Middle East telecom operators can generate up to USD 75 bn additional shareholder value
A.T. Kearney experts say value extraction from existing portfolios imperative for successentrepreneurship
Dubai (8th October 2009) — Telecommunications operators in the Middle East have done well in expanding their footprint internationally in the last four to five years. They have acquired more than 50 green field licenses or existing companies costing them upwards of USD 43 billion, in the hope of creating substantial shareholder value and realizing significant cost and revenue synergies. However, shareholder returns in the future will heavily depend upon value extraction from the large portfolios built by the telco operators according to global management consultancy A.T. Kearney.
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 internationalization strategies on the basis of return to shareholders, in terms of market capitalization growth and dividends, the progress has been modest so far. The cumulative market capitalization of the top five Middle East telecom groups has only gone up from approximately USD 68 billion in end 2005 to around USD 75 billion today; shareholders have reaped returns largely in 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 commented: “Acquiring licenses 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 USD 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 USD2.2 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.
Given all this, value extraction from portfolio is a daunting challenge and the critical question for the Middle East telecom groups remains: ‘Is this challenge surmountable?’ Based on A.T. Kearney’s global experience, the answer is a clear ‘Yes’. As initial analysis of Middle East telecom groups shows, the increase in EBITDA of up to USD 9.5 billion can be achieved by 2013 translating into creation of additional shareholder value worth more than USD 75 billion. 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.
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About A.T. Kearney
A.T. Kearney is a global strategic management consulting firm known for helping clients gain lasting results through a unique combination of strategic insight and collaborative working style. The firm was established in 1926 to provide management advice concerning issues on the CEO’s agenda. Today, we serve the largest global clients in all major industries. A.T. Kearney’s offices are located in major business centers in 33 countries. During our 80 year history, we have provided management consulting services to most major corporations and governments around the world. From our fast growing Middle East offices in Abu Dhabi, Bahrain, Dubai and Riyadh, A.T. Kearney actively contributes to the operational excellence and profitable growth of industries and services in the region. For more information, visit www.atkearney.com.
About The Authors
 Dr. Karl Deutsch
Vice President
Dr. Karl Deutsch is an A.T. Kearney partner and practice leader in telecommunications with expertise in corporate/business unit strategy, organization, marketing, restricting and process design. Dr. Deutsch has more than 25 years consulting and professional telecommunication – fixed line and mobile – experience. During his career he has consulted on the restructuring of a global telecommunications equipment manufacturer, on the sales and promotion campaign for a start up mobile operator, market entry strategy for an Asian mobile operator to enter the European and Middle East markets and product marketing strategy for an integrated Indian telecom operator, among others.
Before joining A.T. Kearney Dr. Deutsch worked for a high-tech company and was the managing director of a European consumer goods company.Dr. Karl Deutsch holds a Phd, MSc in physics and telecommunications engineering from the Technical University of Graz, Austria and an MBA from the University of Aston, Birmingham, UK.
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