Cross Purposes

The success of the UAE's TECOM in bidding for a 35% stake in Tunisie Telecom has confounded analysts, many of whom are struggling to understand the company's reason for existence as well as its strategy. Alex Ritman and Tawanda Chihota investigate what lies at the heart of the Middle East's latest international competitor.

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By  Alex Ritman Published  April 30, 2006

|~|Bin-Byat200.jpg|~|TECOM and du chairman Ahmad Bin Byat says the investment in Tunisie Telecom is just the beginning of TECOM's international ambitions.|~|It was generally accepted that the US$330 million sale of TECOM's communications assets and staff to Emirates Integrated Telecommunications Company (EITC) in February would see the company absorbed into the UAE's second all-service operator du, and see it cease to operate as an independent entity. Thus news of TECOM's participation in the bid to acquire a 35% stake in Tunisie Telecom, and its subsequent success in the process has left the UAE's telecoms sector seeking answers regarding TECOM's purpose and ambitions. “The whole thing doesn't really (seem to) make sense. I mean du bought TECOM and then TECOM is now active on the international front. I think as usual in the country, there's politics in these operators,” says Marc Hammoud, senior financial analyst — research, Shuaa Capital in Dubai. “It seems like everything in the country, when you have one company like Etisalat doing something, you have competition from the other company that was just set up to do the same thing. Always expect this competition between UAE companies that want to be the best locally, regionally and internationally,” he adds. Hammoud is not the only analyst to point to political ambitions as being at the heart of TECOM's emergence on the international scene. “I think it's a deliberate strategy of Dubai Investment Group and the government of Dubai to move away from Etisalat, and maybe it has more to do with internal politics than any telecoms experience,” says Taha Rangwala of Massachusetts-based Pyramid Research. He claims that Etisalat is looking to reduce the amount of royalties its pays to the federal government now that its monopoly has ended. “I also think that it (Etisalat) is no longer being controlled by the Dubai government as much as it once was,” Rangwala suggests. “Maybe this is the Dubai government’s way of getting back and saying ‘you’re not the only one (telecoms entity) who can invest our money’.” Supported in part by the same financial backers as Etisalat, TECOM's move into the international arena will, according to Rangwala, create artificial competition that will only serve to increase investment prices, something that seems set to happen with both TECOM chairman Ahmad Bin Byat and Etisalat chairman Mohammad Omran having both declared the importance of their overseas expansionary ambitions and strategies. Given that the UAE's current incumbent, Etisalat was short-listed in Tunisia but was subsequently eliminated for offering a bid that was topped by other bidders, it appears as though no accord exists between TECOM and Etisalat as to where each company will or will not bid. Such a situation gives rise to the possibility of one UAE company bidding up the price that the other would ultimately have to pay in an award process should it be determined to win the asset on offer. “For Tunisie Telecom, I think they (TECOM) paid US$1,500 per subscriber and it is mainly a fixed-line operator. It would have been an expensive price for a mobile operator, so I think it is rather high for a fixed-line operator,” Hammoud explains. TECOM's winning US$2.4 billion bid was at a 17% premium to the US$2.05 billion bid by the second highest bidder, Vivendi Universal of France. “Both (Etisalat and TECOM) are overpaying for their acquisitions so I don't know what's happening. It's kind of a competition (between the two).” ||**|||~|Sultan,-Osman-200.jpg|~|Du has a formidable task in seeking to challenge Etisalat domestically, says CEO Osman Sultan.|~|Analysts believe TECOM will continue to look for investment opportunities internationally. “My theory is that TECOM is just another vehicle for the Dubai government to increase investment in strategic companies and sectors worldwide,” says Pyramid’s Rangwala. “Now since it (the UAE government) has another one (telecoms company), it might as well use it to increase its global investments.” TECOM, which is part of Dubai Holding, has now gone on to be selected as a preferred bidder for Maltacom in Malta and has expressed an interest in participating in the process to award the third GSM licence in Saudi Arabia later this year. Rangwala is cautious about the development of TECOM as a second telecoms investment vehicle for the UAE government. “It dilutes the government's focus away from home,” he suggests, adding that the international investments should have been left up to the more experienced Etisalat. “I don't know how Etisalat would have done in Tunisia, but at least it is committed to growing internationally through a separate arm, Etisalat International.” According to Bin Byat, in his capacity as chairman of TECOM, the company's development into the international arena forms part of a global vision and he sees no conflict with Etisalat or du on the matter. “We feel that Tunisia is a good platform for us to launch our international operations,” he says. Bin Byat, who also happens to be chairman of du, is quick to point out the separation in identity between TECOM and du, stating that for its part, du is purely focussed on the domestic UAE market. “This is an emirates company, its main focus is the emirates and I believe we have the world here,” Bin Byat told CommsMEA in an interview in March. As far as Bin Byat is concerned, the separate missions and mandates of TECOM and du should not be confused. “They are completely different companies with different management,” Bin Byat explains. “TECOM has international ambitions in telecoms, and this is very different from our investment in du,” he adds, reiterating that du will not be looking to expand outside of the UAE. “du has enough on its plate.” The question that then begs to be answered is what type of company is TECOM given it sold its assets and workforce to du (EITC) in February. “Is it a holding company that has as its main objective the purchase of assets internationally and then the assets will be transferred to EITC, how does it work, I don't know. I think that it is confusing the way that they are handling all of this,” Shuaa Capital's Hammoud states. Osman Sultan, du's CEO has also been quick to differentiate the operations and ambitions of the two companies. “(The acquisition of the stake in Tunisie Telecom) has nothing to do with du at the present time, it is a TECOM investment,” Sultan claims, adding that it would be premature to discuss any synergies that may arise between du and the recent acquisition, Tunisie Telecom. However, Sultan confirms that du acquired TECOM pretty much as a going concern. Defending the high per-subscriber cost of the TECOM acquisition, Sultan noted that: “It's not only the price per subscriber. It's the entire activity, it's the landing station, it's the broadcasting business, and it's the employees.” Despite these seeming inconsistencies, TECOM appears intent on pursuing further international expansion. “We are building an international company, which will focus completely on telecoms,” Bin Byat says, suggesting that a formal announcement of the internationally focussed company's name would probably occur before June. “Tunisia is only a start for us. We have to choose a starting point and we believe Tunisia is a very good one,” Bin Byat explains. “We are definitely concentrating on the Middle East and Mediterranean basin countries. We're not going too far away (from the UAE).” “We are looking at investments in existing operations. There are a lot coming through government privatisation,” Bin Byat adds. Further investment opportunities could include Algeria, for example, where there are plans for the privatisation of Algeria Telecom this year. Further developments for TECOM could also involve a listing on the Dubai International Financial Exchange alongside du.||**||

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