VOL. XLVII

No 05

02-February-2004

TELECOMS

Competition Intensifies As Middle East Telecom Companies Compete For Regional Market Share

The Middle East telecom sector was buoyant in 2003 with the granting of new licenses as many countries sought to liberalize their markets. It appears that this process will gather pace in 2004 providing considerable expansion prospects for Middle East telecom companies along with many financing opportunities for the banking sector. Ultimately, for many telecom companies, the cross-border competition is becoming a survival strategy as they have to relinquish monopolies in their own countries. While the Middle East telecom sector has recently expanded, the table below of total country connectivity measure (TCCM) in 2002 (the latest year for which data is available) shows the low market penetration and illustrates the considerable opportunities for provision of not only internet and global system for mobile communications (GSM) services but even basic household mainlines.

Total Country Connectivity Measure (TCCM) in 2002

(%)

Source: Arab Advisors Group.

Licenses Up For Grabs In Saudi Arabia, Bahrain, Oman

The Saudi Telecom Company’s (STC) performance has been strong and its net third quarter profit was $1.7bn, although the company will soon face competition after the Communications and Information Technology Commission (CITC) is to invite bids for the Kingdom’s second GSM license when it launches its Request For Applications (RFA) in March (MEES, 17 November 2003).  The Saudi Arabian Government has been liberalizing its telecom sector and partially privatized STC when it floated 30% of its shares in a process that began in December 2002 and ended in January 2003 (MEES, 12 January and 22 December 2002). Foreign investment in the telecom sector in Saudi Arabia is still limited, but CITC is expecting liberalization when the RFA is launched. Furthermore one of the conditions for Saudi’s accession to the World Trade Organization (WTO) is to open up its telecom sector.

Despite the competition it is facing, STC does not appear to have any regional expansion plans of its own. In contrast, Bahrain’s Batelco is an aggressive operator and even jumped the gun by trying to set up operations in Iraq before licenses were issued. However, it was also unsuccessful in its bid to secure an Iraq license once they were offered. Kuwait’s MTC-Vodafone recently started operations in Bahrain, ending Batelco’s domestic GSM monopoly.

In Oman, the Government received bids in January from international companies applying for the country’s second GSM license, which will last for 15 years with the option to extend for another 10 years. It expects to issue the license for a system that will run aside that operated by incumbent Oman Telecommunications Company (OmanTel) in April. Arab Advisors’ President Jawad 'Abbasi noted in a January presentation to assess telecom opportunities in the Gulf that OmanTel has been seeking regional associations to improve its performance and prepare itself for competition, noting the operator has a 22% penetration rate, but a peculiar pricing structure.

Qatar And UAE Retain Monopoly Operators

Qatar and UAE retain monopoly operators. Qatar’s Q-Tel is extremely profitable and the lack of domestic competition has meant that the company has not needed to look for regional opportunities. In the UAE Etisalat is also enjoying a monopoly, but unlike Q-Tel has been eyeing cross border acquisitions. This is being accomplished through investments rather than direct licensing and the company, which is a major shareholder in Thuraya, has invested in Sudan but lost to France Telecom in its bid to secure a stake in Jordan Telecom.

Iran GSM Liberalization Goes Ahead

In what is expected to be one of the Middle East’s most lucrative areas for expansion, Iran’s Ministry of Post, Telegraph and Telephone (PTT) issued a tender for the award of a nationwide GSM license (MEES, 3 November 2003). Six consortia had pre-qualified to bid, but South Africa’s Vodacom pulled out and another company, South Africa’s MTN, has changed its local partner. The other bidders include Egypt’s Orascom (with the UK based Balli Group); Turkcell (with the Iran Electronic Development Company); MTC-Vodafone with Kuwait‘s Wataniya; and Austria’s Mobilkom with Iran’s Fanava Group. “Iran is a massive market waiting to be discovered,” said Mr 'Abbasi, noting that Arab Advisors projects that GSM revenues from 2004-07 will exceed $8.6bn. The incumbent, Telecommunications Company of Iran, is expected to see a duopoly for two years after the license is granted, but a third license may then be introduced. The current network comprises only 2.5mn lines and the new license calls for the introduction of a GSM network supplying an extra 5mn lines in three years.

Lebanon License Award Stalled; Developments In Jordan And Egypt

Lebanon’s two GSM license awards is stalled as the country’s Cabinet committee continues investigate why four companies pulled out early from the tender, with only LibanCell and Investcom offering around $6mn to manage the two networks for three years. Luxembourg’s Investcom operates in Syria and Yemen, and is a partner in France Telecom Mobile Liban along with France Telecom/Orange. Many politicians and analysts now expect the GSM tender to be dropped completely, or at least postponed until after the presidential elections in November. The Lebanese Government had announced a year ago that it would hold an auction for two existing GSM mobile networks and related 20-year GSM licenses (MEES, 20 January 2003).

In Jordan the deadline for pre-qualification for the country’s third GSM license was moved from 4 January to 15 January. Jordan’s Telecommunications Regulatory Commission’s tender for the license will end Jordan Telecom’s monopoly on international services. The existing GSM networks are operated by Jordan Telecom through its Mobilcom subsidiary and Jordan Mobile Telephone Services (Fastlink).

Meanwhile, the Egyptian Company for Mobile Services (Mobinil) and Vodafone Egypt each agreed to pay the National Telecoms Regulatory Authority E£1,240mn ($200mn) to boost their local GSM networks. The additional 1,800 MHz was held by state-owned Telecom Egypt. The government was mulling launching a third mobile network, but Telecom Egypt is instead surrendering its license. 

Lucrative Kuwaiti Duopoly Provides Funding For Iraq Move

Kuwait’s market is a duopoly and has provided a good source of funding for the two incumbents MTC-Vodafone and National Mobile Telecommunications (also called Wataniya Telecom) to expand elsewhere. MTC operates in Jordan in addition to Bahrain and Wataniya operates in Tunisia and secured Algeria’s third GSM license late 2003. MTC and Wataniya have recently secured licenses to operate in Iraq. “The GSM duopoly situation in Kuwait sustains very high profit margins for the operators and the country has the fairest pricing schemes in the Arab world,” notes Mr 'Abbasi.  As the result of the bombing and overall neglect of its telecom services, Iraq’s telecom requirements are probably the most extensive in the Middle East. Mr 'Abbasi noted that Iraq will have 192,000 mobile subscribers in 2004, increasing to 480,000 in 2005 and 768,000 in 2006. The revenues estimated from these operations would be $64.8mn in 2004, $300.7mn in 2005 and $534.2mn in 2006, he notes. Last year’s competition to secure the three licenses on offer to operate in Iraq was understandably heavy and a total of 100 bids were submitted.

The three successful consortia were Asia-Cell (Wataniya Telecom, Asia-Cell Telecom and United Gulf Bank of Bahrain) in the North region, Atheer Telecommunications (MTC and Iraq’s Dijla Telecommunications Company) in the South and in the central region Orascom Telecom Iraq Corp (OTI - majority owned and controlled by Egypt’s Orascom Telecom Holding with other Arab and Iraqi investors owning 37%). These three players are now pitched against each other to see who can roll out the technology the quickest, and thus expand into the other operators’ regions. The two-year license stipulates that the three of them must have services up and running two months from the date the contracts were signed (MEES, 13 October 2003). Mr 'Abbasi notes that financing should not be a problem, given that MTC and Wataniya are cash rich and OT strengthened its financial position considerably when it sold Fastlink in Jordan.

Banks Taking Cautious Approach To Iraq

A London bank expert in Middle East telecom financings notes that it is “premature for Iraq to consider bank financing for telecom operations unless it is guaranteed by an entity like the World Bank.” However, he said that “vendor financings” (providing money to equipment manufacturers) are a possibility.  “Vendor financing is not strictly project finance, but you are still providing money to Greenfield operations,” notes the banker, pointing out that telecom deals in countries like Yemen and Syria have experienced this type of funding.  Compared to the oil and gas sector fewer banks are involved in telecom financings in the Middle East and the sector is extremely fragmented. Where banks are active, they tend to prefer transactions with an Export Credit Agency (ECA) or Development Fund Institution (DFI) component. Orascom’s debt financing for its Algerian operation, Orascom Telecom Algeria, for example including two export credit tranches of €282mn covered by COFACE and Hermes, a structured financing tranche of €135.8mn and a mezzanine tranche of €17.5mn. It was arranged by Credit Lyonnais and West LB with participation from Proparco (France), CDC Capital Partners (UK), Deutsche Investitions und Entwicklungsgesellschaft (Germany) and is the first infrastructure financing in Algeria by these institutions. Citibank was the local advisor and agent. The equity funding comprised a capital increase of $104mn and €26mn in a convertible shareholder loan. Some countries with well developed capital markets, such as Egypt, have used bonds to finance telecom transactions.

Meanwhile, the overcapacity and heavy debt loads that resulted from overexpansion in the US and European telecom sectors 2-3 years ago led banks to be extremely cautious when analysing telecom projects elsewhere. As a result, telecom companies have paid the price for such debt and margins on telecom deals are typically 300-400 bps over libor. As a point of comparison, recent oil and gas market deals have typically seen a 120-250 bps range depending on the type of transaction and country involved. “With a telecom deal the payment is made locally so there is no hard currency like in oil and gas. Therefore the risk is higher. Add the telecom sector’s recent problems in US and Europe to this and it’s understandable that margins are going to be higher, although some countries are riskier than others,” pointed out one banker.