DELTA Insight

Middle East Telecom M&A On The Rise?

July 2010

KEY HIGHLIGHTS

Fede Membrillera, Managing Partner

fm@deltapartnersgroup.com

Zdenek Necas, Manager

zn@deltapartnersgroup.com
Anna Martinez Fargas, Senior Associate
am@deltapartnersgroup.com

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After the value of telecom deals in the Middle East declined sharply from
2008 to 2009 due to the financial crisis, leading investment banking and legal
advisers have forecasted a recovery of M&A activities for the current year. In
the course of the last TMT Finance Middle East 2010 conference it was stated that the
total value of deals in the Middle East and Africa could breach the US$30bn mark in 2010.
The question remains which will be the main players in the Middle East to drive the
renewed appetite for deal making and how it will impact the overall competitive land-
scape.

The mobile telecom industry in the Middle East still shows high organic growth potential
driven mainly by opportunities outside of the traditional voice business. Broadband
connectivity, m-money, machine to machine applications are just some of the short /
medium term non-voice growth engines. On the inorganic front, there are still untapped
opportunities for the regional players such as the third license in Syria, potential privati-
zation of the two existing mobile operators in Lebanon and the long awaited privatization
of Omantel to name a few.

Besides the organic and inorganic growth plans pursued by regional operators, consolida-
tion will be another force shaping the regional telecom competitive landscape. Zain’s
reference shareholders have recently expressed their interest to exit in the short term.
Batelco could also be an interesting target for the larger regional players looking to
complement their footprint or even for an international operator willing to build pres-
ence in the Middle East leveraging on an existing platform. In the medium term, we
could see a market dominated by three or four large regional groups concentrating most
of the value, similar to what happened in Europe in the late 1990’s and early 2000’s.

While these regional opportunities could be attractive for both local and international
players, the larger regional operators (i.e. Etisalat, Qtel and STC) will continue to
venture outside of the Middle East in search of additional growth opportunities support-
ing their ambitions of becoming truly international / global players. Etisalat recently
invested in India and Sri Lanka, complementing its assets in Pakistan and Afghanistan, and
has expressed interest in continuing its expansion into Emerging South East Asia consider-
ing attractive markets such as Myanmar, Vietnam, Cambodia or Laos. North Africa,
beyond Egypt, is also an area to which they have expressed their commitment. STC and
Qtel have been less vocal about making their future expansion intentions public, however
their international growth track record clearly points towards continued international
expansion. STC was first to expand East, purchasing first a stake in Malaysian operator
Maxis and later investing in Axis in Indonesia with assets in several Asian countries. Zain,
although being among the first operators to aggressively start its internationalization
process, has not shared yet which are their future growth plans after the divestiture of
its African assets and will mostly depend on the intentions of the current shareholders
and their medium term commitment. Despite this uncertainty, Zain’s capability to lever-
age its strong regional presence to build an international play and rejoin the names above
as a regional operator with significant international ambitions should not be underesti-
mated.

One of the unanswered questions remains whether these regional groups will comple-
ment their portfolios with properties in more mature markets to benefit from stable cash

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flows and to mitigate the risk of their overall portfolios. We could eventually see these
regional groups acquiring one of the European medium sized operators if the opportunity
arises. Regardless of which strategy the regional groups pursue, they will need to acquire
additional delivery skills to ensure that they have tight control over the assets, perform
according to expectations, and translate their growth ambitions into healthy returns to
shareholders.

However, the Middle Eastern telecom landscape will not be shaped exclusively by large
regional groups. Several leading global telecom operators are expected to contribute to
the M&A activity in the Middle East as well. The two global leaders already present in the
region, Vodafone and Orange, are expected to adapt diametrically opposed strategies in
the Middle East. Vodafone mentioned that it might reduce its Middle Eastern presence to
allow the company to focus its activities on Europe, sub-Saharan Africa and India. The
first concrete step in this direction were Vodafone’s recent discussions with Telecom
Egypt, which was interested in buying Vodafone’s 55 per cent stake in Vodafone Egypt.
While these discussion did not lead to a formal offer, they showed Vodafone’s wiliness to
eventually divest its stake. Orange, on the other hand, is likely to continue its aggressive
emerging markets expansion as it has expressed its intention to invest EUR 7 billion in new
ventures in the Middle East and Africa over the next 3 years. Orange could very well be
one of the international operators playing an active role in the Middle East consolidation
game. Although there have not been public statements, other large global operators such
as Telefonica and Deutsche Telekom could potentially consider investing in this part of the
world as well to complement their current portfolios.

In summary, there are interesting telecom investment opportunities in the Middle East
that will be exploited by both regional and international players in the short and medium
term. Regional players could selectively complement their footprint especially in the
Levant area together with potential acquisitions of smaller regional players such as
Batelco or Omantel. The unanswered question is the future of Zain which could drasti-
cally change the competitive landscape in the Middle East depending on whom their
shareholders finally sell to if they will sell at all. Finally, global players looking for invest-
ment opportunities in high value markets with growth potential and relatively low risk
profile could target opportunities in the Middle East as well to complement their interna-
tional portfolios.

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