Size matters in Saudi

Market analysts earned their bonuses last month as many predicted with some accuracy the price the winning bidder would have to pay in order to be considered for Saudi Arabia's third cellular licence. All-conquering MTC Group announced that it had pledged SAR22.91 billion (US$6.12 billion) for the privilege of challenging mobile incumbents STC's Al Jawal and Etisalat's Mobily, confirming the US$6 billion estimation of the likely minimum concession for the award.

A price tag at this level is a seminal moment in the perception of investment value to operators in the Middle East - even if it is for a licence in the Gulf's largest and most lucrative telecoms markets.

Just over two-and-a-half years ago when the last mobile licence was offered in Saudi Arabia, Etisalat came away victorious with a colossal winning bid of US$3.4 billion, which at the time was viewed as being a significant premium on the opportunity's fair value.

Etisalat has gone on to add close to 7 million mobile subscribers since it launched in May 2005, and this number is likely to top 8 million by the time the third licensee launches commercially, perhaps towards the end of this year or early 2008. Hence despite conditions having become less attractive since Etisalat's entry into the Saudi market as a result of higher penetration, increased services, and greater value propositions, the kingdom's latest cellular concession has in fact been auctioned off at a higher price than the last one.

Mobily is also set to continue as a formidable competitor in the market, with the operator's CEO Khaled Al Kaf telling CommsMEA that the operator's presence in the market so far has shown its appetite to succeed through giving subscribers a sense of good value. Along with nine other bidders, Mobily is vying for the kingdom's second fixed-line licence, which if acquired would play a significant role in differentiating the second mobile operator from the new entrant. And while licence bid processes of bygone years often included a strong representation of bidders from outside of the region, such are the premiums currently being paid by Middle East-based operators, that these bidders remain the overwhelming participants in regional processes, and the Saudi award was no different.

A recent CommsMEA newsletter poll asked whether the US$2.9 billion paid by Etisalat for the third licence in Egypt represented better value than the US$3.7 billion Qtel has offered for a 51% stake in regional operator Wataniya Telecom. The point of the question was to try and ascertain whether in this period of inflated valuations, there is a propensity to view greenfield opportunities in strategically significant markets as being more or less attractive as going concerns in similarly significant markets.

Ironically, it was Wataniya Telecom chairman Faisal Al-Ayyar, who just weeks prior to Qtel's confirmation of its approach for a controlling stake in the operator, told CommsMEA that he considered there to be a degree of market euphoria in the telecoms space at this time, and that he "hoped this would not continue for too much longer".

I'm confident he wasn't overly concerned about the effects of market euphoria when it came to negotiating a selling price to Qtel.