Etisalat Eyes Greater Stake In High Growth Units

Etisalat has given its clearest indication that it may embark on another attempt at consolidation amid stagnation in some key financial indicators during the past two years. Etisalat's chief executive officer, Ahmad Julfar, quoted by Reuters, disclosed that the operator may raise its stake in existing operations in high-growth markets to boost its bottom line. BMI views this as a potentially beneficial strategy for Etisalat considering the declining revenue growth in its domestic market and limited opportunities for international expansion across the Middle East and North Africa.

Etisalat operates in 17 countries across the Middle East, Asia and Africa. However, in its recent quarterly results, the operator indentifies Saudi Arabia, Egypt and Nigeria as its best performing markets in terms of revenue and subscriber growth. However, Etisalat does not fully consolidate the earnings of Mobily (Saudi Arabia) and Etisalat Nigeria because of its minority shareholding in those companies. Etisalat owns a 27% stake in Mobily and a 40% stake in Etisalat Nigeria. These units, along with XL Axiata (Indonesia) and PTCL (Pakistan) are regarded as affiliates. In Q112, Etisalat's four affiliate units generated a combined net profit of AED288mn (US$78.4mn) after federal royalty applied in the UAE. Etisalat already owns a 66% stake in Etisalat Misr (Egypt) and is open about plans to increase its shareholding in the company, despite a requirement by the government for it to list up to 25% of the operator's shares on the Cairo bourse.

Stagnant Growth
Etisalat Revenue (LHS) And EBITDA (RHS) Growth

Although Saudi Arabia, Nigeria and Egypt have some of the largest populations among countries Etisalat operates in, BMI believes the operator is more interested in boosting its top line and bottom line figures, which have largely stagnated since 2010. These countries present significant revenue growth opportunities from data services, mainly because of rising disposable income, especially in Saudi Arabia, and a youthful population with a growing appetite for internet-based services such as social networking.

Julfar did not disclose how the company will fund its possible consolidation, especially as it has invested heavily in recent years in the roll-out of next generation fixed and wireless networks across its key markets. One possible source of funds could be the divestment of some of its less profitable operations, especially in Africa. Etisalat has reportedly hired Deutsche Bank to potentially help sell part of Atlantique Telecom, which has operations in eight countries, including the Ivory Coast, Togo, Benin and Gabon. Julfar did not disclose the units likely to be sold, although we believe Etisalat will be keen to retain its presence in Togo and Gabon, which are equally high revenue growth markets for the operator. There are significant growth opportunities in the Ivory Coast but competition is fierce in that market, with four other active operators, including regional giants MTN and Orange. Meanwhile, Etisalat has put on hold initial plans to sell its 13% stake in XL Axiata, a move that could have generated up to US$700mn.

BMI will closely monitor Etisalat's consolidation moves in view of the likely impact on the operator's financial performance, as well as the effect on competition dynamics in affected markets. It is worth mentioning that consolidation through the acquisition of more shares in existing operations is a growing trend among major operators in the MENA region. Since the start of 2012, Qatari incumbent Qtel has announced bids valued at US$3.4bn to increase its stake in Asiacell (Iraq) and Wataniya (Kuwait). We expect other operators in the region to consider similar moves as there are fewer opportunities for them to expand their footprint in the region.


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