Scott Gegenheimer had a tough task ahead of him when he became CEO of Zain Group in December 2012.
While the Kuwait-based telecom group’s underlying business was sound, some of its individual opcos faced some challenges in terms of finance and management. There was also a challenge of perception. Indeed, since the resignation in late 2009 of former CEO Saad Al Barrak, who led the company from a one-country operator to a pan-regional player with a presence in 23 countries, there was a sense that the company had lost its way.
This perception was compounded when the group disposed of the majority of its African operations to Bharti Airtel for $10.7 billion in February 2010, and when Gulf rival Etisalat revealed a plan to acquire the company in the first quarter of 2011.
But talking to Gegenheimer, who has now been in the top job for about 10 months, it is clear that he can at least tick off some of the important points from his initial to-do list. And the fact that the group is once again talking seriously about making strategic acquisitions of other operators and “adjacent” companies in the MENA region is a clear indication that the group’s brief period of contraction is over.
“Are we interested in expanding – absolutely,” Gegenheimer says. “But it has got to make strategic and financial sense, so we are not going to go chasing bids. Looking at mobile operators, first I want to make sure they are in the MENA region. Most of the opportunities are in North Africa,” he adds.
Gegenheimer says that the acquisition of adjacent businesses could also prove to be an important means of allowing the telco to become an integrated service provider and expand into new services such as triple play and quad play.
“Everyone is moving in that direction,” he says. “Over the next three to five years you will see us move much more into that space. There are a lot of regulatory hurdles but we know everything is moving towards M2M, IP and data. There will be no voice in 5-10 years, it will be 100% data and we want to move in that direction. There are a lot of things to do in fibre, content, m-health, post-sale, all sorts
This is particularly important in a mobile market that is seeing its core voice and SMS revenue eroded by so-called OTT players, Gegenheimer says.
He adds that it is also important for Zain Group to build a ubiquitous platform allowing subscribers to access services “anytime anywhere, on any device”.
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By pursuing new revenue streams based on data, Gegenheimer is optimistic that Zain can offset the declines in voice and SMS that are affecting the entire industry and continue to grow its business. “I think reasonably we can continue to grow our revenues, not necessarily directly from the customer we have today on voice and data, but because of the adjacent businesses and the areas that we haven’t explored fully.”
The importance of data was also reflected in the company’s second quarter results. Indeed, Q2 data growth was 24% year-on-year. Excluding SMS and VAS services, pure mobile broadband accounted for 13% of the group’s overall service revenues in Q2. Including SMS and VAS services, data contributed to 21% of Zain Group’s top line.
“The growth in our non-voice revenue was a reflection of our active investment in mobile broadband networks, not least in the LTE infrastructure that not only future proofs our operations, but also allows us to deliver digital content services in even more efficient ways,” Gegenheimer said in the company’s Q2 earnings statement. There remains “a lot of room for growth” on the data side, especially considering that Iraq has still not yet awarded 3G licences, he added.
Speaking of recent network investments, Gegenheimer points out that Zain has already launched LTE networks in Saudi Arabia, Kuwait and Bahrain, as well as 3G, 3.5G and 3.9G hi-speed services in all other countries where the company operates, except Iraq.
And even in Iraq, the network has been upgraded with a single-ran and is 3G-ready once it receives the licence and spectrum.
Earlier in the year, Zain Group gained access to additional funds after signing a three-year $700 million revolving credit facility with seven banks. Gegenheimer says that this is being used for various purposes, including investment in networks.
“If you look at our net debt EBITDA we are at 1.85 so we have one of the lowest leverage ratios in the region, so we have room to take on additional debt but it wasn’t specifically earmarked for something specific,” he says.
However, Gegenheuimer confirmed that the telco would be making significant investments in its networks. “We have never had any issue when it comes to spending on capex. In the previous couple of years there was maybe a bit of underinvestment in Iraq in 2010-2011 but that has changed, we have invested heavily in the last 18 months, so I don’t see any issues anywhere in the portfolio about investing, we have free cash flow.
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In line with Zain Group’s plans to increase its revenues from data services, the company will also explore greater segmentation of its customers, allowing it to make more tailored offerings. In terms of investments in this area, the company has signed a framework agreement with Oracle on business intelligence, and is starting to roll out new platforms. “Gaining insights into the customer and trying to figure out the different segments you want to go after, is one of the best things an operator can do,” Gegenheimer says.
Another key aspect of being able to offer tailored data packages is OSS and BSS, and this is also an area that Zain is looking closely at, and Gegenheimer says that the company is taking a group-wide approach to this. “We are focusing a lot on the BSS side this year, convergence billing, business intelligence and CRM.” The group is in the process of selecting a vendor to deploy a new CRM system and expects to make a decision in the coming months," he added.
The group’s main Achilles’ heel, Zain Saudi Arabia, also appears to be improving. Indeed, the opco has struggled under the weight of the $6.1 billion cost of its licence fee, but with the recent restructuring of its debts, the unit now appears to have some breathing space to develop. Indeed, In June, Zain Saudi Arabia gained an extension on the outstanding $2.3bn it owed on a Murabaha facility. The telco extended the maturity date of the syndicated Murabaha facility for five years, to July 31, 2018.
In September, Zain appointed Hassan Kabbani as CEO of the Saudi operation. Kabbani, a well-known telco executive with 23 years of executive experience to his name, is likely to give fresh impetus to the unit.
With the funding and management issues addressed, Gegenheimer is optimistic about the potential of the operation. “We have a new CEO in place, financing is in place now, and there are no issues with free cash flow going forward,” he says.
“There is a lot of room for us to really drive the business and focus on it. I think we have got the right people there. They have got a significant challenge ahead of them but it is a large market and we have to keep growing our business,” he adds.
In its first half results for 2013, it was clear that the Sudanese operation had hurt the group’s overall results as a result of the weakness of the Sudanese currency. Indeed, adverse currency fluctuations, mainly in the Republic of Sudan, cost the company the equivalent of $347 million in revenues, $150 million in EBITDA and $80 million in net profit.
The effect on the group’s results was clear. The group’s second quarter revenues were $1.1 billion, which reflected a 9% decrease, compared to Q2, 2012. However, excluding the FX, the revenues would have been $1.3 billion, reflecting a 5% growth, Gegenheimer said in the company’s results statement.
However, not all news from Sudan was bad. A new telecoms tax law introduced in the Republic of Sudan in mid-June 2013 removed the 30% corporate income tax for a period of 3 years. The law was backdated to January 1, 2013.
But looking beyond the currency issues, Gegenheimer insists that the Sudanese operation is sound. “The underlying business in Sudan is fairly strong, growing about 8-10% on annual basis of local currency. It’s a nice business but we’ve got huge hits with the devaluation.”
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Zain’s operation in Iraq also appears to be gathering pace. The company is set to list its operation publicly on the Iraqi Stock Exchange in 2014, and has already formed an Iraq domiciled joint stock company in order to stage its IPO. Gegenheimer describes Zain Iraq as “a critical part of the Group”, adding that it represents 40% of the group’s revenues and 31% of its customer base. “It’s a promising country where we expect to grow further,” Gegenheimer says.
Iraq holds huge potential for growth owing to its chronically low broadband penetration rates and relatively low mobile penetration. Zain recently expanded its network to cover the northern Kurdish region of Iraq, and with 3G licences due to be awarded soon, there is also major potential for mobile broadband growth. The company has invested more than $4.5 billion to date in the country and expects the IPO proceeds to exceed $1 billion, according to Gegenheimer.
Looking at the overall group, Gegenheimer is keen to encourage the sharing of best practice between the opcos. To achieve this, the group is looking to hold forums around issues such as VAS, commercial services, and finance, where key staff from the opcos can share challenges and best practice. “We are trying to find synergies across the group and create areas of excellence,” Gegenheimer says.
While the Gegenheimer is keen to help transfer skills across opcos and to maintain a lean group operation, he is adding some important “functional areas” at the group level. One is customer experience. “I am not going to have a big staffing group but have just brought in a new head of customer experience. The working group sets the framework and direction but the opcos own the customer experience,” he says.
He adds that one of the group’s “core strategic pillars” is customer experience. We are starting some key initiatives that will shape how we work together internally to continually improve customer service,” he says.