Zain (Africa) Speculation Watch: Episode 13

Anil Ambani, Reliance Communications: eyeing Zain's African operations?

The newswires have been humming with more than enough Zain-related information over the last few days to justify this thirteenth episode of our mini-series following the summertime rumours around the Kuwaiti telecoms firm.

On Sunday, Eman Goma of Reuters reported that the pan-MEA mobile group has asked shareholders to vote on removing certain ownership restrictions, a move that would pave the way for selling a large stake. This seems to have prompted a Sunday surge in Zain's shares on the Kuwaiti stock exchange, as speculation rose that the move could allow an outside investor to take a large stake in the company.

In the most recent chapter of the Zain (Africa) Speculation Watch story, we considered the possible sale of the 24.61% stake in the operator held by the Kuwait Investment Authority (KIA) (the Gulf state’s sovereign wealth fund) - Kuwaiti newspaper al-Rai, had reported that "the KIA has no objection to discussing any offer to buy its stake in Zain whether made by the UAE’s Etisalat or others under the condition that the offer would be serious and with attractive returns."

Without expressing an opinion about possible purchasers of that stake, it now seems that Zain's management would welcome the opportunity to part ways with the KIA. As a Cellular News article reported this week, Zain CEO Saad al-Barrak has said that he wants to see the sovereign wealth fund sell its stake in his company as soon as possible. "I wish they would leave tomorrow, and I am working on this," he said. He added that the motivation was to ensure the company could operate without political interference.

Whatever the future holds for the group as a whole, stories continue to bubble up about Zain's African portfolio. Only yesterday, that man Eman Goma was reporting comments made by Barrak to al-Rai, to the effect that the company is in talks with three major telecoms firms, including one from India, to sell all or part of its African operations.

Which companies are being referred to here? One of them might be France Telecom. Ten days ago we noted here that in a recent Reuters note on the French incumbent telco's need to limit margin erosion, Finance Director Gervais Pellisier was quoted as saying that the company "might look at some of the African assets of Kuwait's Zain if the latter decided to sell them in parts."

What about the unnamed Indian party? Could that be Bharti Airtel? Back in February, I would not have hesitated to offer that name as my best guess. An article by a former colleague of mine, Nick Jotischky of Informa Telecoms & Media, prompted me to write my own piece about whether India's market-leading cellco might be driven to more aggressive international expansion by the numerous competitive pressures it faces in its home market.

Since then, of course, the Indian mobile operator has been involved in lengthy talks with South Africa's MTN group about a possible tie-up between the two. Given the apparent complexity of those discussions, is it naïve of me to assume that simultaneous talks with Zain would not be feasible? After all, my understanding has always been than an exclusivity agreement has been locking Bharti Airtel and MTN out of discussions with other prospective bedfellows. Earlier this month, the Bharti Group announced the extension of this exclusivity period through to 31st August, and the Economic Times has reported in the last few hours that Bharti Airtel is now very close to raising the funds needed for what would India’s biggest cross-border deal to date, surpassing Tata Steel’s acquisition of Corus for USD 12.2 billion in 2007.

Even if it were possible for India's leading mobile operator to discuss any interest in Zain's African assets at the same time as working on its mooted tie up with MTN, another complication would be that the Kuwaiti group and the South African group have somewhat overlapping footprints. The two companies compete with each other in Congo, Ghana, Nigeria, Uganda and Zambia.

As Eman Goma's article noted, this issue of overlapping assets would also have to be taken into account in any approach Etisalat may make for Zain. Goma quotes Prime Holdings analyst Sleiman Aboulhosn, who says that the Emirati group may be content to cherry pick some of Zain's assets in the region, given regulatory restrictions on a wholesale purchase. "Etisalat cannot buy the ones that co-exist with its own assets, for example in Nigeria," he said in Dubai. "So they might be interested in some parts."

If Bharti Airtel is currently an unlikely suitor for Zain, which other Indian companies might be making the enquiry mentioned by Saad al-Barrak? One possible candidate is state-owned telco BSNL. In June, Reuters reported comments made by the company's Chairman, Kuldeep Goyal, who said the the public sector telco is looking to expand to Africa by acquiring new licences or stakes in firms. "We are looking into various options there... getting into new licences, which are being issued, or partnering with existing licencees (and) taking a stake," Goyal told reporters. Asked whether BSNL, which has cash stockpile of more than USD 6 billion, was ready for a big acquisition, he said: "Yes, why not?"

The positive assessment of the state of BSNL is not shared by Kunal Kumar Kundu of consulting and IT services firm InfoSys. In our most recent article here at DTW, I quoted Kundu's recent Asia Times article, which is nothing short of a gloomy assessment of the health of the state-owned operator, which he feels is set to go the way of struggling government-run Air India, "which has had to crawl cap in hand for a state bailout to survive."

If Kundu's analysis is correct, and if this would prevent any ambitious foreign adventures by BSNL (rather than perhaps actually making it imperative to consider them), perhaps Reliance Communications is a more plausible prospective purchaser of some or all of Zain's African assets? Towards the middle of last year, the Anil Dhirubhai Ambani Group-owned operator withdrew from inconclusive talks of its own with MTN. Another Economic Times article written in the last few hours suggest that the Indian operator's interest in Africa has not waned since then. Amrita Nair-Ghaswalla writes that "sources" have named Reliance Communications as the Indian company currently in discussions with Zain.

The last time DTW visited the topic of all this speculation about the future of Zain, much was made of the impresssive performance of the company's stock since the rumour mill really got churning around mid-May. I even considered whispers passed to a loyal DTW reader - and then to me - to the effect that "the whole Zain thing" has merely been a highly successful attempt to manipulate the Kuwaiti group's share price. If there is anything in that suggestion, the success of any such ruse would appear to have come to a halt around a week after we discussed it here, should we choose to heed the warning noises emanating from Dubai-based investment bank Shuaa Capital. Late last week, Ramya Dilip of Reuters noted that the bank had downgraded Zain to "sell" from "neutral," saying the risk-reward profile of the shares were no longer attractive at current levels.

Around the same time, another Reuters piece carried quotes from analysts who could see the logic of selling the African assets and predictions about Zain's ongoing strategy in the wake of any such sale.

"The African operations are the major contribution to the revenues and subscriber base," said Jithesh Gopi, head of research at Bahrain-based Sico Investments. "But as far as net profit ... they have not been a contributor to the group."

According to this article, African markets account for about 62% of Zain's 64.7 million customers, but only 15 % of the group's net profit, as of the end of March. Seven out of 16 African operations, the article states, made a first-quarter net lost. In the Middle East, only the Saudi Arabian operation was loss-making.

"It's going to be a company that's refocused on the Middle East with a series of very strong franchises," said Simon Simonian, a telecom sector analyst at Shuaa Capital.

If Simonian is correct, Zain's growth plans would be downgraded as the majority of the Middle East markets served by the group are mature to the point of saturation, the exceptions being Jordan and Iraq, where operators face security issues, a relatively unpredictable regulatory/licensing environment and the prospect of a new entrant in the mobile space.

In that scenario, Zain would presumably focus primarily on upgrading existing networks and increasing revenues from mobile broadband multimedia services.

Work of this kind is naturally ongoing across the group's Middle Eastern operations. The Saudi opco, for example, last week announced that it had secured a USD 2.5 billion Islamic loan facility (Murabahah), which will be used to repay an existing Murabahah facilitating network expansion and future growth.

In Bahrain meanwhile, writes Roger Field of ITP, Zain is planning to upgrade its network with LTE technology in a bid to "future proof" its operation and gain an advantage over rival operator Batelco and the new entrant cellco owned by Saudi Telecom. Field observes that Zain Bahrain has failed to provide a timeframe for the network upgrade, but notes that similar projects in other parts of the world are expected to take more than a year to complete, from the time they were announced.

This wraps up another episode in this ongoing saga. Perhaps the fact that Zain's own Saad al-Barrak seems to revealing snippets to the Kuwaiti press suggests that the story is moving beyond the speculation stage. Whether this means we can expect to see imminent announcements about the future of Zain and of its African operations remains to be seen. Keep watching.

Zain (Africa) Speculation Watch: Episode 13

WiMAX and 3G trials and tribulations for India's public sector telcos

'India Week' here at DevelopingTelecomsWatch concludes with a round up of views on the prospects for the country's public sector telecoms enterprises.

State-owned telco MTNL is one company somewhat keen to experiment with WiMAX, but is also keen to mitigate the risks and reduce costs through a proposed partnership with another organisation.

Writing for the Economic Times on Saturday, Joji Thomas Philip explains that the public sector operator has invited global telecoms businesses to set up and run its Delhi and Mumbai WiMAX operations on a franchisee basis for a six-year period. If a willing partner is found, MTNL plans to enter into a revenue sharing agreement with the successful bidder. Philip writes that the contract will be reviewed every two years and can be terminated if the franchisee partner does not meet prescribed targets. MTNL wants to work together with the winning bidder when working out strategies for advertising, marketing and promoting the broadband services, and wants those services to carry the MTNL brand. Execution on the sales and market side, along with the business of credit checking customers will be the prime responsibility of the bidder. MTNL, on the other hand, wishes to retain responsibility for fixing tariffs. While there will be room for consulation with its partner, MTNL's word will be final on this issue, the company has said.

How attractive is this opportunity? This may depend on interested parties' views of where WiMAX fits into India's evolving communications landscape. Any prospective bidders who envisage strong demand for a mobile WiMAX service, for example, may encouter words of warning - even from the CEO of the one company already offering WiMAX-based services on a franchisee model.

San Francisco-headquartered Soma Networks, is a supplier of WiMAX base stations, CPE and a multimedia application system designed to provide essential software elements for broadband service providers - support for simultaneous multimedia applications; integration with third-party, IP-based billing and provisioning; interoperability with IMS infrastructures.

A former colleague of mine, Ken Wieland of Informa Telecoms & Media, recently summarised the deal struck between Soma Networks and BSNL, India's other major state-owned telecoms operator back in January 2008. Writing for the telecoms.com portal, Ken notes that BSNL uses Soma Networks as a mobile WiMAX franchisee in the three circles (regions) of Goa, Andhra Pradesh and Maharashtra. Under the franchise arrangement, Ken writes, Soma Networks pays for the WiMAX equipment in exchange for access to BSNL infrastructure (such as tower sites and backhaul facilities). A revenue-sharing deal is also in place as part of the arrangement, with a 70-30 split in favour of the kit-maker.

Soma Networks CEO Yatish Pathak, in an interview with Business Line last month, argued that the mobile WiMAX opportunity in India is probably quite limited, at least in the short term.

"One of the reasons that Soma Networks chose to use WiMAX 802.16e-2005 technology, also called Mobile WiMAX, is that it supports mobile broadband as well as [having] the capability to provide wireless broadband to homes and offices," Pathak told Business Line. "However, its application depends on the context and availability of competing technologies. In an emerging market such as India with vast areas under-served due to lack of wired infrastructure or due to sub-optimal DSL connections, the best use of WiMAX today is to deliver broadband to the homes and businesses that have no broadband, or poor broadband connectivity."

"Using WiMAX as a mobile broadband application is better suited for developed, more mature markets that have high data consumption," Pathak asserted. "Classic examples are Tokyo and Korea."

Pathak can see the business case for broadband service providers opting to use WiMAX to target the Indian laptop user market, saying that "then it will simply be a service such as EV-DO, but with higher data rates." The Soma Networks CEO believes that India's existing mobile operators will continue to evolve their network towards LTE to address their customers' evolving mobile broadband needs. He feels that cellcos might opt for WiMAX deployments in select high traffic business districts and cities to address the enterprise market. However, Pathak does not envisage any Indian MNO deciding to use WiMAX for mobile data on cellphones, arguing that such a service would require the operator to invest in and run two separate networks - an FDD network for 3G and a TDD network for WiMAX. Besides, he continues, the service would require dual mode phones, and the support for two different types of radios would make the handsets cost-prohibitive for Indian consumers, "until there is service acceptance and we see economies of scale."

Soma Networks, is, then, in Pathak's words, currently focused on the delivery of a "broadband data service that optimises the use of bandwidth link to wirelessly deliver a megabit-rate experience within the comforts of a fixed location, such as home or office," notwithstanding the fact that the company's technology, used for rollouts in India for BSNL, "supports mobility even today". It is BSNL's prerogative, Pathak states, to make a decision depending on its business model and strategy on when it wants to extend the mobility features to consumers.

Pathak feels that "going for mobility from day one is a very ambitious plan and requires massive investments." He told Business Line that broadband penetration across the three circles (total population 240 million) served by Soma Networks and BSNL is currently just 0.5%. Even if this rises to 3% over the next three years, he says, we are still talking of very small volumes to justify that kind of investment, given the low ARPU numbers in India.

"In my opinion," Pathak says, "a prudent approach is to focus on Wireless DSL market where there is a huge pent-up demand. This helps us deploy in a scalable manner without making billion dollar investments before any revenue starts accruing. By phasing the rollouts, we lower costs and risks to achieve rapid ROI and then scale up the investments to stitch the coverage areas to offer mobility."

BSNL, however, does not seem to share Mr. Prakha's cautious view about the prospects for mobile WiMAX. Earlier this month, wireless solutions provider Harris Stratex announced an agreement to supply mobile WiMAX technology to the Indian telco. Under the multi-year contract, run the announcement, Harris Stratex will supply its StarMAX™ WiMAX solution to extend BSNL’s public wireless access network to provide high-speed wireless mobility services to enterprise and retail customers in urban areas across the southern Indian state of Kerala, the country's fourth largest telecommunications market. Financial details were not provided in the announcement, but media coverage indicates that this is another franchising model arrangement.

This has presumably not met with the full approval of global trade and standard body the WiMAX Forum, whose regional Honorary Chairman for India, C.S. Rao, in June asked BSNL to avoid further use of the franchisee model.

"While adopting the franchisee model, we feel that BSNL is losing out on the opportunity of racing ahead of the private players in this space," said Rao, who argued that if the state-owned telco deployed networks itself, this would result in revenues amounting to about USD 1.2 billion annually. In the franchisee model, argues Rao, BSNL would only get about USD 500 million per annum.

That public sector telcos BSNL and MTNL are the ones dominating WiMAX news from India at present is due to the period of exclusivity the two organisations have had in this space. As James Middleton, another former Informa Telecoms & Media colleague of mine, observed in February, BSNL also has a first-to-market advantage when it comes to BWA (broadband wireless access) spectrum. While the BWA auctions are scheduled to take place the same time as the 3G licence awards, BSNL is already sitting on a chunk of pan-Indian 20MHz spectrum in the 2.5GHz band, for which it does not have to pay until the auctions take place. BSNL’s 20MHz of BWA spectrum will cost the state-owned operator the same as the highest amount paid for the three remaining 20MHz BWA licences that will be up for auction, two in the 2.3GHz frequency band and another at 2.5GHz. Whether BSNL can be said to have made of the most of this advantageous position seems debatable in light of the low broadband penetration figures and conservative-sounding projections offered by Yatish Pathak of Soma Networks.

BSNL and MTNL have also gained first-to-market advantage in the 3G space, again not having to make payment for spectrum until private sector operators are involved in an auction. As with the BWA auction, and as noted in a Wall Street Journal article today, the two public sector operators will have to pay the Government an amount equal to the highest bid in that auction, the date of which the article only predicts in the vaguest terms, i.e. "later this year."

The state-owned operators may have got into the 3G space ahead of their rival cellcos, but I'm not sure they can be said to have "enjoyed" first-mover advantage. In Tuesday's piece about Mobile Number Portability, we heard from Rajiv Sharma of HSBC Securities, who warned the public sector telcos not to make significant further investments in 3G mobile technology and from Alok Shende of Ascentius Consulting, who believes that the below-industry ARPU recorded by MTNL and BSNL reflects that the companies have attracted price-sensitive, low-MOU subscribers who do not use VAS and do not gain from the enhanced capabilities of a 3G offering. We noted reports that in the six months since its 3G launch, BSNL has acquired just 10,733 subscribers and that the figure for MTNL is said to stand at a mere 902, an average of just 150 per month across Mumbai and Delhi, considered the two most lucrative 3G markets in India.

It is in the context of these extremely modest 3G subscriber numbers that I'd like to consider an Asia Times article written this week by Kunal Kumar Kundu of consulting and IT services firm InfoSys. This - which is a summary of the writer's personal opinions - is nothing short of a withering analysis of BSNL, a company Kundu describes as showing "signs of sickness." Kundu feels that India's largest fixed-line telco looks set to go the way of struggling government-run Air India, "which has had to crawl cap in hand for a state bailout to survive."

For Kundu, "the signs of sickness are all too obvious, led by bloated payroll costs." He states that BSNL's salaries now account for about 25% of revenue, compared with rival Bharti Airtel's 5%, after rising at an compounded rate of 21.5% per annum between the financial years ending March '02 and March '08. Kundu notes that this far outpaces revenue gains, which in the same period increased at a compounded 5.53% per annum. He also argues that only by earning interest in cash kept idle in bank deposits has BSNL kept out of the red, and reports a deterioration in finances in the year to March 2009. Analysts, says Kundu, are forecasting a loss of between around USD 825 million-1.03 billion as salary costs jump by about USD 500 million.

The company, says Kundu, once regarded as one of the Government's crown jewels, is now one of the top candidates for disinvestment this year. He is especially critical of BSNL's performance in the fixed-line space, where "an abominable quality of service and increased options from the private sector have led to a drastic fall in the company's landline subscriptions."

Whether a proposed merger between BSNL and MTNL would cure these ills remains to be seen - and there may be some wait. A week ago, the Business Standard reported that India's Communications and IT Ministry will decide on the merger between the two state-owned telecom companies only after the listing of the former.

"MTNL is a New York Stock Exchange-listed company, and a merger would not be possible without the listing of BSNL. We will first look at listing BSNL and then will decide on the merger," Union Minister of State for Communications and Information Technology Gurudas Kamat said.

WiMAX and 3G trials and tribulations for India's public sector telcos