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Summary

Etisalat quit Nigeria in mid-2017 after operating in Africa's biggest market by population and mobile subscriptions for almost a decade. The development reveals some of the perils of international expansion, particularly in emerging markets, and the need for thorough risk analysis.

International expansion requires careful risk analysis

Etisalat Group quit the Nigerian market after its local affiliate, EMTS, which had been using the Etisalat brand, as well as the UAE telco's technical and management expertise to run Nigeria's fourth-biggest mobile operator, defaulted on bank loans.

EMTS reportedly could not keep up with dollar-denominated loan payments after the sharp devaluation of the Nigerian currency. Talks about debt restructuring were unproductive and the banks took over ownership of EMTS in June.

Presumably, one possible course of action would have been for Etisalat – and/or Mubadala, the Abu Dhabi government-backed investment fund that was Etisalat's main partner in EMTS – to put in more money in order to stave off the banks' takeover, but they chose not to do that.

Etisalat canceled its management and technical support agreements with EMTS at the end of June, and said it had written off its investment in the Nigerian unit. Negotiations over EMTS's possible continued use of the Etisalat brand went on for some weeks, but with no agreement reached, EMTS switched to a new marque, 9mobile, in July.

These developments brought Etisalat's almost decade-long experience in Nigeria to an end. Mubadala acquired a telecoms license in Nigeria in 2007, for $400m, and shortly afterwards brought in Etisalat as a minority shareholder, as well as to set up and run the business, which launched services in 2008 under the Etisalat name.

Initially, Etisalat had a 40% stake in EMTS, but in February 2017 this was adjusted to a 25% voting rights interest and a 45% economic interest. As Etisalat had a minority stake in EMTS, Etisalat Nigeria was not consolidated in Etisalat Group's results, but Etisalat published some details about the Nigerian operation in its financial reports. Etisalat's analyst report for 4Q16 shows that Etisalat Nigeria's revenue declined from AED4.23bn ($1.15bn) in 2015, to AED3.41bn ($928.27mn) in 2016, while the Nigerian unit's EBITDA margin declined from 18% to 14% over the same period. The Etisalat report said that the performance of the Nigerian operation was "impacted by worsening economic conditions, inflationary pressure, and significant currency depreciation."

The going has been tough at some of Etisalat's other international businesses too. Etisalat's report for 2Q17 shows that group revenue was down by 4% year on year, due to an 11% decline over the same period in the revenues of Etisalat's consolidated international operations, which primarily comprise Etisalat Egypt, PTCL in Pakistan, and Maroc Telecom. Etisalat's international operations accounted for 38% of group revenue in 2Q17, down from 41% in the equivalent period a year earlier. Etisalat attributed the decline in revenue to currency devaluation in Egypt, regulatory changes in Morocco, and competitive pressures. Overall, Etisalat's consolidated international operations are loss-making – although Maroc Telecom is profitable.

And perhaps ironically, given Etisalat's focus on international expansion over the past decade or so, Etisalat's operation in its home market of the UAE remains the group's mainstay, with revenue in 2Q17 up by 1% year on year, an EBITDA margin of 55%, and a net profit margin of 28%.

Etisalat's international expansion demonstrates some of the difficulties of rapid international expansion and of operating in emerging markets. There is the prospect of high growth, but set against that there are often risks such as weak and volatile economies, uncertain political and regulatory environments, and increasingly competitive markets.

Etisalat is by no means alone in encountering difficulties overseas or in emerging markets. Nor do the challenges that Etisalat and many of its peers have encountered mean that operators should eschew all such ventures. But it does underline the importance of careful and continuous appraisal of the risks, as well as the benefits, of international expansion.

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