(Pyramid Perspective - Africa /Middle East Via Thomson Dialog NewsEdge)By Jan ten Sythoff, Regional Manager (jsythoff@pyr.com)

Vodafone won the auction for Telsim (Turkeys second largest mobile operator), late last year with a bid of US$4.55bn. Although the countrys mobile telecommunications sector is poised for substantial growth over the next five years (with expected net additions reaching 16.5m through 2010), many, including Pyramid Research, believe Vodafone significantly overpaid in order to acquire the Turkish number two operator. This sentiment was shared by Vodafones investors as well, with the companys stock price falling 2 percent after the deal was announced. However, we believe that despite the overpayment, acquiring Telsim fits in with Vodafones global strategy of targeting growth markets, and thus makes the purchase price (along with future network investments estimated at US$1.2bn) partially justifiable. Telsim in Trouble before Vodafone Arrived

Telsims case has been one which for years has hogged news headlines across the world. Partnering with equipment vendors Motorola and Nokia, Telsim set out to enter the Turkish mobile market in 1995 with both vendors lending over US$2.8bn in cash and equipment to the now-embattled operator. Charges of fraud and corruption were levied against Telsim and its parent the Imar Bankasi bank, owned by the Uzan clan, one of the wealthiest families in Turkey. Using the bank as a front, Motorola and Nokia contended that the Uzans siphoned US$1.8bn, originally meant for Telsim, into various businesses and bank accounts owned and controlled by the Uzans. With matters reaching a boiling point, the Turkish Government took over the Imar Bankasi bank in February 2004 and Telsim in February 2005.
Ever since this takeover in 2005, Telsim has been ripe for acquisition as it has historically been under-managed and has suffered from under-investment in its network, resulting in poor quality of service and poor uptake among customers. With Vodafone agreeing to purchase the embattled Turkish operator for US$4.55bn (not including the liabilities associated with Motorola and Nokia) along with expectations of US$1.2bn in network investment over the short term, Telsims growth prospects are about to change. To highlight the lucrative opportunity that Telsim represents, (despite the legal problems plaguing the operator since its inception), it is noteworthy to learn that besides Vodafone, several international operators such as MTC of Kuwait, Orascom of Egypt, and Etisalat of the UAE, to name a few, actively submitted a bid to acquire the operator. Vodafone Expected to Turn Telsim Around

Closing 2005 with an expected subscription base of 43.8m, we anticipate the Turkish mobile market will add 16.5m new subscriptions over the next five years, resulting in an increase in penetration from 60 percent to 77 percent over the forecast period (see Exhibit 1). At the same time, there are only three operators in Turkey. Although 3G auctions are expected to take place over the next couple of years, it looks like competition will remain limited. Finally, mobile service revenues (in Turkish Lira) are expected to rise at a CAGR of 5.2 percent over the 20052010 period, increasing from 8.2bn in 2005 to 10.6bn in 2010.
Its international experience in high-growth markets such as South Africa coupled with its knowledge of European subscriber trends makes Vodafone a great candidate to turn Telsim around and to position it to be able to capture a significant portion of growth in the Turkish market going forward. Comparing our forecasts for Telsims growth prior to and after Vodafones announcement of its purchase (see Exhibit 2), we now expect Telsim to capture 11.3m subscriptions by 2010, up from our earlier forecast of 7.3m. This will ensure that Telsim will not lose any market share, as previously anticipated, closing 2005 by accounting for 19 percent of the market (see Exhibit 3). Vodafones Investment in Turkey, Undertaken with an Aim at Investing in Developing Markets

During 2005, Vodafone has invested significantly into growing markets such as India, Czech Republic, Romania, and South Africa largely because of strong competition and slower-than-expected uptake of non-voice services in saturated markets. Hence its interest in regions showing growth potential. Although this acquisition spree has negatively affected Vodafones stock price with near-term earnings taking a hit at the cost of long-term growth and profitability, Vodafone has also shown that it is willing to move out of unprofitable markets by selling its Swedish subsidiary to Telenor this past year. With long-term growth and profitability in mind, we expect Vodafone to continue along the same lines in 2006, with, for instance, the Thai market under present scrutiny.
Although many, including Pyramid Research, believe that Vodafone might have overpaid in its eagerness to enter the Turkish market, we see this deal as a positive for Vodafone since it must continue to strive for scale in order to maintain its competitive edge at a global level. Moreover, in its quest to have a ubiquitous network presence, at least across major European markets, we expect that Vodafone will continue to acquire stake and/or form alliances with operators in countries where it has little or no footprint. In markets such as Austria, Iceland, and Finland, where limited growth opportunities exist, Vodafone has formed alliances with local operators to offer its international customers improved roaming services, while promoting its Vodafone Live! Platform to the alliances domestic subscribers. Contrastingly, in high-growth markets Vodafone continues to adopt an acquisition strategy, sometimes (a) overpaying to obtain a controlling stake (e.g. Turkey), or (b) being satisfied with owning a small financial stake mainly due to local regulations (e.g. China, India) to ensure that its various global markets continue to sustain the organizations growth in years to come.

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