DUBAI: Etisalat continued its relentless regional romp this week when the UAE operator announced that it had won the bid for a stake in Pakistan's state-owned telecommunications company. Although the deal now brings Etisalat's overseas investments to a formidable $6.4bn, the company may find more turbulence as it does business outside the familiar confines of the Gulf.
"We are proud that we participated and came out a winner," said Obaid Saeed bin Mes'har, CEO of Etisalat.
Pakistan Telecommunication Company Ltd (PTCL), Pakistan's largest telecoms operator, was offering 1.33bn shares - a 26% stake. By winning the bid, Etisalat's gave Pakistan its largest privatisation payday to date.
Of the three companies competing for the contract, Etisalat's bid of $2.59bn was the highest, far eclipsing offers from China Mobile ($1.41bn) and Singapore Telecommunications Ltd ($1.16bn).
Etisalat's offer exceeded the expectations of the government as well, as they expected the issue would fetch between $1.75bn and $2.0bn. "We are very happy with the bid, which is beyond our expectations," Awais Leghari, Pakistan's minister of information technology, told reporters.
Yet because Etisalat shattered predictions, some have speculated that the company overpaid for the contract. Others were surprised that the company put up that much money for what is not even a controlling stake.
"People were expecting up to $2bn, so any price over that will be considered overpriced," Mohammed Sohail of Jahangir Siddiqui Capital Markets told the BBC.
But UAE officials indicate the special relationship the emirates have with Pakistan, which encouraged Etisalat to go boldly ahead with their offer. The large numbers of Pakistani citizens living and working in the UAE mean automatic brand-awareness among many Pakistanis.
Overbidding may also have been a result of Etisalat's fulsome wallet. The state-run company, for the time being, remains a monopoly and is still reaping all the benefits as such. Compared to operators in liberalised markets, Etisalat needs to spend negligible money on advertising or enhanced services in the UAE.
"We predict Etisalat will make $2bn just in mobile revenues this year," Jonas Lindblad of Pyramid Research recently told OBG. He said there was no other operator with such vast available resources to spend on expansion.
Yet even familiarity with the brand and plenty of money to burn do not ensure success. There are a number of factors in Pakistan that will make the going tricky for Etisalat. Political instability and a downturn in the global telecommunications sector are a few of the reasons why the UAE's telecoms giant might struggle.
Etisalat is not exactly seasoned in this type of foreign market either. Although it has very recently made inroads into Africa, its main experience has been in the UAE, where it has thrived as the only operator for a relatively small and affluent population. The UAE should announce a second telecommunications company next month, but few expect this new government-owned entity to put up much of a fight.
In its recent foray into Saudi Arabia, Etisalat dropped $3.5bn into a 35% holding of Etihad Etisalat (Mobily), tapping into the least serviced market in the GCC. It became the second operator - oftentimes an ideal situation for a new entrant into the market.
In Pakistan, however, Etisalat will be competing with four other established operators for a very different sort of market than that offered by wealthy Gulf monarchies. This Asian market is far larger, more diverse and more complicated than anything Etisalat has seen to date. On the up side, only one in 10 Pakistanis even has a phone, meaning there is definitely room for new customers. But all the telecoms will be angling for these markets and Etisalat has little experience with even one other competitor, so it remains to be seen how it will do against four.
In addition, workers at PTCL have not exactly rolled out the welcome matt for their new UAE owners. PTCL employees have staged strikes denouncing the privatisation of their company, fearing it would lead to widespread job cuts. Many were upset that the government was selling off what is considered the country's most successful public company.
Weeks of protests ran parallel with the bidding process and required the government to delay the announcement of the winner until the situation could be brought back under control. Amid rumours of sabotage by disgruntled workers, troops were brought in to ensure the smooth running of operations and secure the infrastructure.
The day after the sale, Etisalat initially hinted to the local press that there could be some layoffs, saying, "It is inevitable that some flowers will fall off the tree." However, it has since backed off those statements, declaring that no PTCL employees will be laid off and that the company is committed to using the technical skills of Pakistani workers.
Clearly this is not going to be as easy as some of Etisalat's previous ventures. The sale of PTCL has already proven that it has the potential to be a political headache. Even now that the deal is signed, complications could still sideline the process. As was recently seen with the Turkish telecom Turkcell's deal in neighbouring Iran, even finalised deals can quickly fall apart.
The Islamic Republic's hard-line conservative parliament recently reneged on the original terms of that deal, claiming that Turkcell's 70% stake acquisition in the company was a threat to national security. After months of negotiations and no real progress, the deal is on the verge of termination.
"The Iran case was a wake up," says Lindblad. "The Pakistan deal is not complete or done yet... it hinges on controversial decisions in a sensitive industry."
But in the meantime Etisalat will continue to flex its well-moneyed muscles. CEO Mes'har says that the company plans to invest $10bn overseas by 2008 as Etisalat tries to diversify its holdings in preparation for liberalisation of its telecoms market in the UAE. Winning bids is becoming a habit for Etisalat, but it to date, the company remains untested in how it responds to pressures in uncharted territory.