Etisalat Mulls Foreign Ownership

Emirates Telecommunications Corporation (Etisalat) may widen ownership of its share capital to include foreign investors within the next two years. BMI believes that the move, which requires the approval of the UAE government, the rewriting of the country's telecommunications and business laws and a significant alteration to the company's licences and corporate structure, would significantly improve liquidity and transparency for Etisalat. The company still harbours ambitious overseas investment plans, despite having recently said that major acquisitions are not part of its short- to medium-term strategy.

According to Al-Khaleej newspaper Etisalat CEO, Ahmad Abdulkarim Julfar, said the Emirates Investment Council is working to amend the laws governing foreign ownership of the company. As Etisalat is 60% state-owned and a major contributor to government coffers, as well as the local economy, BMI expects that any relaxation of the foreign ownership laws will be gradual. The state will ensure it retains control of the company either through continued majority share ownership or through a 'golden share', that would give it the power to veto key management decisions.

Vital Signs Look Good… For Now
Etisalat Key Financial Indicators

As one of the largest businesses in the Middle East and with operations in North Africa, Sub-Saharan Africa and Asia, Etisalat can no longer rely on state support, the local bourse and regional financial institutions to underwrite its long-term business strategy. As the accompanying chart shows, quarterly revenue averaged at over AED8bn of late, while EBITDA remains around AED4.1bn. This has yielded an impressive EBITDA margin of around 50%. However, mounting costs relating to its troubled Indian operation, as well as relatively low revenue growth in its African business, mean that its current strategy is not sustainable in the long term.

In Q411 capital expenditures - which include an ambitious FTTH build-out alongside construction of a 4G LTE mobile broadband network in its home market - accounted for 16% of revenue. The ratio could well rise markedly as the operator makes forays into converged services and as competition from Du (and, possibly, more players from 2015) intensifies. Access to a wider source of financing would improve the company's ability to react to changing market conditions.

As noted in our briefer news analysis, the UAE government is looking to liberalise the local telecoms sector further in order to meet its broader commitments to the World Trade Organisation (WTO) and opening up Etisalat's share capital to foreign investors could be an important part of that process. With that in mind, we would not be surprised if rival du were also given the opportunity to tap the global financial market, putting further pressure on the incumbent to adapt. This, in turn, may necessitate a corporate restructuring into discrete retail and wholesale businesses and the introduction of greater transparency in financial reporting. All of this would be welcomed by BMI, but would hit Etisalat's cash reserves and debt.

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