Etisalat admits rivalry with du hurting profits

Bond prospectus says,"Competition from du may cause the group to lose customers"

Etisalat, the sole telecom service provider in the UAE from 1976 until the arrival of du in February 2007, has acknowledged in its $7bn bond prospectus that competition with du is hurting the company’s revenues in the UAE.

“The introduction of du in 2007 led to significant changes in Etisalat’s mobile tariff structure, including segment-targeted promotions and tariffs. In addition, the significant number of new promotional offers introduced by du and Etisalat during the period from 2007 to 2009 and through 30 September 2010 led to a decline in effective tariffs,” Etisalat has said in a bond prospectus filed on the London Stock Exchange.

“Competition from du may result in an overall reduction in the group’s revenues or cause the group to lose customers, fail to attract new customers or incur increased costs to maintain its customer base or to maintain revenues from such customer base,” the prospectus adds.

The company also revealed in the prospectus that it made borrowings of more than Dh2bn over the past two years, with its total indebtedness as of September 30, 2010, amounting to Dh5.37b, compared with Dh4.5b as of December 31, 2009, and Dh3.37b as of December 31, 2008.

Etisalat revealed in the prospectus that its mobile average revenue per user (ARPU) has been on a steady decline over the past three years, from Dh176 for the year ended December 31, 2007, to Dh118 for the nine months ended September 30, 2010.

“Because 37 per cent of the Group’s revenue for the nine months ended 30 September 2010 was attributable to the provision of mobile services in the UAE, should blended mobile ARPU [average of post-paid and pre-paid mobile ARPU] continue to decrease, the group will need to rely increasingly on offerings of new services to maintain its market share and its current profitability in the UAE,” the prospectus warned potential investors.

The company’s fixed line ARPU, where it still enjoys a monopoly in providing such service across all emirates except Dubai (where Etisalat and du have certain areas as exclusive while they compete in certain other areas), too has declined but at a lower clip, from Dh206 for the year ended December 31, 2007, to Dh171 for the nine months ended September 30, 2010.

Etisalat’s total mobile and fixed-line subscriber base as of December 31, 2009 was approximately 9.2m in the UAE (including Etisalat and Thuraya) and 98.7m for its international subsidiaries, associates and joint ventures (of which the Group’s proportionate interest was approximately 34.7m subscribers, based on the percentage ownership interest of the Group in each company whose subscriber numbers are included), the prospectus revealed.

Despite the group’s recent international acquisitions and investments reducing its UAE operations’ relative contribution to its revenue, Etisalat’s UAE operations continue to be the primary contributor to the group’s revenue and profitability.

For the years ended December 31, 2008 and 2009, the group’s UAE operations accounted for 90 and 85 per cent of the group’s consolidated revenues, respectively, and 100 per cent of its profits for both years, the prospectus revealed.

However, with the entry of du, its profitability and subscriber base in the UAE are steadily declining. Etisalat announced net profits of Dh5.53bn for nine months ended September 30, 2010, a decline of more than 17 per cent from the Dh6.69bn that it announced for the corresponding period of 2009.

According to the TRA and company data sources quoted in the prospectus, as a result of the entry of du, Etisalat’s UAE market share has declined from 100 per cent at the end of 2006 to 73 per cent as of June 30, 2010.

Etisalat has launched an $8b bond program to raise funds for its $12b acquisition of Mobile Telecommunications, a.k.a Zain. Etisalat has set up a $7b medium-term note program and a $1b Sukuk program, which will allow it to issue conventional or Islamic bonds.


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