Saudi Telecom’s global ambitions must not lead to losing regional edge

The operator had a two-thirds share of the kingdom’s entire telecoms market in 2015

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The plan to turn Saudi Telecom Co (STC) into a global player is fraught with many challenges for the company, its investors and customers and one should be optimistic that the state-run operator’s majority owners have learned from its earlier multibillion dollar setbacks abroad.

The kingdom wants to turn its top companies including STC into worldwide names, recruiting consultants to achieve this aim, Bloomberg reported this month. The advisors are charged with creating strategies that will boost the international competitiveness of STC – and the other firms such as SABIC and Saudi Aramco – to create national champions, like South Korea has done with Samsung, Bloomberg claims, citing anonymous sources.

“For Saudi Aramco, SABIC and Almarai it makes a lot of sense – they enjoy strong visibility in the region but internationally they’re not as visible as they should be. STC was an unusual name to be included – it did venture outside the Gulf and that didn’t work out as expected,” said Asim Bukhtiar, Head of Research and Investment Advisory at Saudi Fransi Capital.

STC, like other former telecom monopolies in the Gulf, began a foreign spending splurge last decade, snapping up stakes and licenses in the Middle East, Asia and Africa to offset the introduction of domestic competition.

But succeeding in lower income, more competitive markets proved much tougher than the likes of STC anticipated and these problems were often exacerbated by them acquiring only minority stakes that left the buyer liable for debts and losses but with little influence over their affiliate’s operations.

STC’s units in Kuwait and Bahrain, which have similar market dynamics to Saudi, have thrived, but its purchases outside the Gulf, which combined cost billions of dollars have been mostly disastrous, with STC quitting Indonesia and all but giving up on South Africa and India.

Losing domestic market share

The foreign outreach also led STC to neglect its domestic market and it lost market share to its smaller rivals, eroding the company’s prestige as the kingdom’s young consumers chose Mobily, and Zain Saudi instead.

STC’s nadir was 2012, when its annual profit slumped to a 10-year low. Most senior management left and the new guard re-focused domestically to achieve a swift turnaround – STC’s 2014 profit was a six-year high.

True, its earnings have since deteriorated – its third-quarter profit fell 7.5 percent year-on-year to 2.15 billion riyals, an eighth decline in nine quarters – but that reflects a weakening local economy and one-off industry-wide difficulties that have crimped subscriber numbers, rather than problems with STC’s operations.

“Infrastructure development and technology transformation in Saudi Arabia should benefit the company, given its leading position in the domestic market and its wide customer base,” NBAD Securities wrote this month.

As Saudi’s economy recovers following much-needed state budget cuts, so too should STC’s earnings – the operator had a two-thirds share of the kingdom’s entire telecoms market in 2015 - so it seems baffling that authorities would endanger perhaps its steadiest non-oil income generator in an attempt to make a global outreach.

Changes to corporate culture

“Operating on an international scale would require significant changes to STC’s corporate culture,” said Fransi’s Bukhtiar.

Perhaps the government, a 70 percent STC stakeholder, believes the firm’s swelling bank balance – it has 20 billion riyals in cash and cash equivalents and short-term investments – can be put to better use than distributing generous dividends.

Last November, STC promised a minimum quarterly payout of 1 riyal per share for three years. This helped its shares hit a two-year high this week and while the dividend policy to 2018 probably won’t change, a re-expansive STC is unlikely to offer such guarantees after that.

“If STC needs cash for acquisitions, then dividend payouts could be cut,” said Bukhtiar.

The Gulf operators’ overseas splurge also coincided with tectonic shifts in the telecoms industry globally as web-based applications such as YouTube, Skype, Whatsapp and Facebook all but killed SMS and revenues from conventional phone calls also plunged.

In response, operators have sought to become marketing-led media, communications and technology outfits, but that transformation has been fraught and operating across different languages, cultures and time zones multiplies the complexity.

Perhaps the strongest argument against expanding abroad again is foreign exchange volatility, which ravaged profits from foreign units as emerging market currencies tumbled.

Gulf operators didn’t hedge their FX transaction exposure and increasingly believe the volatility is too great to bother with, selling out of underperforming where they are able.

Expanding abroad again confounds industry wisdom.

“Some of the headwinds they’ll face are currency fluctuations and taxes. Harmonising and calibrating that will require a change of mindset. Until we have more details it’s hard to say whether it’s a good idea – how will STC achieve becoming a global player? It would take maybe a decade,” added Bukhtiar.

STC’s purchase of 10 percent of ride-hailing firm Careem for $100 million this month could be a clue that going global may not primarily involve buying up telecom operators abroad – in March, chief executive Dr. Khaled Biyari predicted Internet-based technologies would become vital parts of the company.

But he also said STC’s focus would remain domestic.

Perhaps the most straightforward way for STC to raise its international profile would be to take full ownership of Oger Telecom, of which it currently owns 35 percent. Oger’s sole worthy asset is a 55 percent stake in Turk Telekom. This gives STC an indirect 19.25 percent stake and there have long been questions as to why STC has persevered with this protracted ownership structure, especially with Oger’s construction business in such dire financial straits.

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