portfolio rather than scaling it up.”
The Gulf’s mobile operators have become a closely watched story as they have grown from government-owned domestic utilities to reach more than 375m customers in more than 30 countries. Zain, the Kuwaiti poster child for the industry in the region, once boasted a portfolio of mobile networks in 24 countries across Africa and the Middle East.
In a neat role reversal, Zain is now the model for the pruned industry, having scaled back its international reach when it sold off its African operations to India’s Bharti Airtel for $10.7bn in 2010. Zain, which declined to answer questions about its strategy, has said it is now focused on its seven remaining operations in the Arab world.
The newer, smaller Zain’s best regional move was its push into Iraq, where it has operated since December 2003, just nine months after the US-led invasion. The risky bet has paid off handsomely, and the company reports a more than 50 per cent share of the Iraqi market.
By the third quarter of 2011, the most recent period for which data are available, the Iraqi subsidiary was responsible for 30 per cent of the group’s subscribers and one-third of its revenues, though the company has said it expects its market share to decrease due to heavier competition resulting from the government’s proposed sale of a fourth mobile licence. Zain will also have to grapple with Iraq’s uncertain political future and a requirement to float a stake of the business on the Iraqi Stock Exchange.
While it may have trimmed its plans, Zain has at least avoided the costly international missteps made by Etisalat, the Unite Arab Emirates state telecoms company that abandoned an attempted $12bn takeover of the Kuwaiti company in early 2011.
Thanks to its cash-cow home market, where prices remain high and competition is limited to a fellow government-owned competitor, Etisalat has had plenty of funds to plough into international expansion, and now has more than 140m customers in 18 countries in the Middle East, Africa and Asia, including high-growth markets such as Nigeria and Egypt.
But an early sign of problems came when, months after announcing in late 2008 that it had won the rights to buy a €300m licence to operate in Iran, Etisalat saw Tehran cancel the contract with little explanation. This was followed by a bigger and more expensive setback in India, where the initial excitement of its $900m acquisition in the world’s second-largest mobile market has faded amid one of the country’s biggest political scandals.
A government minister has been jailed amid controversy over the sale of telecoms licences, and 122 separate licences have been cancelled by a supreme court order, including 15 owned by Etisalat, although the UAE company has not been accused of any wrongdoing. Writing off the full value of its Indian operations, to the tune of Dh3bn ($816m) led to the company’s 2011 profit falling 23 per cent.
Etisalat did not respond to questions posed by the Financial Times about the Indian situation and other aspects of its business.
While their travails overseas do not spell the end to international expansion for Gulf operators, they have triggered a move to a more measured growth strategy. It is perhaps no coincidence that the global stumbles and retreats on the part of other Gulf operators have yet to hit Saudi Telecom, the region’s largest and historically most cautious telecoms company, which is emerging as something of a model in the tortoise-and-hare industry race.
Abhinav Purohit, a senior research analyst covering regional telecoms for IDC, the research group, says: “Certain lucrative properties may come up and it might make sense to invest. But what you will see is a more cautious approach to international growth, a more mature approach in analysing opportunities and monetising them.”
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