Operators dial 'L' for Lebanon

The sale of the state-owned companies MIC 1 and MIC 2 could fetch the government more than $7 billion.

Strong tone: Lebanon will soon be inviting bids for the privatisation of its two mobile operators. Interest in the companies reflects the scarcity of opportunities for leading mobile operators in the Middle East.Show less

One of the last chances to buy a market leading mobile operator in the Arab world has the region's telecommunications giants licking their lips. As a stable Lebanese government emerges from the chaos of recent years, the stalled privatisation of the country's two mobile operators has been given a new breath of life, with people familiar with the process expecting a sale to take place by early next year.

Lebanon's mobile network infrastructure is currently state-owned, with two operating companies - Alfa and MTC Touch - contracted until 2009 to manage the two networks, known as Mobile Interim Company (MIC) 1 and 2. Alfa is owned by Fal Dete, a joint venture between Saudi and German investors, and MTC Touch is a division of Zain, a regional operator based in Kuwait. The sale of MIC 1 and MIC 2 to foreign investors could net the government more than US$7 billion (Dh25.7bn), according to some estimates. But it will come at a political and economic cost that will require tricky political manoeuvring to overcome.

The revenues earned by the operators are paid to the state, minus operational expenses and management fees. Payments from the mobile industry currently make up almost a third of the revenues received by the Lebanese government, making privatisation a politically sensitive topic. But Lebanon's current political alignment means a sale of the two companies is now firmly on the table - although few political developments are considered certainties in a country whose politics is famously unpredictable.

The pro-privatisation Future Movement is the lead member of the ruling March 14 political alliance, which won a majority of seats in the country's 2005 parliamentary elections. The movement is firmly in favour of international investment, in no small part because regional trade built the empire that brought its leader and his family to power. The party is led by Saad Hariri, whose father Rafik built a sprawling business conglomerate across the Middle East before leading Lebanon's political and economic rebirth after the conclusion of the civil war in 1990.

Rafik Hariri acted as both businessman and statesman, arranging for tens of billions of dollars of foreign reconstruction loans to stimulate the economy, while simultaneously holding a majority stake in Solidere, the company that spent much of this money on the rejuvenation of downtown Beirut. After Rafik Hariri's assassination in early 2005, members of his family, including Saad, inherited a total of more than $16bn. For a time, his daughter Hind was the youngest billionaire on Forbes magazine's rich list.

One of Rafik's less-cherished legacies is the country's crippling external debt of almost $45bn, more than double its annual gross domestic product. Debt repayments account for more than 35 per cent of government spending, and by selling state assets such as telecommunications and energy companies, the government hopes to pay down the debt, reducing the amount of money needed to service it. Every major telecommunications company in the region has expressed interest in bidding in the auction. Qatar Telecom has said it would not baulk at a $3.5bn price tag for one of the networks, while Saudi Telecom has long made clear its ambition to acquire one of the networks - along with its $15bn acquisition war chest.

The Kuwaiti investment group Noor Financial, which has recently launched a telecommunications investment subsidiary, has also said it would take part in the auction, along with other licence sales in Qatar, Oman and Africa. Interest in the two Lebanese operators reflects the increasing scarcity of attractive new opportunities for telecommunications operators in the Middle East. Every country in the region now has at least two mobile networks, with the most profitable customers already signed up.

New opportunities now come in the form of second fixed-line or third mobile licences in smaller markets like Qatar and Bahrain. Although breaking a fixed-line monopoly can be lucrative, it is most beneficial for an existing mobile operator, rather than an outside player new to the market. Egypt recently cancelled the sale of its second fixed-line licence, citing a poor international economic environment.

In such a climate, the opportunity to grab a business that has almost half a million relatively prosperous subscribers in a market with less than 40 per cent penetration is a seriously attractive one. Due to tight government regulation and revenue maximising measures by the country's politicians, the Lebanese mobile market of one million subscribers is currently split almost exactly 50-50 between the two networks.

There is not heavy competition for new or switching customers, and calling fees are among the highest in the region. The government has been reluctant to make significant investments in infrastructure upgrades, meaning new high-speed data services such as mobile internet have yet to be fully exploited. Such a market is ripe for international involvement, with Lebanon's relatively small geographical area and low mobile penetration meaning that rolling out a state-of-the-art national network and doubling customer numbers are both viable short-term possibilities for a new entrant.

In August, the telecommunications minister Jebran Bassil said mobile calling rates would be cut before any auction process began, and the government would try to invest in new infrastructure, both moves aimed at boosting customer numbers and, ultimately, the sale price for both networks. "The Lebanese must understand that the rates or tariffs of mobile phones in Lebanon are partly commercial and partly taxes," he said, emphasising that his government did not believe it should be running a communications business as a revenue raising tool.

Hugely profitable state-owned operators such as Etisalat and Saudi Telecom probably do not share such sentiments, but it is likely to be one of the few areas of disagreement between the companies and Lebanon's new pro-business government. [e-mail]