STC’s international expansion performance – Our opinion
Now that we’ve got our multientry visa for KSA, and considering the heavy telecom movements that are taking place in the country, it’s time to start publishing country specific articles related to the Saudi’s telecom environment.
Following up the ArabBusiness Newsletters of 2007, I recovered a post where Saudi Telecom Company (STC) stated that was in the final stages of selecting a bank or banking consortium to advise it on future international investment opportunity as a new inorganic growth strategy was going to put in place. STC’s CEO said the telco was entering a new phase in its development where it was actively seeking investment opportunities outside of Saudi Arabia, and he believed the company’s size, scale and potential to generate synergies would allow STC to acquire investments without over-extending itself.
STC embarked then on an investment strategy called 10×10, seeking to generate 10% of our total service revenues from inorganic growth by 2010. STC’s 10×10 expansion strategy was reminiscent of MTC Group’s original 3×3x3 strategy, which was geared at the company ramping up its regional and international expansion plans in a bid to execute 27 years worth of development in a nine-year period seeking investment opportunities in the Middle East and North Africa region, South Asia and sub-Saharan Africa. Given the telco’s position as one of the largest telecoms operator in the Gulf, STC had as a main objective to pursue proportionally large investment opportunities.
Two years after, STC has recently announced the appointment of Eng. Saud bin Majed Al Daweesh as CEO for STC Group following new organizational restructuring in order to cope with the large expansion of STC operations both locally and internationally. This change represents the first phase of STC’s planned development and growth in order to keep abreast with its local and international investments and enable it to lead its operations in full force as a global enterprise.
The change entails creating key new administrative units that report back into the CEO of the Group which includes two additional CEOs, one overseeing financial, sales, and marketing functions in the Kingdom of Saudi Arabia and the other heading international operations which involves managing and diversifying external investments for the Company and creating synergies amongst them. STC has been expanding internationally for the past two years and has achieved global status in a short period of time. STC has modified its organizational structure to get the highest value from the Saudi operations as well as of other investments in Kuwait, Bahrain, Indonesia, Malaysia, India, Turkey and South Africa.
With increasing returns, STC took a strategic decision to expand on an international level and started implementing an ambitious expansion strategy outside its home base by investing in key markets which include Malaysia, Indonesia, India, Kuwait, Kingdom of Bahrain, and South Africa. Here’s our analysis and point of view of STC’s International expansion performance so far and a detailed comparison and bechmark with STC’s telecom competitors in the Gulf (Zain, Etisalat, Orascom and Qtel).
Enjoy the reading. Best regards, CVA. Off to Al Andalus (الأندلس)
How to succeed in a Network O&M deal to reduce costs?
Following my previous post related to how to improve EBITDA through a cost reduction program, I would like to share our thoughts on what’s maybe one of the sub-topic where most of the cost reduction measures come from: Network operation and maintenance.
Due to prevailing IP networking trend and urgent demand and growth in mobile data services in mature markets, network maintenance has become increasingly complicated. As a result, operators have been forced to shift their operation and maintenance (O&M) focus from equipment to services. This is the case of a Central European operator, source of this business case that is presented in the presentation bellow.
Previously mobile networks transported services via a single medium, which made maintenance more straightforward and simplified. However, due to the gradual transition to broadband networking, more access means have now become available and base station coverage requirements have also become increasingly varied.
Tightening regulatory policies, growing coverage, rising costs, and increasingly varied terminal applications have all contributed to cause greater diversity in regards to access means at the base station level. Given the current trend in the mature markets, the door is now wide open for other possibilities (such as fiber, microwave, copper wires or the Ethernet) to be used to deliver mobile bearer capabilities. In this case, the operators face the daunting challenge of maintaining and managing various types of bearer media.
On top, varied frequencies and data service requirements of different commercial districts have contributed to the density of base station coverage. As a result, the number of 3G base stations may be twice the number of currently operating 2G base stations in the near future. In the initial stage of 3G construction, 80% of all 3G base stations will be able to share sites with 2G base stations.
Another key learning of the case unveils how the maintenance mechanism should also be able to support both 3G and 2G service bearers. O&M systems are now required to be able to support more complex, but flexible configuration and control of multiple service types, as the OPEX is reduced.
Network O&M cost is generally believed to be 3 to 4 times as high as network building cost. Consequently, the need continually arises for mobile operators to reduce O&M costs. Their first reaction is generally to minimize their O&M workforce through automation and information technologies. However, most operators are hesitant to accept substantial O&M transformation in order to protect their investment and control costs.
Those operators accepting that the network O&M evolution is a progressive process and being able to adapt its processes and tools will gain significant financial upsides. Enjoy the reading.
Best regards, CVA
Company analysis: Qtel Group
Following the company analysis series recently published (Zain, Orascom and Etisalat, now is the turn of another telecom giant: Qtel Group.
Based in Qatar, The Qtel Group is a diversified telecommunications group with three business lines including consumer telephony, consumer broadband and corporate managed services. It is committed to expansion in line with its strategic vision of becoming a global top 20 telecommunications provider by the year 2020.
Over the past three years, Qtel Group has built a successful track record of acquisitions hence expanding its geographic footprint from 2 to 17 countries within the Middle East, North Africa and Asia, connecting more than 55 million customers. Re-capping on the company’s strategic achievements to date, the first international investment was in Oman where, Qtel won the second mobile operators’ license in 2004 and created Nawras.
By year-end 2006, Nawras had successfully captured over 31% of the Omani wireless market. Nawras has gone from strength to strength and has already delivered financial returns ahead of Qtel’s expectations. To strengthen Qtel’s strategy in the Managed Data Services market, the company opened the state-of-the-art Qatar Data Centre in early 2006 that hosts the region’s first AT&T Global Node. This facility connects directly to AT&T’s global network in 150 countries.
In late 2006, Qtel also took a 38% equity interest in NavLink – the MENA region’s leading provider of Managed Data Services. AT&T also have a 38% stake in the venture. In February this year, Qtel acquired 25% of the voting shares of Asia Mobile Holding Pte Ltd (AMH), in partnership with Singapore-based ST Telemedia. AMH holds controlling stakes in two multi-service operators; StarHub in Singapore, which has 2 million customers, and PT Indosat in Indonesia with 14 million customers.
As part of its comprehensive international growth strategy, Qtel acquired a Kuwait based National Mobile Telecommunications Company KSC – (Wataniya) from Kuwait Projects Company in a deal that gave Qtel an increasingly important and prominent role in the MENA region. Wataniya is now a well respected and successful company with operations in more than 7 countries. Wataniya has been in the mobile market for 8 years and is regarded as a successfull and innovative operator. From their initial operation in Kuwait, they have extended their footprint into Tunisia, Algeria, Iraq, Saudi Arabia, and the Maldives. Wataniya has also won a license to operate in Palestine.
Wataniya in Kuwait has over 1 million customers and is considered one of the more advanced network operators in the region, with strong ongoing revenues being generated from an array of innovative services. Tunisiana is a joint venture with Orascom and is a well-run and rapidly growing business with over 3 million customers. It currently has 48% market share, up from 45% last year. Nedjma in Algeria, is owned 71% by Wataniya and has over 3 million customers and an increasing market share. The mobile market in Algeria has substantial growth potential remaining, with current penetration at just over 50%.
Other operations within the Wataniya group include an iDEN (Integrated Digital Enhanced Network), ‘push-to-talk’ business in Saudi Arabia, a 49% shareholding in Asia Cell Iraq, a mobile start up in Palestine and an active mobile operation in the Maldives.
Multiple SIM ownership in emerging and mature markets
I have been recently invited to attend to a short, focused conference called the Mobile Pricing Symposium, based at Cambridge University in July. The conference will be held from the 22nd of July and I will present on the rise of multiple SIM ownership in emerging markets.
Nice subject, right? As written heavily before in this blog, multiple SIM management is one of the top hot topics in both mature and emerging markets. I can’t remember one single CEO to whom I spoke in the last year without this topic in his agenda, and it seems that my friends at Cambridge seem to be aware of this, considering the audience and number of chief executives that will be present at my hopefully not boring speech.
For that reason, I have prepared a short presentation where we explain the reason-why of the existence of the multiple SIM phenomenons, the key factors that drive it, and the facts underlying the problem. After no less than five assignments of this kind, I’ve been repeatedly asked how can did we reach this situation. In our opinion, considering that it’s now too late to discuss on the “why”, and focusing on the “how to solve”, there are three key facts to consider:
- Fact 1: Market share of SIMs has lost its traditional meaning. What matters today is the trade off between SIM penetration and share of telecom spend. Operators have to decide how would they like to put the skin in the game. This will differ if they are present in mature markets where the “share of revenues” is king, or if they belong to emerging markets where the market penetration still has room for improvement.
- Fact 2: Multi SIM both creates and erodes value for all players; Operator have to decide whether the want to play the value creation or value erosion role.
- Fact 3: The market leaders risk more revenue erosion. The impact of the multiple SIM phenomenon is not one-directional, however it will typically erode and redistribute revenues from dominant players towards followers and new entrants. The sooner they accept that the effect will not disappear and define the right marketing policies, the better for them.
Once faced the facts, each operator has to define its strategy towards multiple SIM ownership. Different solutions apply to the same issue depending on our business objectives and market positioning. I have decided to publish this presentation in advance so that I can get your feedback. Please feel free to comment on it and share your thoughts with me. Enjoy the reading and comment (if you dare).
Best regards, CVA.
Company analysis: Orascom Telecom Holding
Considering the success of our previous post related to Zain’s potential valuation and it’s company profile, we have decided to publish some additional company profiles of top-notch telecom companies across the World. This is the turn of Orascom Telecom Holding (OTH).
OTH is considered among the largest and most diversified network operators in the Middle East, Africa, and South Asia, although has recently acquired licenses to operate mobile services in North Korea and Canada. Orascom Telecom is a leading mobile telecommunications company operating in emerging markets having a population under license of 430 million with an average penetration of mobile telephony across all markets of approximately 44%.
OTH operates GSM networks in countries such as Egypt (MobiNil), Algeria (Djezzy), Pakistan (Mobilink), Tunisia (Tunisiana), Bangladesh (Banglalink), Zimbabwe (Telecel Zimbabwe), Namibia (CellOne) or North Korea (Koryolink). OTH had exceeded 79 million subscribers as of September 2008. A detailed company analysis can be seen bellow:
As you can red in our detailed assessment, OTH has positioned itself as a leader in the region for its diverse GSM operations with various GSM support and Internet operations. One of OTH’s main strategies is to create its own non- GSM subsidiaries to act as a backbone of support for its regional GSM operations.
OTH has achieved this by dedicating financial, technical and management resources for supporting its subsidiaries. This includes network support and installation of GSM operations, equipment procurement, handset procurement and distribution companies, Value Added Services, and Internet operations. OTH is dedicated to providing the best quality services to its customers, value to shareholders and a dynamic working environment for its nearly 20,000 employees.
Relevant links:
1. Orascom telecom site: http://www.orascomtelecom.com/
2. OTH Profile: http://www.google.com/finance?q=LON%3AOTLD
Critical success factors of a money-transfer service in telecom
Following up my intention of writing a brief essay related to money-transfer, and considering that we will be participating in the Mobile Money Summit in Barcelona next week, we wanted to share our view of the critical success factors for ensuring success in any money-transfer or mobile payment service.
In the last several years the mobile money products (mobile banking, mobile payments and money transfers) have received a lot of attention from mobile operators, regulators and trade organizations. Specifically in the case of money transfers, there have been a number of success cases, notably M-pesa by Safaricom in Kenya and Smart Padala by Smart Communications in the Philippines. International experiences suggest that money transfer services thrive in markets where (A) there is low penetration of banking services and (B) there is an important inflow of international remittances.
Different African and Asian markets show different completion levels of these pre-conditions. Just to give some examples, you can find: 1) Algeria, a country where the estimated 2008 inward remittances were $5.4 billion annually and the banking penetration rate is at 31%4, 2) Kenya that demonstrates low rate of penetration of banking services at 10% and 3) the Philippines holding the 3rd position in the world by inward remittances at $14.6 billion in 2008.
What can Telecom operators get from Managed Services?
Facing increasing competition and commoditization from traditional telecom products, service providers are either in the process of or planning for the move to next generation, converged, network infrastructures in order to offer new, revenue-generating services.
Making this transformation can be complex and difficult. However, if done correctly, working with a managed services provider and outsourcing all or part of the next generation network planning, implementation and management, the transition to the new infrastructure can occur quickly and efficiently and with reduced risk.
I was today speaking with a close friend working in a well-known bank who was asking for some credentials of some managed-services companies in Europe. Why? Because there’s a recent interest in the investment community to bet for companies delivering technology solutions through a managed services model as it seems that these companies have weathered the current economic recession better than any other companies (across different industries) that are focused on more traditional product and support sales.
Emerging markets: Mobile market review: Uganda 2009
Reading at Wireless Federation that Zain, one of the leading mobile operator in Middle-East and African countries, have inked an agreement with SCB to launch its mobile money transfer service Zap in Uganda, I wanted to publish a couple of posts: one related to the mobile telecom situation in Uganda, and other related to money-transfer and some other mobile financial services. Here’s the mobile market overview prepared by our consultants.
Uganda has a population of approximately 32 million inhabitants, which is growing at 2.7% per annum. It has a per-capita GDP (PPP) of USD 1,100 and a GDP annual growth of 6.9% in 2008. Uganda’s mobile market is growing rapidly, having benefited from two factors: (i) a continuous positive growth of the country’s GDP and (ii) a strong market liberalization – Uganda competition commission’s universal licensing scheme launched in 2006. As a result, mobile penetration reached 27% at the end of 2008 and is expected to reach 39% by year-end 2009, already having increased about 16 p.p. in the last two years.
Short-term growth potential in Uganda is confirmed when compared to other similar African markets. In Kenya, for example, while there are a similar competitive level, network coverage and mobile expenditure over available income, mobile penetration is much higher than in Uganda – 41% in 3Q’08 – while in Uganda was only 25.8%.
Is Zain Africa worth US$12Bln?
This week, Vivendi, the French media conglomerate, has reportedly put in an offer to acquire Zain’s African mobile operations. Zain acquired the businesses in 2005 via the US$3.4 billion acquisition of Celtel. However, the firm is now reportedly looking at selling the networks, which are valued at as much as US$12 billion. For those who need to know whom are we talking about, Vivendi is the joint-owner (with Vodafone) of SFR (France’s second-largest mobile operator); is the company that controls Morocco’s Maroc Telecom; is an international player which has numerous stakes in other African countries such as Mauritania (Mauritel), Burkina Faso (Onatel) and Gabon (Gabon Telecom).
A sale of Zain’s African networks would be a surprising move as the operator has only recently completed rebranding the networks following the Celtel acquisition. There would be some countries that would “suffer” from this sale, such as Zain Nigeria that would have to be rebranded again despite having changed names several times in recent years, from Econet to Vodacom, then V-mobile, then Celtel and finally to Zain.
A separate report by Money Biz notes that Zain’s African businesses account for 16 of the group’s 23 markets and around 65 percent of the group’s customers. However, Africa only contributed 10 percent of group profit last year, and suffered a net loss in the first quarter. So, is it accurate to value it in US$12 billion?
Zain Africa has definitively outperformed in the last 4 years. There was a dramatic jump in net income in 2006 – the year where the full impact from the Celtel acquisition was felt. From then, revenues have been growing rapidly thanks to the new acquisitions and the high take up of mobile services. It is true that the company has not been able to maintain profitability, mainly due to:
- Adding less profitable businesses to its portfolio (lower ARPU or startup phase).
- Costs related with integration and improving efficiencies.
- Forex losses.
Having said this, Zain is one of the few operators in Africa & ME where growth is financed in larger proportion by equity than debt – for every dollar borrowed from the bank, shareholders put 1.13 $. Debt represents as of today a 37% of the funding needed for the expansion of the last five years whilst shareholders equity supports 42%.
The Group has therefore a healthy EBITDA level despite the negative impacts of new deployments and currency issues in certain countries such as Madagascar, DRC and Sierra Leone that, for example, have experienced issues with local currencies. However the main issues that can affect the valuation are:
- With the exception of Nigeria and Sudan, the subsidiaries in Africa have small individual subscriber bases. Revenues will come once the penetration levels reach the forecasted penetrations, but this will not be in the short / mid term.
- Growth through the acquisition of existing smaller operations in Africa presented the complication of integrating systems and processes since there are no existing quality standards, therefore increasing costs and reducing profitability.
- The regional concentrations of the operations portfolio have increased the exposure in current downturn affecting the African region. In our opinion, group’s expectations have been delayed some years.
- Certain African operations carry some inherent risk due to historical social and political unstableness that might affect Zain’s performance in the future, as it’s more and more complex to homogenize the business culture across regions.
Please find next our Zain’s profile assessment. It gives some additional economic data to understand the rational behind a potential valuation. As written before in this blog, I’m a firm believer of African’s opportunity. But 12 billion dollars is a, let’s say, “non-minor” figure.
If I were Dr. Saad Al Barrak I’d invest less than a minute to accept the offer – it is a no-brainer for me. I believe in Zain’s Africa potential in the long term but we’ll need a long time to get the same consolidated value coming from the operations. He has 12 billion reasons to turn around the repeatedly group’s statement of becoming a top ten global mobile operator by 2011, an ambition that is unlikely to be achieved if it were to sell off its African businesses.
Good luck in any case to both seller and buyer but special congratulations to Chris Gabriel and his executives either at a group and operation levels, real architects of this record valuation.
Enjoy the reading.
Best, CVA
