Optimising acquisitions

If the rate of acquisitions by GCC operators slows over the coming months it will allow valuable time for telcos to focus on extracting revenue from completed deals.

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By  George Bevir Published  April 11, 2009

If the rate of acquisitions by GCC operators slows over the coming months it will allow valuable time for telcos to focus on extracting revenue from completed deals.

The leading GCC operators have a foothold in an ever-expanding list of countries that stretch across the Middle East, Africa and deep into Asia with Etisalat present in 18 territories, Qtel in 14 countries and Kuwait-based operator Zain looking to extend its reach into 23 countries with an impending deal to take control of Paltel.

Deals are still being done, but expansion through acquisition looks set to slow down and instead of buying growth, it could be time for operators to concentrate on making money by integrating their recent purchases.

Rapid expansion has occurred as a result of second, third and fourth licenses being issued to ambitious and often cash rich operators. But over the past few months, IPOs and 3G spectrum auctions have been delayed as governments and regulators wait until a time when they can expect a better price for assets. Although many of the big hitters are still in a strong position and are able to continue to make purchases, the opportunities may become fewer and farther between.

And analysts say that in the mean time, operators would be wise to concentrate their efforts on integrating recent acquisitions rather than looking for new ones.

Head of global strategic management consulting firm AT Kearney's Middle East Telecom Practice, Dr Karl Deutsch, says: "During the past three to four years a number of leading regional telecommunications operators have exercised a strategy of intense expansion, mainly in the form of acquisitions.

"Most of these operators have enjoyed the growth in revenues so far, but many of them have yet to reap the full potential for group synergies and operational excellence that these acquisitions pose."

Etisalat has risen from its 2007 position of 444th in the Financial Time's Top 500 Global firms by market capitalisation, to 219th in 2008. But according to AT Kearney, 70% of Etisalat and STC's earnings before interest, taxes, depreciation and amortisation still stem from their home markets. And the management consulting company said its research showed only 29% of telecommunications groups had realised an increase in aggregate profitability when acquiring or merging entities.

Making the transition

A recent report by management consultants Booz and Co says that operators that can make the transition from "mere collections of independent multimarket companies to truly integrated international companies will sustain competitive advantage in the region for years to come".

Uncovering crossovers and similarities has the potential to save operators pots of cash, and operators in the region are engaged in the process. But for them to push closer towards their stated aims of elbowing past the more established European, Chinese and Japanese operators further action needs to be taken.

Anlaysts at Booz and Co say that the first problem that needs to be resolved is how to create synergies across the different companies. According to the report, "strikingly few" GCC operators have integrated their companies and consequently they are unable to derive economies of scale.

"There are natural points of integration that stretch across the entire footprint of these companies such as use of technology, call centres, data centres, procurement processing, accounting, marketing and advertising. "Cross border synergies can increase revenues and generate savings in areas from reduced roaming charges to operating expenses and capital expenses," the report states.

The high level of trade that takes place within the Middle East creates additional traffic from roaming, and together with the high proportion of expats and migrant workers in the region a large amount of lucrative international calls are made. Steering these customers to an operator's own international network means that they can avoid paying roaming charges to rival operators. Indeed, the high amount of traffic that flows between Saudi Arabia and Bahrain was cited as one of the main reasons for STC being the only bidder for the recent third mobile licence in neighbouring Bahrain.

One of the more obvious ways to align a host of disparate companies is by giving them all the same identity. The rebranding of an acquisition can be costly in the short term, but longer term it can cut costs through a host of synergies. Zain says that it took a year and a half to create its brand but chief communications officer Ibrahim Adel says it was essential in order to create a global brand.

Adjusting the structure of a company can also generate savings, and Booz and Co has identified four alternatives for an international operator: geography based, segment based, function based and product based.

In February last year, Qtel International was formed with the aim of providing "leadership and corporate governance" across the Qtel group, with the responsibility for what it described as "key headquarter functions such as procurement, strategy and group finance".

Analysts at Booz say that a variety of factors can influence the choices of structure, such as level of internationalisation, size of domestic market, proximity of collection of operators, positions in various markets.

Top priority

Regardless of an operators own set of circumstances, analysts say it is a matter of urgency. Tim Peters, principal, AT Kearney, Middle East, says that creating synergies between acquisitions remains a top priority for CEOs and board members of telecommunications groups in the Middle East.

"Particularly during times of an economic crisis it is now even more urgent to shift from a pure growth focus to extracting maximum value, while expansion opportunities can still be eyed opportunistically," he says.

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