Flush Gulf firms eye foreign acquisitions

Undervalued companies, particularly in Egypt and India, appear as bargains during downturn.

All ears: Attendees gather around the Etisalat booth at the MECOM 2008 Exhibition, Conference and Summit.
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Telecommunications companies in the GCC, flush with cash and largely immune from takeover, are set to take advantage of the global economic downturn by making big foreign acquisitions. Uncertainty in world markets has led to relative bargains to be found, with telecommunications companies from Cairo to Sydney plummeting in market value. Egypt recently cancelled the auction for its second fixed-line telecommunications licence, saying poor market conditions meant it was unlikely to get the price it was seeking.

Publicly traded mobile operators in the GCC, where markets have dropped by up to 30 per cent this year, are no exception to the downturn; analysts see most as being undervalued by between 20 and 50 per cent. The same is true for mobile companies across the world, with one important difference: most GCC operators are at least partially government-backed, with restrictions on foreign ownership. "Many telecommunications companies internationally are looking cheap right now, and every region has some undervalued companies," said Faisal Hasan, the head of research at Global Investment House, a Kuwaiti investment bank. "I don't think much merger and acquisition activity is likely to happen within the region - government and sovereign wealth fund links mean takeovers here are less likely."

Aside from Zain, the Kuwaiti operator rapidly expanding across the Middle East and Africa, every major GCC telecommunications company is majority owned by its government or government-linked investment vehicles. While reaping healthy profit margins from booming local markets, these companies have their eyes focused abroad, where bargains abound. "What all these companies are doing is diversifying their revenue base internationally," said Mr Hasan. "They don't want to be dependent on upturns or downturns in individual economies, and they are proving to be very good at making smart acquisitions."

Smaller regional players, like Bahrain's Batelco and Qtel of Qatar, have reaped big rewards from smart purchases in small, growing markets such as Jordan and Yemen. Such purchases are likely to continue as new opportunities are made available in Lebanon, Iran and Central Asia. But heavyweight businesses like Saudi Telecom, Etisalat and Zain are fixed on bigger catches, including a handful of multibillion-dollar opportunities available in India, and the hunt for the Johannesburg-based Pan-African operator, MTN.

The company was almost acquired by India's Reliance Telecommunications before a feud between the billionaire Ambani brothers ended negotiations. It has lost almost 10 per cent of its value this year and is seen by many as one of the best deals around, opening up lead positions in key African markets. An even better buy, most agree, would be Egypt's Orascom Telecom. The company holds leading positions in growth markets like Egypt, Algeria and Pakistan, but is trading at a two-year low, having shed more than half its total value since the beginning of the year. But it would take a substantial premium to convince Orascom's founder, Naguib Sawiris, who along with his family owns almost 70 per cent of the Dh37 billion (US$10.1bn) company, to sell.

Like Saudi Telecom, which says it is ready to spend more than Dh50bn on international expansion and yesterday singled out North Africa as a market of interest, such a premium could be on the cards. With the government of Saudi Arabia owning 70 per cent of the company, it would not struggle to raise the funds. "We are comfortable with the financing of any transaction that may seem worth it," Saud al Duweish, the company's chief executive, told Reuters yesterday. "We have excellent ratings."