Big trouble for Batelco (page 1 of 2)

This is the end. For Batelco, Bahrain's state-owned telecommunications monopoly, the old era is nearly over and a new, more challenging one is
about to begin.

On April 22nd, Kuwait's fast-moving Mobile Telecommunications Company (MTC), in partnership with British giant Vodafone, bagged the license to become the second mobile telecom operator in Bahrain. Just a few hours before the announcement was made, Batelco announced its own aggressive program - the Get Ready project - to meet the challenge from MTC head on.

But it's not clear that the sluggish monopoly is up to the challenge. For starters, Batelco is highly overstaffed. The company's ratio of staff cost to revenues is 21.3 percent, which is the highest in the region, says Sayed Zahiruddin, a telecom analyst with Bahrain's TAIB Bank. He insists that Batelco urgently needs to trim its staff in order to improve its operating performance.

Tony Hart, Batelco's CEO, admits there is a serious problem of overstaffing. "Our workforce continues to be our most valuable asset. But in our review, we found we had too few skilled personnel in some areas and too many in others," Hart admits. "This has been about 'rightsizing' -
getting our many sets of skills, talents and expertise exactly where we need them in order to get ready for the competition."

Easier said than done. Batelco recently announced severance packages as part of its Voluntary Retirement Scheme (VRS), hoping that a large number of its employees would sign up. But employees, most of them Bahraini nationals, are up in arms. The employee union has taken management to the local courts, which ordered Batelco to put its VRS program on hold until it obtains the necessary clearances from the labor ministry.

Batelco says it will challenge the court order, but there are signs that the company could get entangled in lengthy courtroom battles just as the competition arrives. Instead of being able to focus on the threat from the competition, management will be spending its time fighting its own employees.

The combined effect of competition and overstaffing will have serious implications for Batelco, which has so far been a steady performer with an average revenue growth of 12 percent over the last five years. The company's profits have grown at an average eight percent
annually.

Zahiruddin says that as Batelco will be forced to continue its price reductions, it will limit the revenue growth potential for the company: "I
expect the topline growth during 2003 to be around four or five percent.

However, full-fledged competition will have an impact on the mobile revenues, which presently account for over 40 percent of Batelco's total
revenue. I expect a negative growth of around five to seven percent in Batelco's top line for 2004. And the profit level is expected to remain
flat or have single-digit growth over the next two years largely due to the costs of restructuring."

Batelco's management, for its part, complains that the government has bent over backwards to attract overseas companies. They say that while the newcomer has been given all the facilities needed for a successful business, Batelco has been left in a straitjacket, with little freedom to deal with its own problems, especially reducing its workforce.

Batelco management has a point. For MTC-Vodafone the entry into Bahrain has been extraordinarily smooth. The company had to pay a mere $265,000 as an upfront license fee.