Share analysis: Batelco – Telecoms

The Company

Bahrain Telecommunications Company (Batelco) is the oldest and largest telecom service provider in the kingdom. Established in 1981 as a Bahraini shareholding company, it offers telecom services across the fixed-line, mobile and internet segments. Batelco has evolved from a regional operator to a major international communications group, with direct and indirect investments across 14 geographies: Bahrain, Jordan, Kuwait, Saudi Arabia, Yemen, Egypt, Guernsey, Jersey, the Isle of Man, the Maldives, Diego Garcia, St. Helena, Ascension Island and the Falklands.

The government of Bahrain controls Batelco through direct and indirect investments. Bahrain’s sovereign wealth fund, Mumtalakat Holding Company, owns 37% of Batelco’s shares, while the quasi-state Social Insurance Organisation (SIO), has a 21% stake. Amber Holdings, a Cayman Islands-based company jointly owned by Mumtalakat and SIO, holds an additional 20%.

At the end of 3Q14, Batelco Group’s subscriber base reached 9.3m, over 90% of which was mobile. Indeed, mobile revenues were the largest contributor to total revenue in 9M2014, at 45%, followed by data and wholesale. Despite increasing competition in its home market, Batelco remains the leader in the telecom space, with a 35-40% mobile subscriber market share. Bahrain’s contribution to group revenues has declined steadily from 68% in FY2009 to 42% in 3Q14 due to heavy competition and the acquisition of Cable & Wireless (CWC) assets in the Maldives and other islands.

In April 2013, Batelco acquired CWC’s interest in the Maldives, the Channel Islands, the Isle of Man, the Seychelles, South Atlantic and Diego Garcia (the islands), as well as a 25% shareholding in Compagnie Moné- gasque de Communications (CMC), which holds CWC’s 55% interest in Monaco Telecom, for a consideration of $680m. However, when the necessary approvals to complete the acquisition of the Seychelles business and the remaining 75% stake in CMC could not be obtained in time, Batelco sold its 25% stake in CMC back to CWC at a pre-agreed price of $100m. As a result, Batelco effectively acquired CWC’s assets, with the exception of the Seychelles and CMC, for $470m. The primary purpose of the acquisition was to diversify Batelco’s business outside the kingdom, which remains highly competitive, especially after the launch of a third operator, VIVA (Saudi Telecom’s subsidiary), in March 2010.

To fund the acquisition, Batelco raised $650m through its maiden 7-year Reg S bond offering in April 2013, which was rated BBB- by both Standard & Poor’s and Fitch. The offering was very successful, with an order book of $4.8bn. However, because Batelco could not complete its acquisition of the CMC and Seychelles businesses, it repurchased $177m of the outstanding bond in early April 2014 to reduce its leverage.

Development Strategy

Over the past two years, Batelco has pursued an active M&A strategy for diversifying its business outside Bahrain. In addition to the aforementioned acquisition of CWC’s assets, it increased its stake in its Kuwaiti subsidiary, Qualitynet (the market leader in internet and data communications) from 44% to 90% in April 2014. With operations spread across Europe, Africa and Asia, the successful integration of CWC’s assets is crucial for the company. Maintaining market leadership in Bahrain and protecting its high-value customers (retail and corporate) also remains a key challenge for the operator, especially in light of kingdom’s competitive environment.

Batelco undertook considerable restructuring of its Bahraini operations in 2012-13 to minimise costs, which should be positively reflected in its FY2014 earnings. It continues to invest in its network and has offered 4G LTE in Bahrain since February 2013. Along with Zain and VIVA, Batelco secured an additional 4G-spectrum licence from Bahrain’s regulator in September 2013.

The company continues to have a strong balance sheet, with cash and bank balances of over BD137m ($363.1m) in 3Q14 and a net-debt-to-equity of less than 0.1x. Batelco has strong free cash flow generation and should continue to reward its shareholders through regular, healthy dividends in the 70-75% payout range.