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Regional operators have developed ambitious goals of being in the top 10-15-20 clubs in the global telecom business. Measuring the success of these internationalization strategies on the basis of return to shareholders, in terms of market capitalization growth and dividends, the progress has been modest so far. The cumulative market capitalization of the top five Middle East telecom groups has only gone up from approximately $68bn in end 2005 to around $75bn today; shareholders have reaped returns largely in form of dividends. In fact, the total return to shareholders has been close to those of US government bonds, showing clearly that acquisitions alone do not create value.
A closer look at the fulfillment of the ambitious targets reveals that most of the operators will see challenging times ahead.
Against this background Dr. Karl Deutsch, head of telecom practice at A.T. Kearney's Middle East office commented:
"Acquiring licenses and operators has definitely been the right way to increase the geographic footprint and establish the platform for future growth. However, the key challenge now is to extract value from these portfolios in order to increase value for the shareholders"
A.T. Kearney's experience with several leading operators shows that there is close to $9.5bn EBITDA upside potential for the Middle East telecom operators that can be unlocked by 2013. About two thirds of this potential can be extracted in a 'business as usual' way, whereas another one third - required to achieve substantial returns to investors - calls for a comprehensive and dedicated portfolio management approach at the group level. While the focus in saturated domestic markets will have to be on containing costs and to a large degree on avoiding unnecessary costs, international operations will need to focus on profitable growth and sustainable market share gains.
"Operational excellence, new business models capable of dealing with ultra low ARPUs (average revenue per user) and complemented by in-country consolidation (wherever possible), will be the name of the game in future. Group led fast track OpCo performance improvement plans will be imperative to extract maximum value from the portfolios to satisfy shareholder expectations," added Dr. Deutsch.
Some of the operators have already taken initial steps in this direction, such as one of the Middle East operators setting up regional headquarters in Asia and another (Etisalat) entering a long-term passive infrastructure sharing agreement, worth $2.2bn, to reduce its capital expenditure burden in India and increase the speed of building up a green field operation in a highly competitive low ARPU (average revenue per user) environment.
These initiatives make a good beginning for value extraction from existing portfolios, however, most synergies that looked great in the business cases supporting the acquisitions will simply stay on paper without a proper implementation approach and a committed team behind it," said Sameer Jain, a senior manager with A.T. Kearney's telecom practice.
Given all this, value extraction from portfolio is a daunting challenge and the critical question for the Middle East telecom groups remains: 'Is this challenge surmountable?' Based on A.T. Kearney's global experience, the answer is a clear 'Yes'. As initial analysis of Middle East telecom groups shows, the increase in EBITDA of up to $9.5bn can be achieved by 2013 translating into creation of additional shareholder value worth more than $75bn.
Capturing this value would make Middle East telecom stocks an attractive investment proposition, resulting into higher valuation multiples and would help them get closer to their grand ambitions of becoming top 10-15-20 in the world.
Posted by Rima Ali Al Mashni
