The acquisition of Telenor Pakistan’s mobile operations by PTCL is expected to ‘complete’ the consolidation of the country’s highly saturated and competitive mobile telecom market, which, according to PTCL Group CEO and President Hatem Bamatraf: “is just big enough for three operators to create value (for their customers).”
“Pakistan’s telecom sector has seen erosion in value because there are so many players operating here. Re-examining and consolidating the market into three (from the existing four) players will actually protect the value,” Bamatraf was quoted by Business Recorder to have noted after the Rs 108 billion (roughly $380 million) deal was announced in mid-December.
Ever since Mobilink purchased Warid in 2015 to create Jazz, most analysts in the telecom industry were expecting another merger or acquisition to further consolidate a sector that has seen its average revenue per user (ARPU) drop to just $0.8 per user per month from a high of nearly nine dollars in the noughties.
The largest business transaction of 2023 will help PTCL (which holds a 100% stake in Ufone and U Microfinance Bank) to create the country’s largest telco in terms of market share, slightly bigger than Jazz, the market leader in terms of number of subscribers and earnings.
The deal had been on the cards for some time and in September last year, PTCL had informed its shareholders through a stock exchange filing that it was making a binding offer for Telenor – which, according to some published reports, has about 45.2 million customers but only generated $242 million in revenue during the first nine months of 2023, down by 21% from the same period a year earlier. The government owns a 62% shareholding in PTCL while 26% is held by the UAE’s Etisalat which controls the company’s management.
The sale of Telenor’s Pakistan operations is part of the Norwegian telecom giant’s strategy to revamp its operations in Asia through mergers and acquisitions, including the sale of its business in Myanmar and the merger in Thailand and Malaysia with local peers.
Before making the sale/purchase agreement with PTCL, Telenor had tried for a merger but did not succeed. “We tried to do a merger in Pakistan, but we didn’t manage to get that, and when we saw this wasn’t happening, the second-best alternative was to arrange a sale,” Telenor CEO Sigve Brekke told Reuters. Petter-Børre Furberg, head of Telenor Asia, was reported to have observed: “We systematically considered all alternatives during the strategic review process and believe that following the sale the market will be better served by a strong local champion.”
Apart from its overall Asia strategy, Telenor’s decision to exit Pakistan’s mobile market after 18 years is informed by a difficult economic and political situation in the country. It had noted previously that high inflation, macroeconomic uncertainty and political unrest had made Pakistan a tough market to operate in currently, reporting an impairment of $235 million against the business in the second quarter of 2022. Pakistan’s low ARPU (one of the world’s worst) was also a major concern for the Norwegian firm, considering that the group’s other subsidiaries in Asia were doing much better.
However, many argue that Telenor’s strategy of targeting the low-income rural population in order to quickly build a larger consumer base and its delayed acquisition of spectrum for its 3G/4G services at a substantial cost of $395 million have also contributed to the telco’s financial troubles despite a customer base of over 45 million. A similar strategy was followed in India, which also led it to exit that market six years ago. Furthermore, Telenor and other mobile telecom companies are facing challenges related to the high spectrum and licence fees they were required to pay in dollars.
“The exit from the Pakistani market was long overdue for the Norwegian operator, as it had been facing challenges in expanding its customer base and revenue over the past few years,” Ahtasam Ahmed, a journalist who has covered the telecommunications industry extensively, says. “This can be attributed to a flawed strategy of acquiring a large number of low-value customers, which ultimately proved to be an unprofitable venture for the telco. Furthermore, the high operational costs, including expenses indexed to the dollar resulted in the departure of the CMO from the country.” On top of this, the steep rise in interest rates and the high tax burden on mobile services made it even tougher for Telenor to sustain its Pakistan operations.
PTCL’s mobile brand, Ufone, has also been struggling with a subscriber base of just over 25 million. The company delayed the launch of its 4G services to 2019. By that time, other operators had already captured a large portion of the market. According to a recent article in Profit Magazine: “The late entry into the 4G arena proved to be too little, too late for Ufone users who were already enjoying the benefits of faster internet speeds and better connectivity.” The article added that Ufone’s persistent reliance on 3G technology even after the widespread adoption of 4G by other operators negatively impacted its subscriber base. “As if this was not enough of a drag on profitability, Ufone subsequently acquired high amounts of debt to finance capital expenditure including spectrum payments. This led to a surge in finance costs post the rapid interest rate hikes in the past two years,” the article noted.
However, the acquisition of Telenor presents vast growth opportunities for PTCL as Hatem Dowidar, Group CEO at E&, which owns Etisalat, reportedly stated: “The strategic acquisition of Telenor Pakistan presents a significant opportunity for market consolidation, empowering us to invest more in creating the best next-generation network in Pakistan.” A combined Ufone and Telenor Pakistan entity would be the market leader with Jazz. The third operator, Zong, owned by China Mobile, has 47.1 million customers.
In addition, the merger infrastructure of Ufone and Telenor provides PTCL opportunities to improve its coverage and expand its footprint in the rural areas through Telenor’s extensive tower infrastructure. One of the key synergies resulting from the deal would be the utilisation of adjacent spectrums held by Ufone and Telenor.
That said, it remains to be seen how the industry deals with the prevailing extremely poor ARPU, as well as low spectrum availability and its dollar-indexed pricing structure, going forward. In spite of market consolidation, these challenges will continue to haunt the operators.
Nasir Jamal is Bureau Chief, Dawn Lahore. firstname.lastname@example.org