Telco Mergers to Close Gap With Market Leaders

When the country’s economy started to show signs of growth a decade ago, the stage seemed set for the telecommunications industry. Years of unrest had left minimal infrastructure for fixed line telephones and demand for mobile telephone services was growing fast.

From 1992 to 2000, five companies entered the mobile telephone sector, including Royal Group’s Mobi-Tel, which is currently the market leader. Ten years later, that number has almost doubled, with a total of nine operators fighting it out for a market that analysts say is made up of anywhere between 4 million and 8 million subscribers.

But the early optimism is now over, and companies are looking to make some profits, a target that has proved rather difficult of late due to particularly stern competition.

VimpelCom Ltd, which owns the Beeline brand in Cambodia, an­nounced last week that revenues at the company slid 9.1 percent during the third quarter, and Hello’s parent company, Malaysia’s Axiata Group, last month reduced the value of its intangible assets by more than $14 million.

And on Monday, Smart Mobile, owned by Latelz Co Ltd, and Star-Cell, owned by TeliaSonera Group, agreed to merge under the Smart Mobile brand name. If approved by the government, the total number of Smart Mobile subscribers will rise to 850,000.

Experts say the deal will open the way for a chain of similar such deals designed to cut network costs and increase the number of clients subscribing to individual mobile operators.

“In the wake of the economic climate and capital constraints of the last two years, the ‘grab’ for subscribers has likely given way to a need to focus on profitability,” Marae Ciantar, a partner at the international law firm Allens Arthur Robinson, wrote in an e-mail from Singapore.

“As larger networks and subscriber bases are more efficient, it seems to be a sensible time for telcos to look at combining operations to stem losses [and] increase profit margins,” he added.

Mr Ciantar said it was inevitable for mobile telephone operators to merge, buy each other out or agree to share portions of their network to reduce costs. All have their advantages, especially seeing as many companies are still investing in expanding their network and services.

“Network rollout is a capital intensive exercise, and the operators will need to source the funds for deploying networks,” said Mr Ciantar.

Beyond savings that can be made in the upkeep of their individual networks, joining forces with another competitor will allow firms to instantly increase their client base.

In the last couple of years, mobile operators have been willing to give SIM cards as well as airtime away for free in order to attract more subscribers. And yet less than half of the potential mobile telephone market in Cambodia has been tapped, experts say.

There is also much doubt within the market as to how big Cambodia’s mobile telephone market actually is, as many firms include subscriber figures for SIM cards that are no longer active.

According to the Ministry of Posts and Telecommunications, at the end of October there were 8.5 million subscribers in Cambodia. But though those in the industry say the number is actually much lower as telephone companies sometimes include nonactive SIM cards in their calculations.

Telecommunications Minister So Khun said yesterday the government was in the process of drafting a law to regulate mergers and acquisitions in Cambodia. However, companies will not be prevented carrying out such deals while the law is being drafted.

“We don’t want to have too many operators. If they merge together the number of operators will reduce,” said Mr Khun.

Economists say that the gulf in market share between the industry’s top brands like MobiTel and Metfone, which is owned by the Vietnamese military, has become so large that smaller companies must combine forces in order to survive.

“That is how they will try and compete with MobiTel,” said Neou Seiha, senior researcher at the Economic Institute of Cambodia, adding that if they failed to do so some of the smaller companies would simply die.

For mobile operators, merging or acquiring another firm will probably allow them to concentrate more on improving their services with less money being spent on infrastructure.

“Consolidation will create a more understandable investment environment,” said Tolga Gedikoglu, CEO of Star-Cell. “The meaning of consolidation is actually to combine the powers to serve [our customers] better.”

Mr Tolga said that mergers would allow companies to save costs on the maintenance of their network and increase their coverage across the nation by using the telephone masts and antennas of their partners.

“Any kind of merger will serve in the interest of decreasing costs,” he said.

Whatever companies do to boost their profits, the biggest challenge will surly be to compete with MobiTel, which is preparing its own expansionist policy.

In November, MobiTel’s owner Royal Group signed a $500-million, 5-year deal with Chinese telecommunications giant Huawei Technologies for equipment and services. The game is on.

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