Thursday 24 July 2014
 
»
 
»
COMPANY FOCUS

High costs, foreign troubles challenge Saudi telecom giant

Riyadh, June 26, 2013

By Matt Smith
Saudi Telecom Company (STC) is a firm with a market capitalisation of $21 billion but no permanent chief executive. It has spent billions of dollars to buy foreign assets, but competitive pressures may force it to focus more on domestic business.
 
Annual profits at Saudi Arabia's biggest telecommunications operator have fallen 43 percent from their 2006 peak, and its part-privatisation has had only limited success in spurring it to make the cost cuts which analysts believe are needed to reverse the slide.
 
STC's experience has implications for governments in the Gulf which aim to sell shares in state companies as a way to subject them to market discipline and make them more efficient.
 
The Saudi government has begun to privatise parts of Saudi Arabian Airlines, listing shares of its catering unit on the local stock market last year. State-owned Qatar Petroleum plans to offer shares in four of its units in coming years, Qatari officials have said.
 
But STC's difficulties suggest the benefits of privatisation can be difficult to achieve, as companies may still find it hard to limit staff numbers, streamline operations and compete with private sector rivals.
 
"While revenue for the STC group is trending up, profit is trending down," said Paul Budde, managing director of Sydney-based telecommunications consultancy BuddeCom.
 
"The reality is that they will have to significantly change their cost base in order to stay competitive and profitable. So far, very few telcos have been able to do this."
 
SPIN-OFF
 
The Saudi government spun off the telecommunications arm of its Ministry of Post, Telegraph and Telephone to create STC in 1998; it sold shares to the public four years later, and the company is now 84 percent owned by government institutions.
 
The share sale offered a chance to modernise what had been an inefficient, slow-moving fiefdom of the state.
 
Initial results were promising; STC nearly quadrupled its profit between 2002 and 2006. But in 2005, the government ended STC's monopoly on mobile services in the kingdom and the company has found the going harder since then.
 
Profit plunged 79 percent from a year earlier in the fourth quarter of 2012, and this year has begun inauspiciously, with first-quarter profit down 39 percent because of writedowns on foreign operations and a 17 percent rise in operating expenses.
 
The company's share price is down 8 percent so far this year, underperforming by a big margin a 10 percent gain by Saudi Arabia's main stock index.
 
According to STC's annual report, "other costs" - largely consisting of predictable expenses such as utility bills and rent of equipment, property and vehicles - rose by more than two-thirds in 2012.
 
Much of the cost problem seems linked to STC's high staffing levels, a legacy of its state-owned past. Analysts estimate its head count at about 16,000, equating to domestic revenue of 641,808 riyals ($171,100) per employee in the first quarter, according to Reuters calculations. This compares with 1.61 million riyals for each of the 3,500 workers at Etihad Etisalat (Mobily), the country's second biggest operator.
 
Rapid changes in the executive line-up at STC, which did not respond to questions about its business, may have distracted it from efforts to strengthen operations in recent months.
 
Chief executive Khaled Al-Ghoneim, who had joined the company in June 2012, abruptly resigned in March this year; a company statement on his departure gave no reason. Chairman Abdulaziz al-Sugair then became managing director, but STC has not named a permanent successor to Ghoneim as chief executive.
 
STC also saw the heads of its domestic and international operations, strategic affairs and finance, as well as Ghoneim's predecessor as chief executive, leave their posts in less than a year from April 2012.
 
STRATEGY
 
Inside Saudi Arabia, Mobily, an affiliate of the UAE's Etisalat, is the leader in data services, which is the sector's main source of growth as customers switch to low-cost, Internet-based communications from conventional calls and texts.
 
STC's dominant position in fixed-line services means it can offer bundled packages that include television, Internet and mobile services. Using these to win customer loyalty is a key plank in its domestic strategy.
 
But Mobily is in talks to buy a stake in fixed-line operator Atheeb Telecom. Meanwhile another competitor, Zain Saudi, an affiliate of Kuwait's Zain, agreed with the Saudi government this month to defer $1.5 billion of annual fees to the state until 2021, and it appears near to concluding a $2.4 billion long-term debt refinancing. So both companies may soon be better placed to attack STC.
 
Abroad, STC has adopted the same strategy as other big Gulf firms such as Etisalat; it has tried to offset competition in is home market by using its extensive cash reserves and cheap borrowing to buy stakes or licences in foreign markets.
 
Between 2007 and 2011, STC spent at least $10.6 billion buying into Bahrain, Kuwait, South Africa, Turkey, Indonesia, India and Malaysia. It has slashed its dividend by three-quarters since 2005, in part to fund the acquisitions.
 
But the foreign strategy has so far had only mixed success. Among its foreign assets, STC owns only indirect stakes through affiliates in the most important: Turk Telekom and Malaysia's Maxis. The two firms together have provided about $1.4 billion in dividends to STC since 2009, according to Reuters calculations, but because it only has minority interests in them, it does not have management control.
 
STC bought mostly into Islamic countries to capitalise on foreigners visiting Saudi Arabia on religious pilgrimages. But its domestic market still accounted for 89 percent of its first-quarter revenue; in the past, it has said it wants to obtain half of its revenue from abroad.
 
The firm now appears to be focusing on strengthening its domestic operations, said a person who is familiar with STC from doing business with company. He declined to be named because of commercial sensitivities.
 
"Right now, the international operations will be on autopilot, and management has put the question of what to do with these assets on the back burner," he said.
 
But this could be a risky strategy at a time when some of the foreign units are struggling. Saudi Arabia's NCB Capital wrote in a research note: "The international business has led to higher risks for the overall STC business. This has come in the form of FX exposure, higher taxes, as well as operational problems at its international businesses."
 
For example, STC bought 25 percent of Malaysia's Binariang, which owns 74 percent of India's seventh biggest operator Aircel, for $5.87 billion in 2007. The Indian firm had accumulated losses of 14.6 billion riyals as of March this year.
 
"STC's main foreign risk comes from its exposure to India - it's a market that is likely to consolidate and STC might have to invest substantially more to remain there," said Alexander Griaznov, an analyst at credit rating agency Standard & Poor's. - Reuters



Tags: Gulf | Saudi Telecom | STC |

More Analysis, Interviews, Opinions Stories

calendarCalendar of Events

Ads

Buy high quality China wholesale Health & Beauty , Electronics, Sports & Outdoors , Computers, Video Games, Toys & Hobbies Cell Phones, Automobiles and other wholesale products directly from reliable Chinese wholesalers or Factories on DHgate.com