International expansion has emerged as a fundamental strategy for telecommunication companies within the GCC region, representing a pivotal approach to fostering growth and diversification. Telecom operators in the GCC have actively sought opportunities beyond their domestic borders, aiming to scale up their operations and unlock new avenues for revenue generation and subscriber expansion.
Driven by the dynamic nature of the telecommunications industry and the need for sustained growth, GCC telcos have recognized the importance of venturing into international markets. This strategic move enables them to tap into diverse demographics, capitalize on emerging technologies, and navigate the evolving landscape of global telecommunications.
The pursuit of international expansion is rooted in the desire for telcos to not only extend their geographical reach but also capitalize on the increasing demand for telecommunication services on a global scale. By strategically positioning themselves in new markets, these telcos aim to leverage their expertise, infrastructure, and technological capabilities to stay ahead of industry trends and meet the evolving needs of consumers and businesses alike.
Investing in Emerging Markets
In historical retrospect, telecommunication operators within the GCC embarked upon substantial forays into emerging markets, characterized by the acquisition of telecom licenses and assets across diverse regions, including South Asia, Southeast Asia, Sub-Saharan Africa, and various segments of the Middle East and North Africa (MENA).
A paradigmatic illustration of this strategic trajectory is evident in the 2000s, wherein entities such as e& (formerly Etisalat) expanded into India, Nigeria, and Pakistan; Ooredoo (formerly Qtel) penetrated the Indonesian market (subsequently extending to Myanmar in 2013); and Zain secured a foothold in multiple African nations through the acquisition of Celtel. Furthermore, in 2008, stc executed a notable financial transaction, disbursing USD 2.6 billion for a 35% equity stake in Oger Telecom, which, in turn, possessed a 55% ownership interest in Turk Telekom.
These strategic endeavors have provided telecom companies with a substantial geographical footprint and a substantial subscriber base, particularly leveraging the demographic dividend emanating from the sizable youth cohorts in these regions. Nevertheless, the impact on overall revenues and profitability has proven to be somewhat nuanced, primarily attributable to the intense competition and the low average revenue per user (ARPU) dynamics inherent in these markets.
This financial challenge is compounded by a spectrum of macroeconomic impediments, including foreign exchange losses, elevated inflation rates, and the intricate political and regulatory landscape characterizing emerging markets. Consequently, domestic operations persistently emerge as the primary revenue contributors, thereby underscoring a discernible disjunction between subscriber distribution and revenue generation. As the market evolves, the strategic pursuit of international expansion by GCC telecom operators intensifies.
Diversifying Financial Footprints
Through the acquisition of assets in novel geographical realms and the provision of products and services therein, telcos are anticipated to observe a projected increment of 3% in their annual revenue during the period of 2023-2024, as indicated by Moody's Investors Service.
The potential positive impact on credit from investments in foreign markets over an extended period is contingent upon finding a delicate equilibrium between the maturity and growth prospects of the new geographies, highlighted by Moody’s in their report.
Analysts underscored that outcomes of prior investments in African and Asian enterprises have exhibited a varied spectrum of results attributed to the influence of currency fluctuations, macroeconomic volatility, and the occasionally unpredictable legal and regulatory landscapes prevailing in certain regions. Consequently, GCC operators are presently engaged in an effort to strike a harmonious balance. Specifically, they seek to navigate between more stable operational environments and the potential for growth within the telecommunications markets, recognizing the imperative of balancing risk and reward in their strategic endeavors.
The ongoing transformation within the telecommunications industry, spurred by innovative technologies, compels companies to adeptly integrate these advancements to optimize operations. This strategic adaptation not only facilitates the expansion of consumer bases but also introduces new revenue streams— a crucial maneuver in the face of escalating competition.
Strategic Telco Investments
The motivation behind strategic telco investments is rooted in the aspiration to emerge as influential global entities in the Technology, Media, and Telecommunications (TMT) sector, with a focus on achieving substantial scale and fostering innovation.
Citing prominent instances, e& and stc have been at the forefront, consistently finalizing noteworthy deals and making significant announcements in recent years.
In May 2022, e& acquired a 9.8% stake in Vodafone Group for USD 4.4 billion, and three months after, the techco put forward an offer to increase its stake in Vodafone Group to 20% and acquired 50% plus one share in PPF Telecom Group’s assets in Bulgaria, Hungary, Serbia and Slovakia for EUR 2.15 billion.
Between December 2022 to April 2023, e& progressively increased its stake in Vodafone Group to 14.6%. Through its partnership with Vodafone, e& has highlighted the opportunity to create mutually beneficial strategic and commercial partnerships across R&D, technological applications and procurement.
On the other hand, in September 2023, stc reportedly spent EUR 2.1 billion to increase its stake in Telefónica to 9.9%. This investment will enable the Saudi-based telco to become a member of the Telefónica Partners Program, allowing it to participate in knowledge sharing and explore potential business opportunities.
Additionally, in August 2023, TAWAL, the tower infrastructure unit of stc, completed its acquisition of tower infrastructure worth USD 1.3 billion from United Group in its first foray into Europe’s telecoms market. The acquisition supports the towerco’s strategy to expand its international footprint in markets with significant growth potential.
Analysts predict Europe to be the primary region for expansion by GCC telecom operators as it complements the GCC companies’ existing footprint and provides diversification into more developed jurisdictions.
Meanwhile, Ooredoo announced the sale of its Myanmar business and merged its Indonesian operations with CK Hutchison to create the country's second-biggest operator (Indosat Ooredoo Hutchison aka IOH).
Locally, Omantel is actively building their ICT capabilities, with a focus on corporate and government customers and the wholesale business, particularly on organic growth and new start-up ventures.
In July 2023, Ooredoo Qatar, Zain Kuwait, and TASC Towers Holding initiated exclusive negotiations to establish an independent tower company, encompassing potentially 30,000 towers across Qatar, Kuwait, Algeria, Tunisia, Iraq, and Jordan. If this partnership succeeds, it aims to form the largest independent tower company in the Middle East and North Africa region.
By acquiring assets in new regions and offering products and services there, telcos are expected to increase their annual revenue by an average of 3% in 2023-2024, reported Moody's Investors Service.
Future Outlook
The evolving ICT landscape demands carriers to efficiently manage network assets as utilities, ensuring the recovery of capital and establishing a margin. Monetizing assets through sales or carve-outs becomes paramount in adjusting strategic priorities. However, beyond these essentials, the imperative for collaboration within and across industries intensifies. Embracing innovative interactions with suppliers, customers, and competitors is crucial for capitalizing on strategic growth opportunities. From a long-term perspective, acting as ecosystem enablers positions companies to unlock substantial potential in this dynamic environment.
