Delta converges on the Gulf

As statistics continue to show signs of expansion in the telecoms industry in the region, Rogier Van Driessche talks to Tamara Walid about the company and the launch of a private equity fund.

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By  Published  November 11, 2006

Telecoms is booming. Wherever you look, new parts of the industry are springing up and new players waiting to join the action.

Little surprise then that investment firms are now joining the telecoms bandwagon, hoping to get a share of the billions of dollars worth of deals expected to be made next year.

“Telecommunications in the Middle East is absolutely booming,” says Rogier Van Driessche, partner at Delta Partners. “It is one of the strongest growing industries in this part of the world.”

He should know. Delta Partners was set up at the end of last year when a group of people decided to leave their consulting firms, including big names like Dan Cluster, Mackenzie, Booz Allen, BCG, and establish a new company specializing in telecommunications. Now, Delta Capital, the investment arm of Delta Partners is launching a US$100m telecommunications fund exclusively for a number of operators in the Middle East.

Experts are all agreed on this. The Middle East telecom industry has seen exceptional growth, especially in the last three years, from an overall revenue perspective as well as from a subscriber point of view. Many analysts also hold that this is actually only the beginning, with future growth expected to continue at double-digit rate. The telecoms industry revenues are projected to continue to grow at a steady 10 to 15% over the next five years. It is also noteworthy that projected growth rates in the ME region are double those in mature markets, and above other high growth emerging markets like Asia, LATAM and Eastern Europe.

Van Driessche believes the market is liberalising and competition is increasing dramatically and in affect the whole landscape of the telecoms industry is changing. This change, he says, will not be restricted to operators who are not used to having competition around, but will also make its way into the market. And although market penetration has grown rapidly over the last couple of years Van Driessche thinks there’s still a lot to be done, especially on the fixed-line side of business as well as in the supporting industries surrounding the operators.

“In Europe or in other parts of the world there are huge supporting industries surrounding telecom operators in retail, content applications, call centres, infrastructure buildings and site-sharing providing services to the telecom operators. In this part of the world, until very recently, telecoms operators have been doing everything themselves,” he says.

However, Van Driessche explains that this is changing and a new trend is emerging as those supporting areas are being developed, which, aside from capturing the interest of advisory and consultancy firms, is very critical from an investment standpoint. “It is expected to create numerous growth opportunities as well as value creation potential," according to Van Driessche. With the emergence of such a trend, Delta Capital is set to not only do strategy consulting as it launches it’s private equity telecoms fund but to also invest in those supporting industries.

“The US$100m telecoms fund will be different from other private equity houses in the region," promises Van Driessche. He sites Dubai-based Abraj Capital, as an example, explaining that while the company is huge in the region with huge capital and investment power and an eye for opportunity it is not necessarily specialised in one specific industry.

“We’re a bit smaller than they are but we exclusively focus on telecommunications,” he says. “We think it’s increasingly important in this industry. The time when you can buy certain opportunities cheap and sell them more expensive is a little bit over. You need to buy things at their fair value and then make sure you sweat the value out of the things you buy.”

For Van Driessche, ‘sweating’ the value out of companies means hands-on work, either through being part of the management team or being involved in placing people to key positions as well as the overall advising. He believes this is what sets Delta Partners apart from other private equity firms – they don’t simply buy and sell, but rather use their industry expertise to turn companies around and create profit.

Another plus for Delta Partners is its synergies with Delta Capital as doing advisory work for some of the biggest telecoms operators in the region like MTC and MTN Investcom has positioned it right in the heart of the action. This, explains Van Driessche, has made it easier to pick up new trends in the industry and know first-hand when new companies arise, which is very beneficial for the fund. On the other hand, looking for investment opportunities for Delta Capital could bring about new concepts and ideas for operators on the advisory side.

On the telecoms fund side, Van Driessche says there’s still a lot of work to be done. “While initially a number of 12 companies were planned to be selected for the fund, this figure is not a hard number," says Van Driessche.

“It’s a back of the envelope calculation. If you want to invest around a US$100 m you typically have capacity because every investment that you make needs effort and time. You have a capacity to do around eight to 12 deals and it’s up to you to divide the US$100m by that number and end up with around US$5-15 m for a deal,” he says.

Van Driessche also explains that the company, through the fund, does not plan on buying 10% of Etisalat for a few hundred million dollars nor does it look for real seat capital or venture capital - individuals with an idea looking for funding. “We’re looking for smaller and a little bit later stage deals,” he says.

Concentration he adds will be on regional investors who are both high net worth individuals and institutions. He believes it’s important for this Middle Eastern fund to be driven by Middle Eastern investors; however, other groups that have a thorough understanding of the region and the industry will also be considered.

In terms of choosing companies for the fund, Van Driessche, in addition to being a telecoms or media company, lists certain criteria such as having a sound management team, have a market, and an exit potential. The latter is very important in this industry, he stresses as it is not only about buying but also being able to sell at a later point and at a profit price. “You need to be able to envisage an exit in those kinds of ventures,” he says.

As the companies will be selected from the MENA region, Van Driessche narrows this selection as inclusive of the GCC countries, the Levant represented by Jordan and Lebanon, and Morocco from North Africa. The company is also examining Egypt very closely as well as Turkey.

As for whether there will be a limit on investment in one single company, Van Driessche says, “it shouldn’t exceed 20-25% or US$20m to US$25m.” This he explains is crucial. “If you’re very concentrated and a deal goes bust then you have problems. It’s something very standard in this industry to spread out your risks as widely as possible.”

The way such funds work, explains Van Driessche, is after investing US$100 m on behalf of the investors, this amount is expected to increase at the end of the investment period and a return on investment is achieved. As fund managers Delta Partners will obtain a certain percentage of the capital gains whereas the vast majority of gains will go to the investors.

Whether these companies will be listed on the stock markets at a later stage, Van Driessche says: “There are two ways of selling the companies, either through a trade sale which is selling to another company in the same business, or by bringing them to the markets and doing an IPO.”

As the company currently launches its telecoms fund via a road show, visiting a country in the region each week where talks are held with potential investors, Van Driessche hopes for rewarding results that would lead to signing up with potential investors. While the road show is lined up until the beginning of December, first deals are expected for completion by beginning of next year.

“We’re filling the pipelines. We have a few companies lined up, not only names but real deals,” says Van Driessche.

While risks in such investments are ever-present as in any other high return investment, Van Driessche remains optimistic, confident that the company’s industry expertise places it in a much better position than many other investors and therefore minimizes the risks.

“There are going to be many winners and many losers and being able to pick those winners from the losers is going to be a key asset for our investors and we think we’re in a key position to do that,” he concludes.

"we’re filling the pipelines. we have a few companies lined up not only names but deal"
"telecoms in the middle east is one of the strongest growing industries in the world"

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