Monday, February 23, 2009

Persian Gulf - constraints on spending by operators

Telecoms spree set to dial down

Even after years of petrodollar-fuelled growth, few Gulf companies have made an impact on the international business scene. The region's telecommunications companies are a notable exception.

Spurred by small, increasingly saturated but lucrative and partially protected home markets - and helped by government owners - Gulf telecoms companies have embarked upon an aggressive investment and acquisition spree in recent years.

According to Dealogic, acquisitions and licence purchases by Middle East operators jumped from $6.3bn in 2006 to $27.4bn in 2007. Even though the exertions of 2007 and the deepening of the credit crunch meant expansion activity slowed last year, Middle East operators still spent a further $9.6bn on licences and acquisitions.

"Growth was going to slow regionally so they had to go internationally, and governments were happy to support them," says Sean Gardiner, regional head of research at Morgan Stanley.

Meanwhile, investment in technology and telecoms infrastructure has continued. Saudi Telecom alone spent about $5.1bn on capital expenditure last year, according to HSBC figures.

Gulf operators still lag behind Japanese and US peers in technology but most now operate on advanced 3G networks and are on a par with European operators, says Kunal Bajaj, a Dubai-based analyst at HSBC.

Gulf regulators and policymakers have also continued a "managed liberalisation" of the telecoms industry. Qatar Telecom's monopoly was the last to fall in the Gulf, when Vodafone won a licence to operate in the peninsula last year. Vodafone Qatar is scheduled to start operations in March.

"So far, the objective of achieving competitiveness in telecoms is coming to maturity," says Bahjat ElDarwiche, a telecoms expert at Booz & Co, the consultancy. "Nearly all countries in the region now have at least two mobile operators and several broadband and fixed-line operators."

Last year, Kuwait's Zain entered Saudi Arabia, sparking a price war in the largest and potentially most lucrative market in the Gulf. This is an "encouraging" sign for consumers who have previously paid relatively high tariffs, says Mr Gardiner.

Liberalisation and expansion in recent years have seen a dramatic transformation of the regional industry.

"Seven to eight years ago, the market lagged behind other regions and operators were mainly state-owned and bureaucratic," says Mr El-Darwiche. "But Gulf telecoms companies have been able to modernise and are expanding regionally and making international acquisitions and investments."

Telecoms is usually perceived as a defensive sector - spending on phone calls and text messages usually holds up well in a downturn. But analysts expect that the Gulf operators will not escape the economic slowdown completely unscathed.

The credit crunch has shaved billions off operators' market capitalisations - some share falls have outpaced those of their stock markets - and is likely to encourage indebted firms to pause.

Scheduled licence auctions for fixed lines and mobiles have been postponed across the Middle East and North Africa as the financial outlook limits demand and undermines the price governments can expect to pick up for their licence sales.

Thus, 2009 will be a year of consolidation for many operators, according to analysts.

"After a recent wave of aggressive mergers and acquisitions they will step back and try to extract synergies," says Mr Bajaj. "Cash is becoming scarce. Even though they are mostly cash-rich, you have to look at their debt to equity ratios."

Qtel, one of the more aggressive Gulf operators, acquired a majority stake in Kuwait's Wataniya Telecom for $4.2bn last year, and this year took a large stake in Indonesia's PT Indosat and signed a co-operation agreement with San Miguel in the Philippines.

Abdullah Bin Mohammed Bin Saud Al-Thani, the chairman, says Qtel will now take a breather. "We will use this interim period of this crisis crunch . . . to manage and synergise our company. I don't see any aggressive move at the moment."

Gulf operators also face more humdrum challenges. Fiercer competition will start to eat into earnings and domestic markets are becoming saturated.

The trend to liberalise and deregulate is likely to continue, says Mr Al Thani. As monopolies become duopolies and duopolies become three operators, companies which had counted on "enormous profits . . . will realise that the party is over."

According to an Ernst & Young report, average revenue per user since 2002 has already dropped by about a fifth in all Gulf countries except Qatar - the only monopoly market

But canny operators can still realise bumper profits, say experts. Broadband penetration is minuscule and is another growth market. And consumer spending on phone services is relatively low in the Middle East compared to emerging markets, adds Mr Bajaj.

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