ETISALAT – A REGIONAL MNC IN THE MAKING

If, as reported, Ettihad Etisalat’s IPO did cause a mini riot among investors or a gold rush in jostling for application forms and a black market-type manipulation – then it is indeed a manifestation of ‘irrational exuberance’; Greenspan’s immortal quote.  Such emotive responses are common place in emerging markets; for any scarce items such as IPOs.  Such detail responses apart, Etisalat has arrived fully and firmly on the GCC firmament,  at the institutional, corporate and regional business levels; as a major corporation that now has multinational aspirations.

With quiet determination, Etisalat concluded a major financing package amounting to US$ 3.46 billion, to support its successful bid for the license. It moved with deliberate speed and care, in putting together a consortium wherein it held 43.75% of the shareholding and with the General Organization for Social Insurance holding 18.75%.  Some important investors and business families / their organizations participated as promoters / founder shareholders and were from the various provinces in Saudi Arabia. Etisalat then also committed itself to a capital expenditure of almost US$ 1 billion. It invited bids from the various financial institutions in the GCC, including the leading Saudi banks, who responded with unprecedented interest in this transaction.  This is how it should it be, as Etisalat has always been one of the most profitable GCC companies and one of the only three companies in the region that can justifiably claim to be among the largest 500 companies in the world, in terms of market capitalization.  It has always had a very substantial cash cushion over the years and has built up enormous business developmental reserves. Not only is its paid-up capital AED 3 billion, but if you add other reserves, shareholder funds exceed AED 12 billion. This strong financial muscle can well support such big ticket cross-border business expansion plans. Noteworthy is that until this transaction, Etisalat has had no debt on its balance sheet.

Etisalat’s investment book include some strategic telecom investments; if one might call them that. It holds 34% of Zanzibar Telcom and also provides Zantel with some key managers.

Zantel has proved to be profitable and given Etisalat a foray into the East African market region. Zanzibar had close links with the Arab world, since the time it was an Omani colony.  Etisalat  also has a small stake (4.6%) in Sudatel (Sudan’s incumbent telephone operator that owns a majority stake in Mobitel, the cellular operator in Sudan). This stock is listed on both Khartoum and Abu Dhabi stock exchanges, and the company has been generous with its dividend payout. Another small but significant stake is Etisalat’s 1% shareholding  in Qatar Telecom (Qtel), also listed in Abu Dhabi and Doha. Qtel  has been one of the more aggressive telecom operators in the GCC.

It is in this context, that Etisalat’s foray into Saudi Arabia (the largest GCC market) is eminently timely. It proceeded efficiently on the technical front by spanning out into the four Saudi regions and has tied up with major corporations such as Motorola, for the equipment and infrastructure. It expects to provide a full range of services within six months time and has set itself somewhat stringent time lines, indeed.  However, such products and services have been successfully rolled out in the UAE and its track record, makes Etisalat enviable and enhances its credibility. 

Emirates Financial Services PSC (EFS) and I had a first hand experience of working on what is the largest recorded Islamic bridging facility transaction in the region.  The total expenditure of US$ 4.4 billion is being met through shareholder funds / loans of US$ 2.057 billion, and the balance of US$ 2.35 million through this Sharia-compliant syndicated bridging facility in two tranches. As International Book Runners, EFS had to weigh in with other Mandated Lead Arrangers to ensure that the pricing was right. The transaction was hugely successful and was clearly, path-breaking. The working relationship built between Saudi banks and those in the UAE and Bahrain was good and a matter of considerable satisfaction; thus this was completed well within the time lines.

The equity IPO of Ettihad Etisalat followed quickly and earnestly. When completed, it will dilute Etisalat’s equity stake to 35% in the Saudi company, but there will be a substantial free float. Interestingly, the IPO is aimed at gathering retail investors, unlike previous IPOs in the region that would attract highly leveraged institutional / HNWI dominance. Here, the maximum amount for subscription has been kept at 500,000. Only individuals and not corporations are allowed to apply.

Taking on Saudi Telecom, in its established market, might appear to be daunting; however, the market penetration is still small vis-à-vis potential and with some 20 million residents, the opportunity is very large for both the companies. Indeed, Saudi Telecom could well be nurturing plans for its own overseas foray. Competition in their domestic market usually spurs big companies to diversify geographically.  It was only a coincidence that the UAE market’s opening up was announced, when Etisalat found its way into the Saudi market. In fact, the bid had possibly been in the works for a while. Etisalat’s leadership and transition into the GCC competitive arena, is a welcome and demonstrable boost to cross-border capabilities of leading GCC corporations. 

Saudi and UAE nationals will benefit tremendously from the experience and exposure that such companies offer. A new leadership is emerging among middle-aged GCC nationals to take senior executive and responsible positions in the corporate world; cutting across the various industry sectors and also within an entity across the functions. It is in this context, that Etisalat’s aspirations to be a strong regional player, need not be restricted only to the Arab markets. Indeed, through Thuraya (its satellite subsidiary), it has reached out far and wide. The risk is that in such wide-ranging investments, deals can also go sour, as indeed was noticed with Etisalat’s small stake (7.34%) in a U.S. telecom company (ICO Global Communications Holdings Ltd) that filed for bankruptcy. The new ICO established in Delaware is in the development stage. It is almost inevitable that as one ventures outside the region, it is best understand that there will be vicissitudes and vagaries of  the foreign market place that impact upon on the MNC’s performance.

Multi-National Corporation (MNC) has a negative connotation in many parts of the developing world, largely attributed to them as illustrated by the alleged abuses by AT&T in Latin America. Some MNCs do go into the market and through transfer pricing methods, enrich the parent company.  Of course, this is not a wholly valid or world-wide phenomenon. Many MNCs have brought in valuable technology, enhanced recruitment and skills in the emerging markets, and introduced a work culture that has been replicated by other budding entrepreneurs in each of those market places. It is true that foreigner-phobia is developed and cultivated by the leftists. The communists have been largely responsible for tarnishing the image and tarring them all black with the same brush. The quality of corporate governance by MNCs, whether it is in Enron or others, have been found to be wanting and not conforming to best practices.

This is where this new breed of regional MNCs, such as Etisalat can set a good example. Already,  there are a number of Indian MNCs that have been listed in NYSE and Nasdaq, such as Infosys or ICICI Bank, that have quickly learnt, that when they go international /  outside their country, they are under the watchful eye of regulators and the market players,  who will strenuously apply and judge them against global standards.

It will not be long before, just like Etisalat from the telecom sector and Emaar from the property sector, or the banks from the financial sector in the UAE, become guiding examples for others to emulate.  There is no reason, why for instance, the large domestic petroleum companies cannot go upstream or downstream through significant M&A activity and drill down other geographies. Similar can be the case for the  petro-chemical giants such as Sabic in Saudi Arabia or Equate in Kuwait or say DUBAL in Dubai or ALBA in Bahrain. They will soon find that their capabilities, track record, experience and exposure are best exploited by expanding into regional markets and replicating their successes. The Dubai Ports Authority has already achieved this, as indeed has Emirates Airlines in spreading its wings far and wide! These are clearly, where the regional MNCs, in the making, will face the next set of positive challenges. Etisalat in that sense, has taken the first bold step; but one, by all accounts and counts, appears to be well-founded. 

[The author is General Manager of Emirates Financial Service PSC.  However, the views expressed in this article are not necessarily shared by the Bank].

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