Record Investment in Pak telecom Sector

Society Business and Career
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Along with Banking and Media telecom is another sector that is looking up in Pakistan. Apparently 25,000 jobs are going to be created by the investment:

Two more mobile phone licences fetch $582 million
RECORDER REPORT
ISLAMABAD (April 15 2004): Wednesday, April 14, 2004 was indeed a good day for Pakistan government when bids closed at $291 million in the auction for new mobile licences.

This amount was very close to the high point in the various models envisaged by experts, predicting bids in the range of $220 to $300 million, depending on how optimistic are the forecasts of growth/revenues that are used for predicting the future of telecommunications in this country.

Telenor Mobile Communications, as expected, were the most aggressive of the nine bidders. The telephone giant from Norway, with 60 percent shareholding of the Government of Norway, enjoys a near monopoly in fixed wire business in the home territory and also has a clear lead in mobile business overseas.

Telenor is the leading mobile phone operator not only in the other Scandinavian countries ie Sweden & Denmark, but also a major force in East Europe, Russia and Greece.

The other winner in the contest was Space Telecom (Pakistan), a joint venture between Syrian Telecom and Ghaith Pharaon. Pharaon is the major shareholder in Pakistan Oil Fields Limited and Attock Refinery Limited, Morgah near Rawalpindi, as well as Attock Cement Limited in the south.

It was a four hour-long nerve-wracking bidding competition conducted by Pakistan Telecommunications Authority (PTA) which ended up with Telenor Mobile Communications of Norway, and Space Telecom, highest local offer of $291 million.

Both these telecom sector giants proved successful bidders for grant of licence to operate as new mobile phone service provider in Pakistan.

The new entrants would take the total number of mobile phone service providers to six.

The bidding started at 11 am and concluded at 3 pm after several short breaks of 10 minutes, granted to the bidders so that they could review the situation cool headedly and revise their offers to stay in the competition.

Each upward revision was welcomed by those present with applause. Each contestant made his best efforts to beat the rivals.

The race took dramatic turns more than once, which thrilled the audience, and their encouraging clapping continued till the end of the bidding.

During the bidding, PTA Chairman Major General Shahzada Alam Malik (Retd) remained seated in the hall with his team. Surely, it was a good day for him and other PTA officials since their efforts were turning into a big success.

The first round of sealed bids involved nine parties, and ended at the highest offer of $161 million.

Five top bidders of the first round-Telenor Mobile Communications, Norway; Space Telecom, Pakistan; WorldCall Communications, Pakistan; Warid Telecom Pakistan; and a consortium of Fauji Foundation AWT and Spell Telecom Pakistan, were declared successful for the second round. It was an open round and hence an attraction for the audience.

Since WorldCall was almost out of the contest and its representatives were mere spectators once the offer crossed the $165 mark, a keen contest ensued between Warid Telecom, Pakistan Space Telecom and Telenor Mobile Communications, Pakistan, and Fauji Foundation. Each one of them kept on revising the bid upwards from the very beginning.

Once the bidding touched $220 million, Fauji Foundation/Jahangir Siddiqui & Company dropped out.

The remaining three parties kept the ball rolling for another one and half hours. By the time, the offer had crossed the psychological barrier of $250 million, Telenor (Norway’s) became more aggressive.

They started raising the bids in tranches of $5 million and sometimes even $10 million to see the other two parties to drop out. But Space Telecom Pakistan’s strategy of increasing the offer by one million each time worked well.

Warid Telecom Pakistan team declared that it was not interested in increasing the offer any more when Space Telecom Pakistan and Telenor Mobile Communications’ offers were $291 million and $290 million respectively.

It was time for the highest and runner up bidder to receive congratulations from the PTA authorities and also to appreciate the effort of the unsuccessful bidders. Announcing the result of the lengthy contest, the PTA Chairman termed the bidding process as “very good and completely transparent”.

He extended full support on behalf of the government of Pakistan to make the operation of new mobile entrants in Pakistan a success. He hoped that they would ensure quality service to the mobile users.

The licensing of the new companies, however, would make life difficult for the two existing licence holders namely: Paktel and Instaphone who are now expected to pay $291 million each for renewal of their licences expiring next year.

The leading cellular company in Pakistan Mobilink’s licence expires in 2007, while the licence of PTCL’s affiliate Ufone will expire in about nine years.

Licences to Instaphone, Paktel and Mobilink were awarded free of any charge while a nominal amount of Rs 50 million was charged from Ufone for the issuance of licence.

At present Mobilink has a customer base of 2.4 million. It is followed by PTCL’s subsidiary Ufone with 1.8 million mobile users and Paktel and Instaphone put together have 1.3 million customers. Experts forecast that the new license holders can attract up to 4 million customers each.

Another upshot from Tuesday’s auction is the establishment of a benchmark valuation for Ufone, which may be spun off from PTCL and sold as an independent entity, in case the government decides to break up PTCL prior to its privatisation. Market experts now feel that around $0.5 billion can be fetched for Ufone.

PTCL’s domination with 4.3 million users in the country is expected to continue for some time even though mobile sector growth is much faster than fixed wire telephone business.

In case the local communication giant lays down the fibre optic cable from its exchanges to homes and offices and starts offering Voice Over Internet Protocol (VOIP) to its consumers it could maintain its dominance, otherwise this disruptive technology could lure business away from PTCL.

PTA Chairman Shahzada Alam expected one billion dollars investment in Pakistan’s telecom sector in one year due to the government’s liberal policies.

He gave the credit for liberal policies to the President of Pakistan, which in his view, were generating more economic activities in the country to increase per capita income.

Copyright Business Recorder, 2004
Business Recorder

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Excellent News! It sgood to hear that competition is rising in the telecom sector in Pakistan. I hope it will result in more improved services for consumers.

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Yeah man, I read it on BBC too. I guess everyone knows Pakistanis love to talk!!

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we also advised one of the parties involved..which lost the bid! :smiley: but all in all the bidding was quite thrilling.

yes indeed, the license is a bit pricey by valuation standards..but nevertheless, its good that foreign investors have shown so much confidence and promise in the local telecom sector. Great news indeed for the country.

Pull your socks up mobilink and the gang, telenor is here! :swoosh:

just a background info, the existing operators like mobilink etc will also have to pay the same amount once their existing licenses come up for renewal. Moblink is due in 2007 and ufone in 2014 while paktel and instaphone are due next year.

these are very interesting times for the cellular sector in pakistan…the sector dynamics and fundamentals are changing dramatically.

:~)

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^ Khanu, what are the multiples that PSu's are going for in this sector?

Give me a phat DCF model.. :p

This is so good for the consumers in Pakistan. When deregulation and disinvestment happened in India, the price/minute dropped astronomically, service improved and so did quality. Ability for the common man to get access to communication technology is perhaps one of the greatest achievements of the current gov't. 1 million customers a month are new mobile users...

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I feel bad for Paktel and Instaphone ..how are they gonna cough up that kind of cash next year when their licenses come up?

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Mat: I’d tell you but then i’d have to kill you :hehe: quite right you are there. the new telecom policy (under which the new cellular operators will operate) lays down well-defined Quality of Service parameters in addition to specifying coverage targets in terms of service coverage (implying specific capex requirements) over a maximum period of 4 years. yes, the consumers will be the ultimate winners. i am already relishing the prospects of price-wars…the existing fat dogs have stuffed their pockets like anything…its cough up time :stuck_out_tongue:

Zakk: This is precisely where we feel an opportunity exists for Investment Banks :smooth: we bailed out Paktel earlier (when we did their off-balance sheet securitization) and we can do it again for them by creating a bail-out package for them. Woohoo! :stuck_out_tongue:

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Telenor and Space Telecom to make position in cell phone industry](http://www.brecorder.com/index.php)

KARACHI (April 19 2004): Telenor Ltd and Space Telecom would comfortably make their position in cellular industry in the country as analysts expect that the number of users in five years would jump to 15 million from present level of 4 million as both are bound to provide quality service, reduction in tariff and better customer service.

Pakistan Telecom Authority auctioned two new GSM licences on April 14 @ $291 million per piece. The licences are for 15 years and are renewable after the period without any further payment.

The licence money is payable in two stages: 50 percent at the beginning, with the remaining amount being payable in equal instalment’s over the next ten years.

The licence price has another significance. All the existing companies have to pay the same price at the time of renewal of their licences as they did not pay any such fee when they got their respective GSM licences.

The $582 million, raised through the auction of the two cell licences, is above analysts’ and experts’ expectations.

The target was a price of about $1 per capita whereas the successful bidders have paid about $2.01 per capita.

From a regional and global perspective, the price paid may not look out of scope as most emerging countries have seen prices as high as $3-4 per capita.

However, in the local market perspective, this price looks on the higher side. Sources indicated that PTA’s price expectations were about $2 per capita and they have been able to achieve this.

Arshad Arif, head of research at KASB Equities, said that the last two years have been very exceptional for the cellular market. Since the introduction of the CPP regime, the local cellular market has expanded from 350,000 subscribers to over 4 million subscribers.

This exceptional growth is the largest contributor towards the high price realised for the two licences.

He said that the country’s improving economy and increasing visibility in international politics has also lowered the traditional risks attached with the Pakistani market. The interest from foreign operators, like Telenor, is a direct result of this.

Arif said since this was the last chance to enter the Pakistani cellular market, investors showed significant interest.

According to PTA, it has no plans to issue more licences in the medium term. “The slower performance from the existing players in expanding their networks is another reason behind this increase. In particular, businesses sitting outside can easily visualise the growth potential if they look at the slow capacity expansions of Ufone and the continued poor quality service of a player like Mobilink,” he said.

This high price has started a new controversy, where most of the industry watchers are speculating that Pakistan’s market does not have adequate potential to justify a cost as high as $500 million (licence cost plus physical infrastructure cost).

“We have a contrary view”, Arif said. "We believe that $500 million expected project cost makes some fundamental sense. If we assume $6 per month revenue per subscriber (which is below the average for the comparable countries) and a net margins of 35 percent (again on the lower side of the regional average), a company needs just 2.5 million subscribers to achieve an 8-year payback.

He said he believes that companies like Telenor and Space Telecom are aggressive enough to go for 2.5 million plus subscriber capacity base.

"Unlike the rest of the researchers, we are not advocating a cell density catch up potential within Pakistan vis-à-vis regional markets.

Unfortunately, such experiences have relatively little application in our market. We have used some basic numbers to support our argument that the Pakistani market has the potential to achieve a 15 million subscriber base over the next few years.

"If we assume that about 50 percent of the employed urban labour force in Pakistan gets cellular connections, the number comes to around 15 million subscribers.

In cell density terms, this is merely 10 percent. Given the ongoing economic recovery and inward capital flight, we feel that this number is even conservative.

We are overlooking the self-employed population, which is generally not reported in the economic surveys. And this segment also has a high propensity to spend.

“We foresee significant changes in the landscape of the mobile market in Pakistan. These changes range from an improvement in service quality, reduction in the tariff rates, launching of innovative products, product differentiation and better customer support”, Arif said.

The focus of the most of the existing players has been on meeting demand rather than paying much attention to quality service.

Ufone is an exception. In particular, Ufone has been able to develop an image of “no compromise” on service quality, whereas the largest player, Mobilink, has been a poor quality service provider and is indeed the only company that has been penalised for its services.

On product innovations, Ufone appears to be leading with its offering of GPRS etc while Mobilink here is again concentrating on simply enhancing its subscriber base.

Some industry experts also believe that a lack of innovative services on the part of the local players has more to do with equipment suppliers to these operators.

In particular, the European suppliers have been lagging in terms of new service features vis-à-vis other suppliers and Pakistani companies working on European technology would suffer.

The tariffs have also been a non-issue for all the players as both GSM operators are charging almost similar rates for their services.

Probably the abundance of the unmet demand and relatively easy approach of the regulator has facilitated the existing players in continuing the existing tariff arrangement.

Instead of just meeting demand, the GSM operators are likely to shift their focus towards retaining their existing customers.

This would only be made possible by offering better quality services and reasonably good customer support.

At the same time, the market will see a whole series of new services likely to be offered by Paktel’s GSM operations and Ufone after its expansion.

And these services will see further innovations once Telenor comes online, as the company is known for its premium quality service.

"In terms of rates, we expect Paktel GSM to be the first to come up with a 15-20 percent reduction in its call rates. This would push the other two GSM operators to follow suit. Mobilink has already sent a strong signal to the new entrants by slashing its existing connection charges to zero.

What we are hoping for at this juncture is that in order to facilitate customers, the government will also lower its own levies," Arif said.

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Khanzada: You do that, I'm gonna tell my cousins to switch to Ufone!!

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great read ehsan bhai....arshad arif has made some sense here (he sometimes does).

Zakk: Jee acha....aap fikar he na karein..hum aap ko batae baghair aisa kar dein gae! :D