Monopoly comes back to South Asian telecom markets, thanks to Etisalat ...

Pakistan is not the only monopoly of Gulf states, as apprehended in one of the previous posts in a sister blog. Etisalat, UAE's telecom corporation, is now fully geared up to take the entire South Asian telecom market under its monopolistic wings. It first bought Pakistan Telecom (PTCL) when Pakistan was selling family silver at throw-away prices. It won the bid and when the seller was totally entrapped, it dictated its terms and paid at will, not according to commitment. As it did not have any experience of operating in the competitive market, it brought with it the monopolistic practices of UAE’s over-regulated market, thus totally defeating flawed and tilted Telecom Deregulation Policy of 2003. Private sector companies who had obtained licenses were driven out making Pakistan a monopoly of UAE once again.

After successfully “buying” Pakistan telecom, Etisalat bought 45% stakes of Indian Swan Telecom. Financial Times has now reported that this state-owned Gulf monopoly is close to buying a 26 per cent stake in Reliance Communications, India’s second-largest mobile operator. In an attempt to overcome a number of regulatory hurdles, the two groups are also considering merging Reliance with Swan Telecom, the Indian company in which the United Arab Emirates-based group holds a 45 per cent stake.

The deal – which is estimated to be worth about $3bn – would give the government-controlled group known as Etisalat a big step up in the world’s fastest-growing large mobile market with more than 600m subscribers. On Friday, the market capitalization of Reliance, which has more than 100m subscribers, was $8.3bn, according to the Bombay Stock Exchange’s website. The alliance between the two groups could be completed as soon as mid-August. Another person said it could take up to the end of the year. Reliance and Etisalat declined to comment on any specific negotiations.

Financial Times has further reported that a successful outcome hinges on how fast Etisalat can free itself of the stake in Swan Telecom, a joint venture that it acquired in 2008, as Indian regulations do not allow one company to own more than 10 per cent in two telecom groups. “Once Etisalat has freed its hands the deal could happen very quickly . . . both sides are very keen to join forces,” said one person familiar with the matter. Another person said the two groups could merge to facilitate and speed the completion of the operation. Rajiv Sharma, a telecom analyst at HSBC, said a “merger may be a better option both for Reliance Communications and Etisalat”. However, he added that it would not be simple, as merger and acquisition regulations in India discouraged a union between the two groups.

Etisalat invested $900m in Swan Telecom, which has licenses for 13 areas of India, however, it has been unable to launch full services and since the beginning of this year it has been looking for alternative investment routes in India. Reliance has been working hard to cut its net debt, since it acquired the 3G mobile spectrum in 13 regions for Rs85.9bn ($1.8bn). The group has a net debt of Rs330bn, primarily due to a very competitive domestic environment that ate into its margins.

It now seems that Etisalat wants to turn the entire South Asian region into a literal monopoly. It seems that the price it is known to have agreed with the Reliance is much more than it paid for PTCL which has far dearer assets in the form of prime land in posh locations of Pakistan’s major cities. PTCL was far healthier than Reliance as it had no financial liabilities as a result of domestic competitive market because it had no competitor at all.