du to use windfall to reduce debt burden

The chief executive of the du said the UAE telecoms operator has another Dh600 million to pay down debt.

Dubai, 24th February 2010. Osman Sultan (Chief Executive Officer, du) at the press briefing on du's gain in the market. Held at Royal Mirage Hotel. (Jeffrey E Biteng / The National)

BARCELONA // The UAE telecoms operator du has an additional Dh600 million (US$163.3m) to help pay down its debt after the Government levied lower than expected royalty charges.

On Monday, the country's second-largest operator said it would have to pay the Government royalties amounting to 15 per cent of its net profit from last year.

It had provisioned half of its earnings for royalty charges since it launched services in 2007, but had not been ordered by the Government to transfer the funds.

Including the profit set aside in 2008, 2009 and the first three quarters of last year, du would add Dh606m to its bottom line, analysts said.

The operator now has "several options" to help manage its Dh3 billion bond, which matures in June, said Osman Sultan, the company's chief executive.

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"If I looked at what we've announced up to the end of nine months of last year in terms of performance of the company, if I look at the success of the rights issue, the vendor financing deals that have been put in play and I look at the news of the royalties, our position in 2011 is much better than the beginning of 2010," Mr Sultan said.

Last June, du raised Dh1bn in an oversubscribed public issue of more than 574 million shares. It also struck a €200m (Dh993.6m) vendor-financing deal with Nokia Siemens Networks for help in building the operator's next-generation wireless network.

"We started last year to look at the road map of financing the needs of this company," Mr Sultan said. "We need to work in a rational way in terms of debt-to-equity ratios and work with the right capital structure. We need to be very efficient with this road map."

Mr Sultan confirmed the operator would not have to pay any royalty charges for 2008 and 2009 but declined to provide further specifics until the company reports its fourth-quarter earnings on March 3.

Irfan Ellam, a telecommunications analyst with Al Mal Capital, said du had two primary options in making use of its extra profitability.

The company could borrow less or pay a dividend, he said.

"We were expecting royalty rates to come down [but] this 15 per cent for du for one year wasn't expected," Mr Ellam said. "I don't think people thought it would be so low. I thought it would be around 40 per cent."

Investors reacted positively to the low royalty rate, sending du up more than 3 per cent on the Dubai Financial Market yesterday. The stock was at Dh3.31 at the close of trading.

The news was also welcomed by analysts, who collectively raised their earnings forecast for du's fourth quarter.

"The UAE Ministry of Finance's favourable royalty announcement strengthens our case for a potential long-term cut in royalty - one of our key positive catalysts for du," said Christian Kern, an analyst with JPMorgan Cazenove.

Mr Kern raised his price target on du to Dh4.25 on the basis of the royalty announcement.

Representatives from Etisalat declined to comment. The UAE's largest operator pays the Government half of its earnings.

However, Mohammed Omran, the chairman of Etisalat, has previously said he would like the company's royalty rate to be lowered.

Mr Ellam said there was now a greater likelihood that Etisalat's royalty payment would be reduced.

"We also expect it to be reduced for both companies. We need to see a level playing field here," he said. "I think it would only be fair that both operators pay the same, especially on the domestic revenues."

Last year, the head of telecommunications investments for Emirates Investment Authority, a sovereign fund that is a major shareholder of Etisalat and du, said the 50 per cent royalties levied on the UAE operators were not sustainable.

Mohammed al Ghanim, the director general of the Telecommunications Regulatory Authority, said the responsibility for setting the level of royalties lay with the Ministry of Finance.