M&A activity will drive future telecom investment in the MENA region

However, unless consolidating operators work to quickly realize cross-border synergies through early planning and a highly disciplined investment approach that includes strong pre-deal due diligence and post-transaction integration, these operators could face collapse or takeover, according to a study on the sector by Booz Allen Hamilton.

Intriguingly, Booz Allen observes that the telecom companies that will capture headlines in this new era of consolidation may not be the big regional players currently dominating the scene.
The study finds that favorable economic conditions have combined with a strong wave of telecom liberalization in the Middle East and North Africa (MENA) region to attract significant investments in the telecom industry. Such investments have occurred predominantly in the form of license acquisitions by regional telecom players whose primary aim is to mitigate the potential risk of stagnation or decline from imminent liberalization and saturation in their home markets.

At the same time, the scarcity of license issuances and privatization opportunities in the MENA region has driven up price premiums and triggered a new wave of consolidation among the top players.

'A period of uncertainty is now emerging, characterized by new challenges facing the operators that have caught the footprint expansion wave in the region and are now in the process of moving to the next phase of international development. The investors who will succeed are those who can best address the challenges of non-organic expansion,' said Ghassan Hasbani, Principal at Booz Allen Hamilton, a global management consulting firm with offices throughout the MENA region.

Telecom Investment Environment

In the past few years, telecom operators in the MENA region have exhibited varying levels of readiness to expand beyond their home markets. As a result, only a handful of ambitious operators have dominated the race for international expansion. These operators are often referred to as the Big Four: Etisalat (UAE), Orascom (Egypt), MTC (Kuwait), and Q-Tel (Qatar).

It is evident that the international expansion pioneers have been the operators that faced growth stagnation in their home markets as they became liberalized or reached higher maturity levels. As such, these operators' ambitious plans were truly a product of necessity.

Other operators, however-especially those that focused on realizing untapped potential in their home markets-have de-emphasized to date the adoption of an international expansion strategy.
Classifying operators based on their level of internationalization and ability to create value provides insight into their next move.

Local Players: Operators that focus solely on their local markets. Unless their home markets exhibit significant value potential, these operators face a major risk from regional players who could eventually take them over.

Opportunistic Players: Operators that expand regionally with limited ability to realize synergies among their various operations. They should expect to integrate and consolidate their operations or risk failure or takeover.

International Integrators: Operators that focus on realizing synergies among the various regional opportunities they pursue. This category of players will dominate the telecom landscape across the region as they increasingly accumulate and sustain a competitive advantage.

Dormant Giants: Operators that have the potential to create value outside their home borders but have not yet pursued any regional opportunities. These operators should expect to make major acquisitions using their untapped financial power to capture new growth opportunities.

'Going forward, it is unknown whether operators that dominated the previous expansion wave will continue to do so,' Hasbani added. 'In fact, operators that were late to participate in expansion may be well-positioned to lead the next phase, partially because of their untapped financing potential. In addition, many of the original pioneers may be distracted by efforts to consolidate their portfolios and realize the expected value of their initial investments.'

In building their international portfolios, operators can perform three possible transaction types: greenfield expansion, acquisition of existing operators, and merger of equals.

In the Middle East, we have thus far predominantly observed the first and second approaches. We have witnessed the early signs of potential mergers of equals, but no such transactions have yet occurred.

Greenfield Expansion

Since the start of the liberalization wave in the late 1990s, there have been more than 40 new mobile licenses issued in the MENA region. The premiums paid for these licenses have skyrocketed with the scarcity of issuance opportunities.

Acquisition of Existing Operators

Several privatization programs in the MENA region are attracting various interested operators, but the structure of these programs is limiting. They typically leave little room for investors to achieve control. This situation, combined with the scarcity of greenfield investments, has sparked a market consolidation phase.

In addition, Middle East operators must expand beyond their traditional target geographies. Some are considering emerging regions, such as Africa, Central Europe, and Asia. This expansion of target geographies would help telecom operators grow internationally and avoid paying exorbitant premiums for the few remaining opportunities in the MENA region.

Merger of Equals

Mergers of equal-sized telecom operators have not yet taken place in the MENA region. However, this trend is inevitable, especially when ambitious operators realize the difficulty of achieving their global reach through sequential small-scale acquisitions. The scarcity of financing possibilities will also drive mergers of equals. Unlike acquisitions, operators could possibly conduct mergers through stock-based transactions rather than cash-based transactions.

Components of a Successful Investment Strategy

As the rules of the game continue to change, the winners in the consolidation phase may not be the names we have seen in the past, unless they modify their approach. At this stage, a successful expansion strategy requires a certain set of elements, such as:

• Development of a clear vision

• An optimal investment approach

• The right price

• Value capture through synergies

• Clear financial planning

• A disciplined due-diligence approach

• Post-transaction planning and management

Developing a Clear Vision

Very often, telecom operators embark on an international expansion drive without clearly articulating a strategic vision. A clear investment intent is critical, and it should, at a minimum, encompass critical components such as: Objective for International Expansion, Target Geographies, and Industry Sectors.

Deciding on an Optimal Investment Approach

A number of key components determine an operator's acquisition approach: Strategic Positioning, Target Equity Stake, Level Operational Involvement, and Partnership Potential.

Paying the Right Price

There is no such thing as a bargain or an overpriced transaction; it is all relative to the value that can be created. At first look, many M&A deals in the region seem to have been commanding unjustified premiums. However, to better assess these deals, it is important to understand the ambitions of the operators dominating the M&A scene.

Capturing Value Through Synergies

Operators prefer to enter markets that exhibit a high level of integration with their existing footprint. Synergies could also be achieved when realizing scale economies by integrating operations under a shared services model.

Clear Financing Plans

Telecom operators in the MENA region are generally cash rich. In fact, many operators still rely on their excess cash to finance acquisitions. Others have effectively resorted to bank debt and low-interest shareholder loans. Going forward, acquirers will have to tap into even more financial resources, such as high-yield bonds and equity financing.

Following a Disciplined Due-Diligence Approach

A robust due diligence process is a must for any M&A activity. Investing upfront in due diligence helps mitigate post-transaction risks. Notwithstanding the importance of a systematic approach, speed is of the essence given the highly competitive M&A landscape.

Post-Transaction Planning and Management

The first challenge operators face after a transaction is managing the acquired operation. The key to success is to have a robust integration plan that is timely and does not disrupt ongoing operations.

The Way Forward

A number of factors indicate that the momentum of expansion activities in the Middle East telecom landscape will continue through mergers and acquisitions.

Economic and Regulatory Environment

• Increasing liquidity in the market will attract new breeds of investors to the regional telecom landscape.

• Private equity players are not yet active in the regional telecom market, but they are bound to enter as more operators start exhibiting financial difficulties and require performance turnaround.

• Many telecom operators in the region are cash rich, and the level of debt on their balance sheets continues to be relatively low.

• Many operators have not yet felt the urgency for international expansion.
Regional Competitive Pressure

• The increasing economies of scale of regional players will pressure late players to expand so they can compete effectively.

• As regional players expand their footprint in related markets, they can leverage revenue synergies from the resulting 'corridor effect,' leaving local players at a competitive disadvantage.

• As a result of their expansion, many operators will experience cross-ownership and multimarket-facing, helping them become more collaborative at the expense of local players and rivals.
Local Competitive Performance

• Markets with high levels of competition (more than four players) will exert increasing pressure on operators to deliver satisfactory financial results, prompting consolidation at the local level.

• Some players starting greenfield operations for the first time may not do so effectively and will become attractive acquisition targets.

In conclusion, the MENA telecom M&A scene is set to continue thriving amid a positive economic outlook and an increased level of market liberalization. As greenfield investments continue to diminish, a wave of consolidation will emerge. In the upcoming phase, operators should focus on realizing cross-border synergies in the shortest possible timeframe or else risk collapse or takeover. Operators can realize synergies through early planning and by following a highly disciplined investment execution approach that includes mastering critical activities, such as pre-deal due diligence and post-transaction integration.