CEO Challenges in North Africa Telecoms

DUBAI, UAE, August 4, 2010 - Key highlights

    - North African telecom operators are immersed in a fierce battle in
      which only the smartest players will survive

    - CEO's of telecom operators face continuous challenges in revenue
      augmentation while preserving profitability levels in an increased
      competitive environment

    - Only a correct diagnosis of the present situation and
      identification of winning trends will allow CEO's to succeed in this
      demanding region

Telecommunication markets in North Africa present diverse
opportunities and challenges. These markets have been growing at a CAGR of
20% during 2007-2009 and are expected to continue growing at a CAGR of around
7% over the next five years. The blend of strong mobile voice together with
mobile broadband explosion is expected to ensure the future growth.
Furthermore, the favourable demographics and the presence of a large youth
population will provide additional impetus to this growth potential. While
mobile data is set to increase by ~35% annually in the coming five years, it
will still represent less than 10% of the total telecom revenues by 2014.

Meanwhile, business profitability is expected to shrink due to
the continuous addition of new and less valuable subscribers, which will in
turn compel players to ensure a proper allocation of new capital investments.
However, as a whole, these markets present some of the most unique growth
opportunities in the region.

On the other hand, international players might intensify their
footprint in the region, which would complicate local players' business
models. In the recent past, players like MTN, Qtel, and Etisalat have
expressed growing interest in the region. Additionally, several governments
are laying the foundations for healthy competition in telecoms. They are
helping putting in place the basics to establish strong local ICT businesses
which will bring higher margin returns to the sector at large. Thus far,
Morocco, Tunisia and Egypt are progressing towards becoming regional hubs for
the ICT sector.

Given this context, North African telecom operator CEO's face
a specific set of key challenges. The proper understanding of those and the
appropriate means of addressing them will be critical in determining the
winners and losers in this marketplace.

    - Defending Traditional Voice Revenues - Voice revenues
      constitute over 80% of the mobile operators revenues in the region and
      will continue at such levels until mobile broadband roll-out and
      take-up reach significant levels. In such high churn markets (with
      extreme cases like that of Morocco, where yearly churn levels are
      close to 45%), operators must defend voice revenues by understanding
      the customer base through 'Analytics Based Management' (ABM) and
      preventing the churn of high value clients.

ABM is a new way of looking at the industry putting rigorous
customer behavior data analysis at the core of management decisions, being
applied in both technical and commercial areas. ABM links business needs with
financial requirements, making sure that all restrictions are properly
framed. It has become an excellent tool to avoid non-properly quantitative
based decisions, which could have led to unnecessary value destruction

    - Increase Non-Voice Revenue Share - The limited fixed
      infrastructures of North African countries open the opportunity for
      mobile to lead broadband growth (until FTTx deployments become a
      reality). We expect mobile broadband business to add up to US$ 2.2
      Bln in the region by 2014. In order to maximize share value, operators
      must not only offer capacity, but need to provide attractive devices
      and content that is relevant to the market. Vertical integration in
      the data value chain of both internet players and device manufacturers
      poses a risk for operators, as they may be cornered in the new
      ecosystem, minimizing their share of revenues captured.

As such, operators must first set a clear broadband strategy
and define the role that they want to play in the rapidly shifting data
services ecosystem. They need to define a strategy towards devices and
content, understanding which elements they want to control, partner, or leave
open to other players in the value chain. Operators in certain countries such
as Tunisia have made inroads towards the development of broadband strategy.
The entrance of Orange as a new player has significantly increased
competition in the data front of the business.

    - Maintaining healthy EBITDA Margins - Most operators,
      especially incumbents, will see EBITDA margins erode as the markets
      mature and new competition enters. New subscriber additions to the
      Bottom-of-Pyramid will further bring down profitability levels per
      subscriber.

As a result, operators must embark on EBITDA optimization
programmes to transform the business model into leaner operations. Optimising
efficiencies including infrastructure sharing, standardisation of systems and
process, rationalisation of suppliers, cost management and cash optimisation
are some of the initiatives to be pursued by operators in North Africa in
this regard.

Under a win-win scheme, Tier 1 and operators in more mature
markets like Vodafone or Telefonica are offering strategic alliances to
players in less mature environments. For those operators in North Africa
lacking a significant scale, this type of deals represents an interesting
opportunity towards operational efficiency. Currently, the EBITDA Margin
levels reported by operators have ranged from highs of 50% in Algeria and
Tunisia to mid 30% range in Morocco. The Algerian market has witnessed what
is perhaps one of the highest margins in the region, i.e., ~57% by Djezzy,
the Orascom subsidiary, in December 2009

    - CAPEX Optimisation - As revenue growth stagnates, but
      subscriber numbers continue to grow, the network quality will be
      compromised. Heavy traffic demand originated by explosion of data
      services will overload networks in North African markets. Operators
      will need to look for efficient allocation of new CAPEX, such as
      exploring opportunities in infrastructure sharing. This would be
      especially relevant in the event of depleting cash reserves.

'Analytics Based Management' (ABM) techniques can also help
North African operators identify customer behaviour per BTS. Identifying
areas where valuable customers are, as well as quality issues per BTS, can
help operators optimize the return on their investments.

    - Consolidation of the Regional Footprint - Most players in
      the region are trying to consolidate their local or regional footprint;
      however, the opportunities are scarce which will likely drive up asset
      prices. Those operator Groups who are cash strapped will face
      difficulty in securing funding. Many can raise capital by spinning off
      assets, such as the network.

The challenge is more for local players to compete with large
regional or international players on voice provision. The local players can
solidify their positioning by acquiring ISPs or ICT related companies in
their local markets.

    - Relevant role in the Regulatory landscape - All operators
      need to proactively engage the Regulatory Bodies, given that
      regulators and governments continue to have a high influence on the
      competitive environment in North Africa.

In Summary

CEO's of Telecom operators in North Africa region are playing
a fierce competitive battle in which winners will be only those that really
understand their challenges. More importantly, success will be determined by
the capacity of the CEO's to properly apply solutions to those challenges.
The proper implementation of ABM techniques, cost efficiency programs,
intelligent and adequate CAPEX investments, data strategies and even regional
consolidation strategies will decide on the real winners in this
battleground.

About Delta Partners

Delta Partners is the leading TMT advisory and investment firm
in emerging markets. With more than 160 professionals the firm operates
across 50 markets in the Middle East, Africa, Eastern Europe and Emerging
Asia. Delta Partners provides three synergistic services: management
advisory, corporate finance and investments from its offices in the UAE,
Bahrain, South Africa, Spain and Singapore. Delta Partners delivers tangible
results to its clients and investors through its exclusive sector focus on
telecom, media and technology, and a unique approach to services, combining
strategic advice and a hands-on pragmatic approach.

    For further information please contact:

    Javier Alvarez
    jav@deltapartnersgroup.com

    or

    Fernando Lopez
    fl@deltapartnersgroup.com

    For media relations please contact:

    Mia Mutic
    mmu@deltapartnersgroup.com
    +971-4-369-299 

    www.deltapartnersgroup.com

For media relations please contact: Mia Mutic, mmu at deltapartnersgroup.com, +971-4-369-299