Telecoms wars: over the next few months the Middle East's rapidly growing and increasingly ambitious telcos will go head-to-head for some of the region's last remaining cellular licences

Middle East, The, July, 2006 by Rhys Jones

THE LIKES OF Kuwait's MTC and Watanyia, Egypt's Orascom Telecom and the UAE's Etisalat, all of which have experienced massive growth over the last five years, will battle it out for lucrative licences in Saudi Arabia, Egypt and Morocco. In the past, Europe's large telecoms groups would have been the favourites to land these deals but today the Middle East boasts an array of financially powerful and aggressive operators who are on the lookout for additional growth opportunities outside their own borders.

Some observers feel that, in time, the Gulf's telcos could rival the likes of the UK's Vodafone, which has 179m customers in five continents, and Spain's Telefonica--a company with 181m subscribers across Europe, Africa and Latin America. This could well happen sooner rather than later as it is the increasingly sophisticated regional operators who are expected to come out on top when the latest round of bidding kicks-off.

"Today is the age of the Middle East's telecommunications super-players," says Jawad Abbassi, president of Arab Advisors Group, a research company focused on the region's communications markets. "If you look at the companies that have come to prominence over the past few years in the Middle East, they all have big regional ambitions and are all looking to seriously increase the size of their regional and global footprint. All of these guys have the financial clout to do it."

With fewer and fewer opportunities for further growth in their home markets, the region's newly-powerful telcos will be eager to snap up some of the last local licences which offer huge potential for growth. When you consider that most western European markets are at saturation point and many Gulf countries have already reached 100% cellular penetration, the remaining regional licences represent one of the last chances to get into a potentially lucrative emerging market.

Egypt, for example, has a population of 70m and a GSM penetration rate of just 20%, which clearly leaves a great deal of scope for growth. However, Saudi Arabia and Morocco could be the top prizes as they are already extremely high-revenue markets which generate a great deal of cash and both offer space for further growth and expansion.

Analyst estimates suggest the number of mobile subscribers worldwide could top two billion by the year-end. Furthermore, mobile penetration in the Middle East and North Africa (MENA) region is expected to grow by 162% over the next three years compared with a worldwide average of just 70%. As such, bidding for the rights, which will not come cheap, is expected to be strongly contested.

"The upcoming licences in the region represent top prizes if an operator can get them at a reasonable price because they are all growth markets," explains Abbassi. "It will be interesting to see how the Europeans and the rest of the international operators compete for those licences because the cash-rich Gulf players will go all out to get them."

Having recently outbid their European counterparts for many lucrative licences in Turkey and North Africa, the Gulf's telcos have every right to be confident about their chances. MTC beat off strong competition to buy African operator Celtel for $3.4bn last year, while Orascom and Watanyia have both picked up interests in Iraq, Tunisia and Algeria.

Dubai's Tecom Investments also beat off stiff competition from European and Asian operators to snap up a 35% stake in Tunisia's Tunisie Telecom for $2.5bn, while Saudi Arabia's Oger Telecom outbid its Russian counterparts by over $1bn to take a 55% stake in Istanbul-based Turk Telecom, in Turkey's biggest ever privatisation deal. Despite their success, the Gulf operators haven't had it all their own way.

At the end of last year the UK's Vodafone out-muscled its Arab competitors to win the race for Turkish mobile operator Telsim. However, in order to land the deal, the British outfit had to bid big and only just beat off competition from MTC, Orascom and Etisalat with a bid of $4.55bn--well over the predicted price of $2.5bn.

"European operators are also on the lookout for acquisition potential in the Middle East but the problem is that the valuations are often too high so the Europeans are more cautious these days," explains Mohsen Malaki, a senior telecommunications analyst at research group IDC. "The European players are a bit more calculating in terms of valuations whereas you have companies like Etisalat that tend to bid very highly for something they want."

One company which will be notably absent from bidding proceedings for the hot licences in Saudi Arabia, Egypt and Morocco is Lebanon-based Investcom. The company, which is listed on the Dubai International Financial Exchange (DIFX) and has interests in Syria, Yemen, Guinea and Afghanistan, last year raised $741m through an IPO on London's stock exchange and was expected to be among the leading players gunning for new licences.

However, late last month the Beirut-based outfit announced it had accepted a $5.5bn cash and share takeover bid from South Africa's MTN Group, despite previously claiming it would remain an independent mobile operator.