Opportunity knocks

Regional mobile telecomms operators could invest up to $3 billion in network infrastructure alone in the next two years, making the sector a definite bright spot in a battered global telecomms market.

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By  David Ingham Published  April 29, 2003

|~||~||~|Opportunity seems to be waiting around every corner in the regional mobile telecommunications landscape. The awarding in April of a second GSM license in Bahrain promises to be just the start of a mobile services boom in the Middle East. The coming 18 months are likely to see several billions being poured into regional mobile telecomms, making the Middle East a boom market in a debt-ridden global industry.

“The Middle East is one of the few bright spots in telecomms right now,” says Joseph Braude, senior analyst, Pyramid Research. “There is tremendous pent-up demand, planned privatisations, new licenses and increased investment mandates by governments over the next several years,” he continues.

Investment will be made both in the expansion of existing networks, whether monopoly or privately-owned, and in the construction of entirely new networks. In a December 2002 report, Pyramid Research suggested that $3 billion could be invested in mobile network infrastructure in the Middle East & North Africa in 2003 and 2004 alone. That figure does not include license fees for new networks and potential merger & acquisition costs.

Whether or not international mobile operators, with their perilous finances and reluctance to invest in ‘risky’ markets, will want to bid for new licenses or buy existing service providers remains to be seen. Should they steer clear, the way will be left open for local operators to benefit, with deep-pocketed MTC Vodafone and Wataniya of Kuwait in the driving seat.

“I think there are plenty of opportunities,” says Mohsen Malaki, telecomms analyst at IDC. “The really big market that is going to be opening up is Saudi Arabia. That’s a market all of them would be interested in. Whoever gets Bahrain, it would be an additional subsidiary they can put in their portfolio when bidding for Saudi Arabia.”

A tender for a second GSM license will be issued in 2004, but a very new and potentially interesting development could be the award of a ‘virtual license.’ That would involve a new operator buying network capacity from Saudi Telecom Company and offering a service without having to build a GSM network.

An exact parallel is Virgin Mobile, which offers such ‘virtual’ GSM services in the UK. “This would be a potential investment, in addition to the second network operator that is being planned,” says Malaki.
Another country where there is likely to be considerable activity in the coming months, and both MTC and Wataniya are keeping a close watch, is Lebanon. There, the country’s two mobile operators are running their networks on short term contracts after having their licenses unilaterally cancelled by the government last year.

According to various sources, the government intends to auction off the networks to the highest bidders by the end of May. The auction will be open to all comers, including the two companies, Cellis and Libancell, that built the networks and had their licenses revoked in the first place. Wataniya and MTC have confirmed their intentions to bid.

How the earlier behaviour of the Lebanese government towards Cellis and Libancell affects the amount bidders are prepared to offer for the licenses remains to be seen. There is talk of the government seeking around US $600 million for the two licenses, but the CEO of at least one potential bidder thinks that “unlikely.”

Lebanon’s 800,000 mobile subscribers currently generate around US $500 million in revenue annually. The country’s GSM revenues are projected by Arab Advisors to reach more than US $884.7 million in 2007.

The opportunities don’t stop there. Both Pyramid Research and IDC believe that there will be a third operator in Egypt. That operator will definitely be Telecom Egypt, but the consensus is that the company will have to seek a partner to help it manage the network. “It doesn’t have the marketing savvy or the operational knowledge to be able to compete in an already competitive GSM market,” says IDC’s Malaki.

Malaki says that Telecom Egypt is in discussions with European partners, but the way may be left open for a partner from the Gulf if those discussions do not come to fruition. With a mobile penetration rate of only 5.3% at the end of 2001, according to Pyramid Research, there is plenty of potential for growth.

Opportunity also beckons to the South, in Sudan. The country has largely been off the radar of investors due to political instability, but it has a growing population now approaching 30 million.

Dr Saad Al Barrak, CEO of MTC, confirmed that his company has been approached by Sudanese investors to become involved in a new GSM operator. A budget of US $139 million has been set aside for the creation of the new company and a five year subscriber target of 400,000 has been set.
There is also considerable opportunity in Iran and both Wataniya and MTC have expressed interest in this market of around 60 million people. First up is a tender to build a technology platform that will allow the national monopoly to offer pre-paid mobile services to up to five million people. The contract will be awarded on a build/operate/transfer (BOoT) basis, with the winning company sharing revenues with the country’s incumbent.

BNP Paribas has recently been commissioned to help draw up the tender for a second GSM license. Malaki expects the tender to be issued by the end of 2004.

All of this doesn’t even mention Iraq, an oil rich country of 24 million people that doesn’t even have a national mobile network. Saudi Arabia, another oil rich country with a slightly smaller population of 21 million, currently has around four million subscribers, a number that is actually considered very low.

For suppliers of network equipment, such as Lucent, Motorola, Nokia and Siemens, all this is clearly a big opportunity. Pyramid Research cautions, however, that international companies must get their approaches right if they are to benefit.

“Taking advantage of this tremendous demand for infrastructure requires strategies tailored specifically to the region,” says Joseph Braude. Those strategies include a willingness to extend credit to operators; supporting local equipment manufacturing and knowledge transfer initiatives; and studying the unique challenges and circumstances of individual operators.

If they do get these things right, suppliers could well benefit. Regional telecomms operators, Pyramid notes, tend to be profitable, especially national monopolies; and have little debt and therefore less need to borrow. “There is limited debt, if any, thanks to strong cash flows and limited need for borrowing,” says Braude. “For operators that borrow, their cash flows and market positions are strong guarantees of repayment, and the backing of the state certainly does not hurt.”

For companies like MTC and Wataniya, the challenge is to make the most of the unfolding opportunities without falling into the sort of debt trap that has forced Orascom Telecom to retrench. “We will not expand without taking care of what we already have in hand,” says Ahmed Dehdary, assistant general manager at Wataniya Telecom.

“We will go where there is business sense, and where the return will give the most to the shareholders. It’s now a case of wait and see who will be coming to the market.”||**||

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