Plummeting stock markets and a difficult credit environment will lead to consolidation in the Middle Eastern telecommunications sector, says a prominent industry analyst. In an opinion paper looking at the future of the main players in the sector, Ghassan Hasbani, a partner in the management consultancy Booz & Company, said mergers and acquisitions were inevitable. "Activity will intensify in the short term, led by cash-rich companies from the region and potentially mergers of equals who have complementary assets," he said. "Undoubtedly, we are likely to see several acquisitions take place in the next few months."
Most regional operators remain in fundamentally strong positions, with growing demand for their services unlikely to be affected by slowing economies. With basic communications being a central part of everyday life, there is broad consensus that mobile services will be one of the last places that consumers cut back on in difficult times. But heavily indebted companies will find it increasingly hard to raise the cash needed to fund their operations. In high-growth markets like Egypt and Saudi Arabia, operators must make huge infrastructure investments for networks to keep pace with new subscribers.
Combined with generally low market valuations of publicly traded operators - the sector on average has fallen by 30 per cent in recent months, with some businesses dropping by more than double that - the appeal of consolidation is stronger than usual. "Those who have an attractively low market valuation may be a target for an acquisition, or a merger with a similar sized company," said Mr Hasbani. "The main driver will be a need for cash."
Egypt's Orascom Telecom is one such company likely to be studied closely by others in the industry. Its stock price has dropped by almost 69 per cent this year, amid a broad sell-off of emerging market equities that has hit Egypt harder than anywhere else in the region. The company is also heavily in debt, with a debt-to-equity ratio of 162 per cent, one of the highest in the industry. The ratio, a commonly accepted measurement of indebtedness, is far above those of its peers.
Kuwait's Zain, which has borrowed significantly to fund international expansion, has a ratio of 126 per cent, while the UAE's Etisalat, which received investment-grade credit ratings in July, has a ratio of just 21 per cent. Saudi Telecom is now the largest telecommunications company in the region, and is in the best position to make a large acquisition. It has more than US$2 billion (Dh7.3bn) in free cash, and would have little trouble raising new debt: as a business majority owned by the government of Saudi Arabia, its debt would be considered almost analogous to a government bond.
"Ultimately, the winners are likely to be those who can successfully leverage their strong cash position," said Mr Hasbani. Orascom's majority owner, the telecommunications magnate Naguib Sawiris, has long denied that he was considering selling his stake in the company. But at the weekend, he told delegates to an industry conference in Venice that he would accept an offer made at a "crazy" price, which may be less than he once believed, given the company is at its lowest valuation since early 2005.
tgara@thenational.ae
