ME telecoms 'can create $75bn more value'
Dubai, November 8, 2009
Telecommunications operators in the Middle East can achieve additional shareholder value worth more than $75 billion, according to a recent report from A T Kearney, the leading global strategic management consulting firm.
As initial analysis of Middle East telecom groups shows, they have done well in expanding their footprint internationally in the last four to five years and an increase in Ebitda of up to $9.5 billion can be achieved by 2013, translating into creation of additional shareholder value worth more than $75 billion, said the report.
The telecoms have acquired more than 50 green field licences or existing companies costing them upwards of $43 billion, in the hope of creating substantial shareholder value and realising significant cost and revenue synergies. However, shareholder returns in the future will depend heavily upon value extraction from the large portfolios built by the telco operators according to the global management consultancy firm.
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 internationalisation strategies on the basis of return to shareholders, in terms of market capitalisation growth and dividends, the progress has been modest so far.
The cumulative market capitalisation of the top five Middle East telecom groups has only gone up from approximately $68 billion in end 2005 to around $75 billion today; shareholders have reaped returns largely in the 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 said, “Acquiring licences 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 $9.5 billion 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 $2.2 billion, 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.
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, he concluded.-TradeArabia News Service