History is in the making in Pakistan's telecommunications industry; as finally, a much-needed and rumored merger in telecom took place yesterday - the welcome marriage of Warid and Mobilink. The industry was in dire need of consolidation as five players were too many in the mobile telecom industry. According to industry sources, none of the operators' bottomlines are in green since the auction for 3G/4G licenses. The two companies merged together in hopes to turn profitable soon.
Now four players are still too many for the market of 120 million users and another merger or acquisition is due in coming years for sustainability of all the operators over the long run as usually in mature markets there are two to three competitors in this industry. Let's see when and how further consolidation takes place.
Mobilink seems to be the winner in this game as based on the subscription base, Warid's share is 22 percent of the merged entity while its shareholding will be limited to 15 percent. Warid's average revenue per subscriber (ARPU) is higher than Mobilink. WImplecom negotiated well while Abu Dhabi Group appears to be a suppressed seller. Nonetheless, the big brother (Mobilink) came down to docile small brother's (Warid) home to announce the transaction and also took 1,200 plus employees of the combined entity for a retreat in Lahore's beautiful winter.
The transaction is more of an acquisition than a declared merger. In a joint press conference that included the senior leadership of both companies, the show was stolen by Mobilink CEO Jeffery Hedberg. No wonder, his bosses will have six seats on the board compared to just one seat for the counterpart. The merged entity, whose name is not finalised yet which may remain Mobilink, has become too big for Zong and others to catch without a merger/acquisition deal. The combined revenues of Warid and Mobilink are $1.4 billion and the synergies in operating and capital expenditure will be around $500 million.
The franchises and retail partners number beyond 7,000 - although Jeffery assured in the press conference that they will keep all of them engaged and his counterpart; Warid's CEO Muneer Farooqui assured that 1,000 plus permanent employees of Warid should have no fears of losing their jobs.
Yet we all know that mergers are tough on few and especially for Warid people, in this case. The transaction will complete in six months subject to necessary approvals by regulatory authorities SECP, PTA and CCP. When the dust settles after six months, chances are that the number of franchises will reduce as will the number of employees. The regulators have to watch this transaction carefully and the CCP has to ensure that dominance in the market will not take place. The merged entity's share of total subscribers is 37.6 percent; which is short of a dominant share of 40 percent; however, it is quite close.
The valuations of the two entities were not disclosed in the press conference despite being asked by BR Research. However, as mentioned, Warid was likely valued at a discount. The valuation in the industry has had a funny trend as in 2007 Warid sold 30 percent share to Singtel for $700 million and a few years later it bought it back at one-third of the original price.
Whatever is the valuation, the merged entity will benefit by sharing costs and customers may have varying experiences. For example, a few of Warid's loyal post-paid customers who had enjoyed great service owing to less traffic on the spectrum for voice and lately for superb LTE/4G services, will now have to share the bandwidth with loads of Mobilink users. On the other hand, Mobilink customers can now have access to LTE/4G services and Warid users may have access to the network from every nook and corner of the country.
Soon the consumers may benefit from offers of free or discounted mobile sets that are compatible on LTE/4G upon shifting to the merged network. Eventually it is a win-win situation and a welcome move in the market which is now pacing towards consolidation. This may pave the way for the merged operator to put in more investments to expand its digital footprint and enhance financial inclusion.