$1.2B to spend

Kuwait’s Mobile Telecommunications Company dished out $424 million to gobble up Jordan’s Fastlink in January. It’s ready to spend $1.2 billion more in a bid to become a mobile telecomms giant.

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By  David Ingham Published  January 30, 2003

Saturation at home drives overseas expansion.|~||~||~|The ink is barely dry on Mobile Telecommunications Company’s (MTC’s) US $424 million acquisition of 91.6% of Jordan’s Fastlink, but the Kuwaiti mobile telecomms company says this could be just the start of a major shopping spree. MTC’s director general, Dr Saad Al Barrak, told Arabian Business that the company intends to spend $1.2 billion on further acquisitions and to grow its number of subscribers from 1.5 million now to five million by the end of 2005.

MTC also plans to bid for a GSM license in newly deregulated Bahrain and may look to move into Saudi Arabia when the GSM market opens there in 2004. “For us, as a mobile telecommunications company, Kuwait is a small market nearing saturation,” says Al Barrak.

“We and our competitor, combined, today have 1.2 million subscribers in a country of 2.2 million people. There is not much growth opportunity, so we have no option but to be a regional player in line with everybody else’s rush to be a regional player.”

The all cash acquisition of Fastlink will be funded 75% through debt, mostly borrowed from National Bank of Kuwait (NBK), MTC’s advisor. Out of a cash reserve of $500 million prior to the deal, MTC has around $400 million in hard cash left.

To fill the rest of its intended $1.2 billion war chest, MTC will take on further debt and create investment funds that will be managed in co-operation with National Bank of Kuwait. The company is currently unable, for regulatory reasons, to use its own equity in acquisitions.

Fastlink was selected as an acquisition target because of its clear number one position in the Jordanian market, where it has an estimated 900,000 subscribers compared to rival MobileCom’s 300,000. “With Fastlink controlling 70% of the market, its superb sales and marketing skills, its excellent management and good growth potential, it was a perfect buy as far as we are concerned,” says Al Barrak.

The company was also attracted by Jordan’s increasingly mature investment environment. “Jordan is probably the best regulated telecomms market, a stable country, with a good judicial system and a great investment climate,” says Dr Al Barrak.

Al Barrak says that MTC will be looking “almost everywhere” as it seeks to expand. Besides Saudi Arabia and Bahrain, the company has mentioned Iran, Lebanon, Bahrain, Oman, Egypt, Sudan and Morocco as potential targets.

There is more than a little irony in the fact that MTC has acquired its stake in Fastlink from Egypt’s Orascom Telecom. Orascom went on a spending spree in the late 1990s, acquiring stakes in mobile telecomms companies across the Middle East and Africa, but spiralling debt has forced it to sell off key assets.

Not surprisingly, Al Barrak disagrees with suggestions that MTC’s expansion plans are aggressive and that it could get itself into the same debt problems as other telecomms companies. “We have zero debt [prior to the MTC takeover] and our debt after three years will be less than $1 billion,” he says.

“Our equity by that time will be $2 billion. It will be 2 to 1 equity to debt, which is not a big issue. The difference is in the financial structure and robustness of MTC and our extremely conservative, stringent financial policy. We will not over extend ourselves; we will only grow our body as much as our muscles allow us.”

National Bank of Kuwait, a bank that prides itself on its very conservative approach, seems to like what it sees. “It is exciting to take a company from being a first class local operator to a regional powerhouse. Mergers and acquisitions in the region are rare and so it is interesting to see this in the telecom sector and the Middle East,” says George Nasra, VP of investment banking at National Bank of Kuwait.

“Strategically we believe this could start the process of consolidation in the telecom sector in the Gulf and Middle East. Operators have realised they cannot survive on their own domestic franchises and have to go regional. Those that are going to survive are the ones who have financial resources and execution capabilities,” he adds.
||**||Possible challenges.|~||~||~|
Al Barrak is confident that the mobile telecomms market, saturated elsewhere in the world, still has plenty of room for growth in the region. “Our target market is the area extending from Pakistan to Morocco, and from Turkey down to mid-Africa. This market is populated by 450-500 million people and the penetration rate is less than 5%. So you can see we have huge potential. The market might be saturated in Europe, but it is not here,” he says.

“Because we are situated in this area with intimate knowledge of this market, its culture, its politics and with our experience, track record and deep pockets we are better positioned than others to leverage the opportunities in this market.”

That might well be the case and telecomms companies might be available at ‘fire sale’ prices, but there are clearly challenges ahead for the mobile telecomms industry. On the one hand, competition has been forcing down revenue per subscriber, a problem that could be compounded in the region by lower income levels outside the Gulf.

On the other hand, service providers are having to make a lot of choices about the deployment of expensive new technologies and services. Should they wait and see how costly 3G technology is received by the consumer, or wait and risk losing out to competitors?

On the question of revenue per subscriber, Al Barrak says that MTC’s are currently amongst the best in the world, at $80 per post paid user and $45 per pre paid user. “If you look at it over the next five years, although there will be a slippage, it will still be an extremely attractive rate,” Al Barrak predicts.

A comparison of MTC and Fastlink’s 2002 numbers provides evidence that a decline in margins could be inevitable as MTC expands across the Middle East. In 2002, MTC made $230 million profit on revenue of $400 million. Fastlink, however, made $65 million on revenue of $230 million.

How narrower profitability might affect publicly listed MTC’s share price remains to be seen. The company has a PE ratio of 13 and was valued at around $2.3 billion on the Kuwait stock exchange at the time of the deal.

As for 3G technology, Al Barrak describes it as, “one of the biggest tricks in the history of mobile telecomms.” MTC’s migration to broadband mobile telecomms will be done in an, “evolutionary way.”
“We are not in a hurry,” says Al Barrak.

“I think the technologies we are using are evolving to 3G standards, such as Siemens switches, such as the Edge technology from Nokia. We will be evolving naturally and gradually to 3G technology over the next five years.”

One question that remains to be answered is how far MTC will take its relationship with Vodafone, which was initiated in 2002. The tieup does not involve any transfer of equity, and appears to be more about branding and technology transfer.

A spokesperson in MTC’s PR department explained that there will be, “dual branding” of services, certainly in Kuwait, but couldn’t say if the arrangement will extend across all MTC subsidiaries.
Announcements regarding the relationship will be made in coming weeks.

“It has partnered with Vodafone and will eventually phase out the MTC brand name and go with Vodafone in the local market. This will happen in the next few months,” predicts Mohsen Malaki, senior telecommunications analyst at IDC. “What the implications of this for the Jordanian market are I’m not sure. I think Fastlink will just carry on as it is because it has been very successful so far in the local market and has thus far prevented MobileCom from gaining much market share. It will probably leverage Vodafone’s experience with MMS technology,” he adds.

Who MTC decides to gobble up next and how its relationship with Vodafone develops all remain to be seen. What you can probably be certain of, however, is that you’ll be hearing a lot more from this company in the near future.||**||

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