Even though these operators may have enjoyed revenue growth in these regions, they have a long way to go before reaping the full potential from recent acquisitions there. Moreover, the revenue generated from these markets will be thinned out as exchange rates fluctuate. Since Gulf currencies are pegged to the US dollar, when these funds go to the holding telco their value is eroded, as local currencies in the foreign markets have depreciated against the dollar.
Saudi operator STC’s fourth-quarter results last year confirmed this phenomenon. According to EFG Hermes’ MENA telecom sector report, STC’s results were below estimates, mainly due to foreign exchange movements. The bank estimated a 12.3 billion Saudi riyal return ($3.28 billion), yet revenues came in 13.3 percent below this, “as two key non-Saudi subsidiaries (Turkey and South Africa) saw a significant depreciation in their local currency,” the report said.
There are also problems with access, or a lack thereof, to the capital markets, another byproduct of the financial crisis. As with consumers, the network operators need access to credit, which has become difficult and costly. According to Delta Partners’ Alvarez, this constrains further investments in operations and in network roll-out, causing a “ripple effect in their network vendors, who are suffering the most,” he says.
While operators with huge war chests, such as Saudi Arabia’s STC and the UAE’s Etisalat, may not be overly troubled by this phenomenon, the impact is hitting vendors in some cases. Alvarez says it is not easy to continue financing expansionary plans, network roll-outs and upgrades without putting pressure on vendors. “So [some operators] are now telling vendors about the need for better financing conditions, and more importantly the delay in payments to next year,” Alvarez says.
According to him, traditional vendors such as Motorola, Nokia Siemens and Ericsson are already under pressure in the Gulf from Chinese vendors such as Huawei and ZTE. So they have no alternative but to accept the conditions being imposed on them by the region’s operators. “I think the only vendor making money in the last quarter was Ericsson,” Alvarez says, “and once they publish figures at the end of first quarter I doubt that even they would be making money.”
Taking stock. The downturn has pushed Gulf telcos into a new strategic phase. Having completed their expansions and acquisitions, they’re taking a step back to review their assets, resources and capabilities to maximize their revenue-making potential. This is backed up by empirical evidence from across the industry that overseas expansion isn’t an automatic key to success, and growth for growth’s sake is no longer the name of the game. “Only 29 percent of telecommunication groups realize an increase in aggregate profitability when integrating acquisitions, raising urgency to focus on extracting value and synergies from acquisitions,” says Karl Deutsch, head of Middle East telecom practice at A.T. Kearney, the strategic-management consulting firm.
Of course, size matters. And on a worldwide scale, the region’s telcos are starting to make their mark. Etisalat and STC are now among the first MENA-based companies approaching the global top 10 in terms of market capitalization. Nevertheless, their home markets are still their largest sources of revenue. According to A.T. Kearney, more than 70 percent of EBITDA (earnings before interest, taxes, depreciation and amortization) of these companies still stem from their home markets. EBITDA is a widely accepted value-performance indicator in industries with standardized high-volume technology investments. According to A.T. Kearney’s study, some firms even lost half their shareholder value as a result of expansion.

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