News, views and commentary from the telecoms sector across emerging markets and developing countries worldwide

Thursday, 22 October 2009

Sri Lanka: Etisalat entry to drive even fiercer price competition?

Etisalat: set to make life hard for Sri Lanka's cellcos?

This blog has recently taken an interest in the fate of the three Asian mobile operations put up for sale by Millicom International Cellular.

Late last month, as noted here, the global emerging markets player sold its 78% stake in Tigo Laos to Russia's Vimpelcom. Prior to that, DevelopingTelecomsWatch had noticed the sale of Millicom's stake in Cambodian cellco Cellcard to the Royal Group, a fellow shareholder in that operation.

This just left Tigo Sri Lanka unsold.

The Sri Lankan mobile market is currently contested by that operation and four other MNOs. In terms of the operators' shares of the country's estimated 13.6 million subscribers (according to WCIS), the competitors are ranked as follows:
  1. Dialog Telkom - 46.33%
  2. Mobitel - 24.14%
  3. Tigo Sri Lanka - 17.44%
  4. Bharti Airtel Sri Lanka - 9.46%
  5. Hutch Sri Lanka - 2.63%
The last time DTW offered an opinion about how this competitive landscape might change, perhaps too much was made of the likelihood of the number of operators consolidating down to four. No very sophisticated analysis was made, nor any inside information sought. It was simply the case that the prospective purchasers of Tigo Sri Lanka getting the most media coverage at the time were companies already active in the island nation. I had noted, for example, that Bharti Airtel was rumoured to be interested in snapping up Millicom's operation there, having read an article by R. Jai Krishna of the Wall Street Journal which reported comments from an unnamed person close to the development. Suggesting that any deal would be worth USD 100-120 million, that mystery source had said "in Sri Lanka, if you need to be a significant player in the market, you need to do an acquisition... greenfield, you will not be successful," by way of explaining the rationale behind Bharti Airtel's rumoured move.

This has came to nought, however. The happy new owner of Tigo Sri Lanka is none other than Etisalat of the UAE.

Commenting on this latest purchase, Etisalat Chairman, Mohammed Hassan Omran said: "This new acquisition is a clear example of Etisalat’s international investments strategy of seizing distinctive growth opportunities and maximizing value to shareholders."

He added: "Entering the Sri Lankan telecom market is a logical addition to our interests in the Asia continent. The acquisition promises attractive returns as the Sri Lankan Government is increasing its effort to promote foreign investment in all sectors. The acquisition is of a mature operator with a strong reputation for its good network and quality of service. It also offers great opportunities for synergy with our other operations in the region, particularly in the UAE, Saudi Arabia and India. We also plan to invest in this company to ensure that it has the dynamism to take the leading position in the market in the next few years and that it continues its effective role in the development and growth of the telecommunications sector in Sri Lanka."

How far, then, will this transaction affect the Sri Lankan mobile market? Shortly after it was announced, Fitch Ratings reacted with a gloomy prediction, stating that the entry of Etisalat into Sri Lanka could further delay any prospects for recovery in the country's operators' profitability.

The ratings agency's statement notes that price competition in Sri Lanka has led to a rapid deterioration of tariffs over the last four years, weakening the profitability of the operators, especially in the wake of the licensing of the Bharti Airtel-owned fifth entrant in 2007.

Fitch notes that Etisalat has tended to enter other new markets late in the race and has generally pursued a course of aggressively challenging established operators. "If Etisalat's track record is anything to go by, it is possible that it may invest heavily to acquire more market share in Sri Lanka, which will intensify the challenges facing other operators," says Buddhika Piyasena, Director of Fitch's Asia-Pacific Corporates team. Certainly, I recall a conversation a few months ago with the marketing director of one of Afghanistan's cellcos. He spoke about how the arrival of the the Etisalat-owned operator in that market had caused the price of a voice minute to tumble, with the country's nascent regulatory regime offering little by way of protection for the longer-established players.

Fitch contends that something similar could easily unfold in Sri Lanka, where "apart from lax regulation, a major reason for the heavy price-based competition... is the absence of a framework that requires mobile operators to pay other networks for interconnection." The ratings agency argues that this allowed Bharti Airtel, which has "limited coverage", to challenge other operators to the point where a full scale price war resulted. As Fitch notes, a revision to the interconnection framework is currently on the telecom regulator's agenda. When implemented in 2010, Fitch expects this to ease further pressure on tariffs.

According to Fitch, however, operators may see subscriber acquisition and retention costs - including handset subsidies, and subsidised starter packs - increasing with competition intensifying for market share.

Fitch is also of the view that a higher level of regulatory oversight over the competitive practices of operators and some intervention on tariffs is required to ensure the financial health of the industry.

Etisalat has made this latest acquisition against a background of mostly positive coverage about the group's prospects. While Q3 revenue fell slightly vs. the same quarter last year, the company posted a 5% improvement in net profit.

Also encouraging is the performance of Mobily, the Saudi MNO in which Etisalat has a 27% stake. Q3 profits were up 49.7%, vs. Q3 2008, beating the most optimistic forecasts by about 10%.

Etisalat, then, is well-placed to compete extremely aggressively in Sri Lanka. Industry watchers will doubtless be interested to observe how seriously this affects the profitability of its competitors there.


  1. Thanks for the etisalat acquisition update. Been eyeing etisalat for a while now and wanted your take on their possible acquisition or even interest in struggling CDMA/MNO Alegro of Ecuador. Aside from the possible icey political ramifications, I´d assume a player like Etisalat can scoop Alegro PCS for a cheap price and grow aggressively. The dollar currency on its own should aid it in the long run. Now imagine if that is complimented with further acquisition of Tigo Colombia and giving regional players like Telefonica´s movistar a run for their money. Maybe I am just hallucinating. Your take mate.

  2. Hallucinating might be a strong word, but it could be a bit fanciful. So far, I've not heard much to suggest that Latin America is on Etisalat's radar. I know of the Ecuador opportunity you mention, but understood that, for now at least, a strategic alliance with CANTV, the renationalised incumbent telco of another country with a left-of-centre government (Venezuela) was the preferred route for a bail-out of Alegro PCS. I also think that LatAm is a very different landscape from that in the under-penetrated markets where Etisalat has looked to grow of late (Afghanistan, India, Sri Lanka, West Africa (Moov/Atlantique Telecom). These are much more mature markets and with pretty formidable opposition in the form of Carlos Slim's America Movil and the Telefonica empire.

  3. thanks for the feedback mate. The reason I mentioned earlier and now more open to this m&a is the fact one of UAE´s high figures, Sheikh Abdullah bin Zayed Al Nahyan, the foreign minister was in Ecuador as well as Colombia and few other latin american countries this last October. In specific in Ecuador, the issue of Allegro did come up but from a bloomberg colleague of mine told me it did not seem much of a viable plan for Etisalat given Allegra currently does not even have a cdma structure of its own and is rellying heavily on Movistar for transmission. My mate says and again I am a bit sceptical on this issue the left alliance between ecuador and venezuela is a mere temporary deal till allegro is sold of to a prospective buyer. What would you estimate Allegro price tag to be given their dismal market cap and incomplete instrastructure? Combine this with the fact etisalat currently bought tigo srilanka for a high tag price of 207million, what do you should a fair price tag for allegro be? I am also told the reason Etisalat may not even venture into allegro if they cannot get Tigo Colombia, or atleast a controlling stake in Tigo Colombia. The reason being, they are interested in across country mobile banking as etisalat is currently pursuing South Africa´s Fundamo. Am I having worthless vivid dreams here or do you see a viable plan here if this were to happen? A value added service both in Ecuador and Colombia and across state lines will be a reckoning and can bring big shift to their clientele. Your feedbacks appreciated mate.

  4. Dear "anonymous". Shall we move this discussion to email?


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