STC plots IPO

Saudi Arabia has taken its first steps towards privatising Saudi Telecommunications Company (STC) by appointing Gulf International Bank to arrange an initial public offering (IPO).

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By  Matthew Southwell Published  July 1, 2002

|~||~||~|Saudi Arabia has taken its first steps towards privatising Saudi Telecommunications Company (STC) by appointing Gulf International Bank to arrange an initial public offering (IPO).

Although details of the IPO remain unclear, a number of sources suggest that it will take place before the end of the year. October is currently being touted as the most likely timeframe.

How much of the company will be floated has also yet to be confirmed. However, bankers within the Kingdom predict the government will offer 30% of the company to the market.

“Anything below 10% is not a significant offering while the government will surely not go above 40%. Anything between the two makes sense because it brings STC to the stock exchange, forces them to use modern accounting principals and brings small Saudi shareholders to the table,” comments Philippe Rixhon, partner, Accenture.

Sources within the banking community also suggest that only Saudi nationals will be able to purchase shares in STC. “This is the crown jewel and won’t be open to foreigners. There is still a long way before that happens,” one senior Western banker told Reuters.

Rixhon says the common understanding is that STC wishes the IPO to create a broad Saudi shareholding structure, similar to those carried out in France or Germany, where all citizens are eligible to by shares.

“The intention is to make them ‘popular shares.’ This is the perceived intention, however, the people working on the share option may produce a different option,” Rixhon explains.

With STC staff refusing to talk to the media on the record, the motivation for the IPO remains a matter of conjecture. However, a number of market pundits suggest the move has come now for a combination of reasons, including a need to hit the WTO’s December 2004 deadline for competition and a desire to reduce the company’s debt.

“STC has huge debt. It has a large portion of government debt and local private sector debt. By floating part of the company on the stock exchange it is hoping to pay some of that off,” says Mohsen Malaki, senior telecoms analyst, Central & Eastern Europe, Middle East & Africa, IDC.

“Also, STC is expecting competition... It will definitely need to raise the cash to invest more in its infrastructure and basically complete the restructuring of the company to compete in a competitive environment,” he adds.

If 30% of STC is eventually offered on the Saudi stock exchange, bankers in the region suggest that the company could raise as much as SR3.6 billion (US$960 million). This money will also go someway to covering Saudi Arabia’s budget deficit, which is predicted to hit SR45 billion in 2002.
Should the planned IPO go ahead, its impact on STC will be significant. To begin with, the PTT will have to bring an unheard of level of transparency to its accounting department as shareholder reports will have to be delivered on an annual basis.

“Even in the preparation of the IPO, STC will have to publish figures that they have never been published before,” comments Rixhon.

Furthermore, STC’s business process will have to be both open and clear. Joseph Braude, senior analyst at Pyramid Research, suggests this could well cause problems as vendor lobbying — where certain companies exorcise undue influence on employees — has been rife within the PTT in the past.

“The IPO will bring transparency and this will bring pressure on some departments within the company that are not used to that kind of scrutiny. One of the obvious concerns is vendor lobbying. There have been publicised issues about this before and some people believe that they are still going on,” he says.

The ability to examine STC’s day-to-day operations should also provide STC’s critics with greater ammunition, while shareholder meetings will offer an ideal forum to voice complaints.

“By privatising STC, the government is bringing it closer to the client. Almost all of the shareholders will be customers so they will voice a point of view to the board that is not only the capital holder point of view, but the client point of view as well,” says Rixhon.

Such internal criticism will undoubtedly force STC to accelerate its plans to streamline operations and become a ‘true’ privatised company. However, such a move suggests that the PTT will have to reduce its 23,000 strong workforce, something rarely associated with Saudi companies.

“When talks broke down with SBC [in December 2000] over it acquiring a strategic stake in STC, it was because SBC thought the company was bottom heavy and needed to lay off employees,” says Braude.

“One of the most sensitive issues in Saudi Arabia at the minute is that the population is growing rapidly but jobs are not growing as quickly… Privatisation will force the company to tighten its operations and this means that STC has to take a sober look at the 23,000 people that are working for it,” he adds.

However, it appears as though plans have already been put in place to absorb some of the staff reductions. For example, STC put part of its revenues aside last year to create an early retirement fund.

Whether STC’s first steps towards privatisation also signify the Kingdom’s move towards a fully liberalised telecommunications market is also open to debate. Malaki says that, globally, there is a close association between privatisation and liberalisation.
However, this may not be the case within Saudi Arabia, especially as the sector’s regulatory body, Saudi Communications Commission (SCC), is still closely tied to the government.

“The responsibility for competition lies with the regulator and how the government or STC influences it. Even though they [SCC] claim to be independent it is not totally independent and a significant amount of influence is still exerted on the regulator,” says Malaki.||**||

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