Deals at a Price

Batelco Jordan's US$415 million acquisition of Jordan's third GSM operator Umniah Mobile Company in June marked the anticipated move towards consolidation in the kingdom's congested telecoms sector. What was unlikely to have been anticipated was the premium paid for the investment, and the deal perpetuates the ongoing search within the region for the fair valuation of assets and investment opportunities.

  • E-Mail
By  Tawanda Chihota Published  August 7, 2006

|~|Dagher,-Michael200.jpg|~|Many onlookers doubted whether Michael Dagher could make a success of Umniah, prior to the launch of the operator in June last year.|~|Just over a year ago, Umniah Mobile Company announced plans to enter the Jordanian mobile market and compete aggressively on price, against two incumbent operators that had created strong operational positions in the market. Michael Dagher, a Jordanian telecoms veteran who had previously headed up the kingdom's leading mobile operator, Fastlink, was the man to rise to the challenge of introducing a third GSM operator in a relatively small market of just 6 million inhabitants. His optimism at the time regarding the chances of his new company succeeding fell on sceptical ears, and the subsequent market entry, growth and sale of Umniah to Batelco Jordan for US$415 million must now be a source of great personal vindication for Dagher. “I believe that an opportunity exists in the market to offer innovative services at an attractive price,” Michael Dagher told CommsMEA prior to launch last year. “Look at the success of the easyjet (the UK-based budget airline) model. It has been very successful but the application of that type of model has been limited in the telecoms world due to a lack of liberalisation,” he added. At the time Umniah launched commercial service in June 2005, mobile penetration in Jordan stood at approximately 36%, with Dagher forecasting this could easily rise to up to 55% within 5-7 years. The new entrant's blistering subscriber growth appears to have given credence to Dagher's faith in the value that remained untapped in the Jordanian cellular market prior to the entry of his operation. Umniah added around 400,000 subscribers in its first eight months of operation. “We were planning to have something like 100,000 subscribers by the end of 2005,” explained Ihab Hinnawi, director of operations at Umniah. “We were expecting to have maybe 50,000 subscribers within two months, then start phase two expansion. But we were shocked, because after five days we had 50,000 subscribers. We reached our year-end target of 100,000 customers within two weeks,” he added. At the time of the acquisition in June 2006, Umniah counted 500,000 subscribers, reflecting a market share of around 13%, with factors such as quality of service and network rollout still being core in carving out its market share. “We had the option to roam (on other operators' infrastructure), but we believed more in doing it ourselves,” said Hinnawi. “If you use a competitor's network, it will make your life difficult. With phase one of the GSM licence we had to cover 92% of the population, and within 12-18 months we had to have nationwide coverage.” Rumours linking Umniah to Batelco Jordan began to circulate in earnest toward the end of last year, and given the enthusiasm of Batelco's Jordanian operation to develop its offering in that market, together with a change in leadership at parent company Batelco in September 2005, competitive manoeuvrings in Jordan were inevitable. “Well the incumbent has size, the incumbent has legacy, the incumbent has coverage. We have to come in and be smart, we have to come in and be nimble, as flexible and really have to leverage technologies, that's really the only way to compete,” Marwan Juma, Batelco Jordan's CEO told CommsMEA around the time of Umniah launch last year. Batelco's rekindled strategic ambition to expand its operations geographically is believed to have played a key role in the amount the company was willing to pay to acquire Umniah, and the likelihood of any other bidder being willing to pay a similar amount was slim. ||**|||~|Jawad-Speech200.jpg|~|Arab Advisor's Abbassi believes Batelco's acquisition of Umniah could now position the Bahraini operator better for further regional expansion. |~|“Now I don't know why Batelco in the past has not been as aggressive as some of the other regional players [in investing in the region]. I really cannot answer that question because I have not been here, but from where I am today, I am looking forward to growing the business in new geographies, in new vertical markets, because our [domestic] geography is so limited, so I have got to crack other markets,” Peter Kaliaropoulos told CommsMEA in September last year, following a visit to see Batelco's operations in Jordan and Kuwait. As a private company, Umniah has issued no financial results for its first year of operation, and analysts remain unclear whether the company is cashflow positive or not at this point. “This acquisition is an obvious strategic drive from Batelco,” commented Jawad Abbassi, president and founder of Amman-based telecoms research and advisory firm Arab Advisors Group. “Looking at the investment in financial terms, we see it as being high. If an investment bank bought Umniah as a financial deal, then the price paid would be considered high. But there are externalities that exist in the case of Batelco's acquisition of Umniah that need to be kept in mind,” Abbassi added. Batelco's ability to now be able to claim a subscriber base of over 1 million in two countries is the breaking of a psychological barrier, which could result in the Bahraini operator successfully pursuing other opportunities in the region, according to Abbassi. The acquisition of human resources from Umniah is another externality that works in Batelco's favour, and given the Bahraini operator's plan to continue to run the two Jordanian entities as completely separate businesses, the deal offers scope for the exploration of some nature of converged service offering. “Synergies can now be driven between Batelco's fixed subsidiary in Jordan and Umniah, offering a range of integrated services,” explained Abbassi. And while the large amount of liquidity available in the telecoms sector in the region at this point in time remains clear to see, the value that is actually being created through the expansion of many of the operators in the region remains hard to estimate accurately. According to calculations from Arab Advisors, Batelco's acquisition of Umniah cost approximately US$815 per subscriber, compared to US$529 paid per subscriber in 2003, when Kuwait's MTC acquired market leader Fastlink. At the time of the MTC/Fastlink deal, blended ARPU in Jordan stood at around US$30 and mobile penetration at 23%. By the time of Batelco's acquisition of Umniah, ARPU stood at approximately US$18, and penetration at 64%, according to Arab Advisors. “There are completely different market conditions at these two different times,” Abbassi stated. “The expansion across boarders is met by the supply of opportunities still being limited, which drives up prices,” he added. The price paid for Umniah also raised eyebrows at home. At the beginning of July, 15 deputies in Jordan's parliament signed a petition calling for the halt of the sale until the government's own rights with respect to Umniah had been fulfilled. Jordanian members of parliament charged that the government had been prejudiced by the sale of Umniah, as the start-up operator paid just JD4 million (US$5.65 million) for the licence, and had been granted tax exemptions and other concessions to allow it to successfully enter the market. Despite the objections, the deal is likely to remain unchallenged. ||**||

Add a Comment

Your display name This field is mandatory

Your e-mail address This field is mandatory (Your e-mail address won't be published)

Security code