What will the Warid-Mobilink merger mean?

Published: January 17, 2016
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Will benefit industry, weaken price war; rural areas remain large markets.

Will benefit industry, weaken price war; rural areas remain large markets.

ISLAMABAD: Adopt, adapt and improve – the motto reflects the very dynamics of Pakistan’s telecom market that is all but resilient and has stood not only the test of time but also the test of cut-throat competition.

The rollout of third generation (3G) and 4G services has resulted in a modest revenue growth and has slowed the trend of declining ARPU (average revenue per user) – providing a much needed uplift to a saturated telecom market. So focusing on upgrading customers to higher value plans associated with 3G/LTE has been a key theme over the last year.

Mobilink completes acquisition of Warid Telecom

However, the biggest news in 2015 was the announced merger of Warid with Mobilink which is due to be completed by the second quarter of 2016; subject to regulatory approvals by the Competition Commission (CCP) and the Securities and Exchange Commission of Pakistan (SECP).

It is highly likely that Mobilink would get the go-ahead from authorities as major market players including Telenor are not planning to push regulators for divestment of excess spectrum acquired by Mobilink through the proposed merger.

Although the deal would diminish consumers’ choice of service provider and would cement Mobilink’s position as the largest player, yet it would benefit the whole industry as remaining players shall have greater control over pricing and would weaken the price wars.

Case of four-year lockup

The current valuation of Warid’s spectrum resources is approximately around $100m as its licence would expire in 2019 and Mobilink would have to buy a 4G licence worth $200m in 2019.

Joining hands: Mobilink acquires Warid in historic transaction

This explains a lot that why there is a four year lock-in period during which the Dhabi Group is barred to sell its equity in Mobilink. After that, the Dhabi group shall have a ‘put’ option to sell its shares in the merged company to Vimpelcom while the latter shall have a ‘call’ option to buy shares of Dhabi group at a fair market price.

Exercising such options related to disposal of corporate shares is usually subject to a large tax bill. However, investments related to renewal of spectrum, expansion of LTE footprint and interest payments would help reduce taxable revenues as losses would be carried forward and costs would be converted into deductible depreciation volume for tax purposes.

Moreover, the lock up period would help the holding company to avoid liquidity problems while it makes further investments in data services.

Mobilink to focus on untapped rural segment

The company is now looking forward to make more investments in rural areas – thanks to low interest rates globally. As a sequel to the proposed merger, the company has already collaborated with Haier group to manufacture cheap feature and smart phones branded as Jazz X – targeting the rural segment by bundling free data on selected applications. Moreover the price gap between its feature and smart phones is small; encouraging consumer data adoption rates. This strategy of leveraging its brand to market affordable smart phones, coupled with subsidised data packages, would help expansion of rural consumer footprint in 4G.

Vimpelcom sells Africa assets, eyes Pakistan telco Warid: sources

The Warid brand might live on

In the meanwhile, chances are that the brand ‘Warid’ would reposition itself to target mainly the corporate postpaid segment– a segment which has been a cash cow for Warid with an average ARPU of $2.6 against an industry average of $1.9. The low-value prepaid customers of Warid are likely to be absorbed by Mobilink Jazz as Mobilink enjoys superior dynamics that have allowed it to fuel the growth of its prepaid base over the years. The Warid brand could be a key to acquire highly prized rural business clients but this time the growth has to be organic, instead of signing corporate deals at headquarters of big businesses.

Way forward

In urban areas, the general trend is that data packages are now essentially cannibalising an existing audience and are eroding revenues from messaging and voice, though internet taxes have slowed this trend for a while. Mobilink will have to go a long way towards making affordable high-quality and seamless internet access available to millions of rural residents. Although rural consumers will be the primary market targeted by the merged company in future, it will be the rural business segment that would unlock the full potential for Mobilink shareholders.

The writer is a Cambridge graduate and is working as a management consultant

Published in The Express Tribune, January 18th, 2016.

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Reader Comments (17)

  • Asim Khan
    Jan 17, 2016 - 11:52PM

    Really informative !Recommend

  • Pervez Butt
    Jan 18, 2016 - 12:08AM

    This merger deal will be really interesting case study ! fingers crossedRecommend

  • Zeeshan Ali
    Jan 18, 2016 - 12:46AM

    yea, focusing on postpaid customers is the key … not the low-value prepaid onesRecommend

  • Hilmi
    Jan 18, 2016 - 10:48AM

    They should focus on money transfer and ecommerce. That’s where the future is. Recommend

  • Eliza Baksh
    Jan 18, 2016 - 1:21PM

    I seriously hope that there is also synergy in QoS (quality of service)Recommend

  • Ali
    Jan 18, 2016 - 2:10PM

    There is too much finance jibber jabber that I do not understand. Bottom-line, mergers are good. Therefore, Mobilink Warid merger is good.Recommend

  • Jan 18, 2016 - 4:22PM

    It will mean higher rates, and no change in service.Recommend

  • AD Choudary
    Jan 18, 2016 - 7:01PM

    its all about saving tax bill … very similar to Pfizer reincorporation strategyRecommend

  • Ismat ullah
    Jan 18, 2016 - 7:19PM

    Despite very low ARPU, telcos have thrived only because of service diversification. Take that back and this is a declining industryRecommend

  • Del Huss
    Jan 18, 2016 - 7:26PM

    Mergers reduce choice for the consumer as they create monopolies, which can than charge as they please because they have no competition. Big corporations have a bigger shareholder base to pay dividends, therefore have to generate revenue from their customers, to stay in business and make profits to pay shareholders.
    This merger is Not good news as it will mean a captive market, which can than be exploited, as the customers have No Choice of provider.Recommend

  • Haider Baloch
    Jan 18, 2016 - 7:34PM

    Expect no more mergers in near future.. Minnows like ufone and zong have no competitive advantage like Warid hadRecommend

  • Aziz Rahman
    Jan 18, 2016 - 8:45PM

    Telenor wont contest the deal as its directors sit on the board of Mobilink’s parent holding company (Orascom)Recommend

  • Maria Khan
    Jan 19, 2016 - 10:50AM

    2015 was a year of mergers and we observed a record no of m&a deals.. most of them r fueled by a desire to reduce competition, need for tax engineering and economies of scope. Recommend

  • Abdul
    Jan 19, 2016 - 10:57AM

    Could we expect another entry of operator in PK market ?Recommend

  • Kalim Khan
    Jan 19, 2016 - 4:14PM

    Re-Branding of Warid is gonna be a tough challenge and a question markRecommend

  • waqar
    Jan 19, 2016 - 5:20PM

    after this merger what will happened with Warid’s Employee???Recommend

  • Ahmad Ali
    Jan 19, 2016 - 6:40PM

    In the meantime, Telenor is doing contracts with Karachi Traffic Police to equip them with portable device with online challan system that allows instant payment of fines thru easypaisa… n Mobilink is stuck with JazzX controversies !!Recommend

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