Saudi: An entry point to GCC Towers Market

BMI View: Although growth opportunities are somewhat limited by market saturation, Saudi Arabia’s towers market will prove attractive to tower firms owing to its large population, subscribers’ high spending compared to African markets, rapidly rising demand for mobile data, and the opportunity to gain entry into the lucrative GCC telecoms market.

Saudi Arabia’s mobile market is already saturated, with subscriptions hovering between 50-52mn since 2013, and reaching a penetration rate of 173.3% in March 2015. Subscribers in the country have demonstrated a rapidly rising appetite for mobile data services. According to the latest data from telecoms regulator CITC, the total number of mobile data users reached 31.8mn in March 2015, up by more than 56.6% y-o-y. Therefore, while the Saudi market will offer fewer growth opportunities for tower firms through network expansion, generally a core strategy, the unabated rise in demand for data will require network upgrades and densification. Moreover, even with limited subscription growth opportunities, Saudi Arabia’s population of nearly 30mn and mobile ARPU levels of around US$16 set the market apart from Egypt and other Sub-Saharan African countries where tower sharing has emerged.

All three mobile network operators - state-owned Saudi Telecom Company (STC), Etisalat-backed Mobily and Zain - are highly reliable tier-one players in the Middle East, making them attractive partners for tower firms. While there are few data-only players to boost potential tenancy ratios, Saudi Arabia is also host to two experienced MVNOs (mobile virtual network operators), Virgin Mobile Middle East & Africa and Lebara. Both players’ licence agreements currently tie them to their respective mobile network partners, STC and Mobily respectively, but BMI believes that, like their hosts, they will be keen to boost coverage and capacity through tower sharing. A third MVNO, backed by regional device and services retailer Axiom Telecom also plans to enter the market on Zain’s network, once the CITC re-tenders its licence.

In BMI’s view, economic activity in Saudi Arabia has passed its peak, with the forces bolstering the expansion of the non-oil economy set to gradually tail off over the coming quarters. We believe that weaker government spending, diminished gains in oil production, and a more cautious business sentiment will drive a moderation in economic growth from 2016 onward. The effects of the one-off fiscal stimulus package initiated by King Salman at the beginning of this year are weakening, and we expect the government will soon take incremental steps to rationalise public spending. We forecast the Saudi economy will expand by 3.2% in real terms in 2016 (using 1999 as a base year), following 3.7% this year.

So far, the effects of this decline on Saudi economic activity have been limited. The growth of the non-oil economy across the first three quarters of 2015 has been powered by the same mechanics consistently seen over the past decade: high government spending feeding into private consumption and construction activity.

That said, leading indicators of economic activity are increasingly pointing to a decelerating trend in the non-oil sector. Growth in point-of-sale transactions (a proxy for retail sales) is still positive, but has moderated sharply since a 42.5% annual increase in February triggered by Salman’s stimulus measures, while private sector lending growth is now at its weakest level since 2011. Most significantly, Saudi Arabia’s purchasing managers’ index (PMI) reading fell to 56.1 in June, reaching its lowest level since the survey began in 2009 - with the pace of expansion in new orders falling to a record low.

Despite the negative impact of lower oil prices on the economy and private consumption, BMI’s forecast for Saudi Arabia’s GDP per capita to reach more than US$23,000 in 2015 is still far higher than the Middle East and North Africa regional average, and its population of nearly 31mn is the largest in the Gulf Cooperation Council (GCC). These fundamentals make it an attractive expansion opportunity for Africa’s leading tower firms, which have thus far operated mainly in much less developed telecoms markets, with much tighter operating margins.

Saudi Arabia vs regional GDP per capita (US$), 2012-2019

Mobily is reported to be negotiating with American Tower Corporation and IHS Nigeria regarding the sale of its 10,000 telecoms towers for US$1.5-2bn. BMI believes Mobily’s desire to generate cost efficiencies now is related to the restatement of two years’ worth of its financials following the discovery of substantial accountancy errors in 2014, and a further revision of 2014 profits down from SAR219mn to a loss of SAR913mn in Q115.

Meanwhile, in January 2015 the Zain Group announced that it had hired an advisor to evaluate the viability and financial benefit of implementing a tower outsourcing strategy across some of its markets. Given its challenging financial position in Saudi Arabia - since launching operations in 2008 a heavy debt burden and strong competition have prevented it from reporting a profit - BMI believes it is likely Saudi Arabia is one of the markets where Zain is considering selling towers.

It is not surprising that Saudi Arabia looks set to be the first market in the GCC to open up to tower outsourcing. Saudi Arabia’s large geographical size makes it far more costly for telecoms operators to achieve universal population coverage compared with other GCC markets. Meanwhile, the country has the weakest subscriptions growth outlook in the GCC, which has fuelled intense price competition between the three mobile operators, and now two MVNOs, also resulting in the lowest ARPUs in the region, according to BMI data.

Saudi Arabia mobile data subscriptions, 2012-2015

However, the demand for mobile data services is on the rise, underpinned by the emergence of several regionally focused video-on-demand (VOD) players, such as OSN and Icflix, and a strong gaming culture. By divesting tower assets, mobile operators will be able to reduce their operational costs, extend mobile networks to underserved rural areas more cost efficiently and turn their focus to innovative services, which will encourage greater data usage and improve customer loyalty.

We retain our view that STC will not choose to follow Mobily and Zain’s outsourcing strategies. STC remains by far the largest operator by revenues, owing to its dominance in both the mobile and wireline markets, as well as its position as the leading provider of communications and, increasingly, IT solutions to enterprises and government agencies. Given these strengths STC is under far less pressure to generate cost efficiencies than Mobily and Zain.

Saudi Arabia operator revenues (SARmn), 2013-2015

Moreover, regardless of STC’s financial situation, BMI believes Saudi Arabia’s government, which still owns 70% of STC, would be unwilling to outsource core telecoms infrastructure owing to the tense geopolitical environment in the Middle East. There are three key factors putting Saudi Arabia in an increasingly vulnerable regional position, which make the sale of STC’s tower unpalatable:

- Saudi Arabia and Iran have consistently vied for geopolitical influence in the Middle East, and Saudi officials worry that an agreement between the P5+1 countries (US, Russia, China, France, the UK and Germany) and Iran on its nuclear ambitions could tilt the regional balance of power in Iran’s favour, with Riyadh retaining a subordinate and insecure geopolitical role.

• - The US’s reluctance to get directly drawn into another Middle Eastern conflict raises concern over regional stability.

• - Saudi Arabia is ramping up its own military intervention across the region (in Bahrain in 2011, against Islamist militias in Libya in 2014, and Yemen in 2015), putting it at risk of some form of retaliation from extremist groups.

BMI believes under these circumstances the government will see telecoms infrastructure as too politically sensitive to transfer into the hands of an independent third party. This means that a large share - likely more than half - of mobile towers in Saudi Arabia will remain operator captive for the foreseeable future

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