Road ahead: 2010

After a turbulent 2009, the region’s telecoms sector is upbeat about prospects for the year ahead.

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Road ahead: 2010 Booz & Co’s David Tusa sees more caution in M&A activity in 2010.
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By  Roger Field Published  January 4, 2010

Few would dispute that 2009 was a tough year for the telecoms sector, with growth slowing and capital becoming harder to find.

But while 2009 was the year that the financial crisis truly gripped the Middle East and Africa, it was also a year that forced the region’s operators to wrestle with some of the challenges that they would have had to confront at a later stage anyway, such as the need to be more discerning in acquisition targets, consolidate portfolios, and focus more on higher ARPU services.

While the telecoms sector is widely viewed as being somewhat insulated compared to many other sectors, operators and vendors in the Middle East and the rest of the world certainly felt the effects of the economic turmoil.

Global capex from telecom operators is expected to have declined by almost 6% in 2009, mainly due to a significant capex shakeout in the Middle East and Africa, a weakening US dollar and delays in US broadband stimulus funding, according to a recent report from analyst Infonetics Research.

The difference in 2010 is that operators will get a little bit more selective about the nature of their portfolios. - David Tusa

Capex is expected to reach a trough in 2010, with a new investment cycle starting in 2011, driven by 3G rollouts in India and Central and Latin America, and the start of 3G rollouts in Africa, according to Stéphane Téral, principal analyst for mobile and FMC infrastructure at Infonetics Research.

But for many industry experts, the effects of the financial crisis, including reduced growth and funding are playing out in an interesting way in the telecoms sector in the Middle East and Africa. Indeed, for most operators, the situation has been a reality check after the excesses of the past few years of low-cost debt.

This in turn is compelling operators to reach a new level of maturity by consolidating operations, increasing efficiency and where necessary, trimming operations through the disposal of non-core assets and services.

Measured expansion

This is most clear in terms of mergers and acquisitions.  After a “land grab” mentality in the run up to 2009, operators now look set to take a more prudent approach to deals, according to David Tusa, principal at management consulting firm Booz & Co.

Tusa says that while he sees heavyweights such as Etisalat, STC and Qtel continuing to expand geographically, they will now adopt a more strategic approach and look for well-priced assets that fit with their existing portfolio.

 “It is a chance for them to say: ‘How can we extend our footprints properly and how can we keep on taking advantage of growth and momentum we have had in the past few years?’” he says.

“The difference in 2010 is that operators will get a little bit more selective about the nature of their portfolios.”

Operators will increasingly question how an acquisition target would fit with the company and add value to the group, according to Tusa, who adds that “interesting markets” including Iraq, Afghanistan and Iran could be a focal point for operators in the coming year.

“They are going to be assembling their portfolios with a view towards extracting better value from them. I know it sounds simple, but maybe that has not been practiced as one of the key drivers of M&A in the past,” he says.

Milan Sallaba, an independent telecoms consultant agrees that continued M&A activity is likely in 2010 – albeit at a less frenetic pace – particularly among the larger operators with healthy balance sheets.

“While some operators appear to have been caught out by the downturn’s double whammy of slowing revenue growth and profits and increasing cost of capital, others are in a strong position and benefit from advantageous debt positions underpinned by strong cash flows – Etisalat being a notable example,” he says.

“It is to be expected that some telecom assets that continue to struggle could become available and may indeed be snapped up if the price is right and provided there is a good fit with the acquirer’s portfolio.”

In addition to a more considered M&A approach, 2010 could also be a year when some operators trim back their portfolios and dispose of operations that are failing to add genuine value to the group, a trend that already appears to have started with Zain’s proposed sale of most of its African operations in 2009, according to Tusa.

“I wouldn’t rule out some portfolio trimming,” he says. “I wouldn’t rule out some of the shareholders and sponsors sitting around and questioning whether X operator in Y territory is really contributing value.”

Efficiency drive

Expansion is not the only area where operators will show a growing maturity in 2010. The region’s operators are also expected to continue to focus on improving their group-level procurement and deployment of services.

“Most players have shifted their focus from continued expansion to more closely focus on managing the EBITDA of the assets in their portfolio,” says Sallaba.

“In the face of tightening budgets and capital, operators have made great strides to increase the degree of professionalism of their selection, approval and purchasing processes for large contracts, for instance.”

Tusa adds that this trend is likely to continue in 2010 as operators look to extract greater value from existing assets and boost efficiency across their operations.

“The big operators have built fantastic portfolios but they have to look at how they can extract value out of the groups. 

Limited roll out of LTE

Despite the hype that surrounds LTE, ABI Research suggests that “most LTE rollouts will not start for a few years”.

Instead, many operators will focus capital spending on squeezing out faster data rates and increased capacity from existing 3G networks. “Nor will there be many types of LTE-enabled devices, apart from some USB modems and perhaps some demo LTE handsets.”

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