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A PTCL Buyout of Telenor?

Is PTCL acquiring Telenor?
Published 16 Oct, 2023 11:13am

On August 29, 2023, PTCL announced its intention to make a “binding offer for the acquisition of a(n) (unspecified) target telecom company.” Three days later, the company informed the Pakistan Stock Exchange through another letter that it had “evaluated and made an offer to acquire the shares of a target company in the telecom sector.” The communication went on to read: “…while the information related to the acquisition of the target may be circulating in the public domain, the question of any merger of PTCL with any other telecom company is not only premature but also speculative as no decision has been taken in relation to the same.” Although PTCL is keeping the identity of the telecom company in question under wraps, the market is abuzz with reports that the group is vying for Telenor.

PTCL (UAE-based Etisalat holds a 26% share) has a presence in the telecom sector through its wholly-owned subsidiary Pakistan Telecommunication Mobile Limited (PTML), which owns Ufone. Ufone has close to 24.5 million subscribers, so going by GSMA Intelligence estimates for 2022, the acquisition of Telenor could potentially lead to Pakistan’s second largest operator with 73.3 million connections, after Veon-owned Jazz, which has 76.2 million subscribers.

For over a year Telenor has been signalling its intentions to exit Pakistan. It was only in November last year that Bloomberg reported that the Norwegian company was searching for a buyer to sell its Pakistani operations to, with a price tag of one billion dollars. However, the company has yet to officially confirm its exit plans, although Sigve Brekke, President and Chief Executive Officer Telenor ASA, was reported to have stated a year ago that: “We are also looking at strategic alternatives in Pakistan. The deteriorating macroeconomic situation is concerning. That is also why we are taking a write-down in Pakistan. And based on this, we will do a strategic review of alternatives when it comes to our future operations in Pakistan.”

There are multiple reasons why Telenor is looking to exit Pakistan, not least a series of underwhelming financial results. In July 2022, Telenor said it would conduct a strategic review of its Pakistan unit after posting a $244 million impairment on operations because of deteriorating economic conditions, and then in October, it reported that its underlying earnings in Pakistan had dropped, in part because of rising energy prices.

The reality is that Telenor entered the Pakistani market in 2005 and has been facing serious challenges for the past several years, including, but not limited to, a consistently decreasing average revenue per user (ARPU), which is now less than a dollar for the entire industry, and according to a former employee of the company, “On top of that, Telenor’s ARPU came under further pressure due to its strategy of targeting a low income, rural population in a bid to increase its customer base,” which further complicated conditions for the telecom. Added to which, when Pakistan launched 3G/4G services in 2014, Telenor bought the 850 MHz spectrum at a massive price tag of $395 million, an investment that failed to produce the expected profits due to the fact that the frequency was supported by relatively expensive smartphones and therefore beyond the affordability of the telco’s primary user base.

However, a poor customer base expansion and spectrum strategy and slumping ARPU are only part of a bigger problem, which is the ‘dollarised’ costs of renewing licenses and spectrum prices. In other words, while revenues are generated in Pakistani rupees, all other costs – from government licence fees to the imported equipment required to maintain and expand the network – are paid in dollars, leading to significant and rapid erosion in profits. Last year’s devastating floods further affected the company’s communication infrastructure and operation capabilities, causing erosion in its customer base.

Tone Hegland Bachke, EVP and CFO, Telenor ASA, is quoted as having said last year: “In Pakistan, the underlying EBITDA (earnings before interest, taxes, depreciation and amortisation) decreased by 22%, which is driven by the energy cost, the FX headwinds, and we also see some negative impact from the flooding on the top line.” In essence, Bachke was telling her company’s shareholders that it did not make business sense to prolong its stay in Pakistan.

This said, industry sources also argue that Telenor’s decision to exit Pakistan was part of Telenor’s broader strategy to liquidate its assets and wind up operations in its Asian markets in order to free up cash flow and that the company is changing its investment strategy not only in Pakistan but is also pulling out of other Asian markets. Five years ago Telenor merged its Indian operations with Bharti Airtel and has conducted similar mergers in Malaysia and Thailand, and exited the telecom market in Myanmar.

The question is now whether PTCL’s strategy to invest in acquiring Telenor at a time when industry revenues are collapsing is a sound one. Going forward, the operating challenges facing the telecom industry are projected by industry insiders to increase, as further hikes are expected in the cost of borrowing, fuel and power tariffs – all this on the back of a weakening exchange rate and high inflation. According to a Ufone executive: “Barring a few people at the top, no one knows what the strategy is. Most people know only as much as is reported in the media, so it is difficult to judge whether the bid to buy out Telenor or any other telecom is serious or not. Even the people at Etisalat may not be able to give you more information on that.”

Nasir Jamal is Bureau Chief, Dawn Lahore.