16
Managing Telecom Portfolios for Sustainable Growth Karim Sabbagh Chady Smayra Amr Goussous Nans Mathieu Perspective
Managing Telecom Portfolios for Sustainable Growth
Karim SabbaghChady SmayraAmr GoussousNans Mathieu
Perspective
Contact Information
BeirutChady [email protected]
Nans MathieuSenior [email protected]
DubaiKarim SabbaghSenior [email protected]
Amr GoussousPrincipal+971-4-390-0260 [email protected]
Irtek Uraz and Fawaz Boualwan also contributed to this Perspective.
Booz & Company
1Booz & Company
EXECUTIVE SUMMARY
Operators initially looked to integrate their acquisitions by creating group level units that could mine synergies from costs, brand recognition, and services. Now, many telecom com-panies can unlock further value from within their portfolios by analyzing their level of coherence, a process that starts with determining their capa-bilities and identifying their “way to play”—the strategic approach neces-sary to distinguish themselves from competitors. They can then assess whether their capabilities system sup-ports their way to play and whether all their products and services leverage these capabilities.
This strategic exercise will tell opera-tors whether they have what it takes to succeed in each market—the right to win—and then enable them to focus their strategy on the right com-bination of capabilities and a success-ful way to play. As a result, operators
will achieve a “coherence premium,” an edge over the competition that could manifest itself in a number of ways—for instance, stronger profits or higher market share. There is no single solution; each operator has unique capabilities, and each market represents a different opportunity with its own set of characteristics that are distinct from others.
Once a telecom company has this understanding of its capabilities and the elements that will enable it to best the competition in a market, it can then rationalize each of its invest-ments and opportunities in a way that will allow for greater coherence in its portfolio. That will include evaluating acquisitions and divestments, enter-ing or exiting markets, launching new products, or making other strategic moves in order to maximize the operator’s value proposition to both customers and investors.
Global telecom operators—including several in the Middle East—have been enjoying a decade-long growth spurt. Thanks to numerous rounds of mergers and acquisitions, their invest-ments span several continents; for some, international business has emerged as a vital part of the company, accounting for more than half of total corporate revenue. Others have portfo-lios of far-flung business units that do not mesh with each other or with the overall goals and operations of the parent company.
2 Booz & Company
Key HiGHliGHtS
Telecom operators can •unlock value in international investments by analyzing their portfolio “coherence” and determining how their capabilities can support their approach to market.
There is a demonstrable link •between portfolio coherence andsustainedprofitability.
This process will enable •operators to assess existing investments and will inform their decisions regarding future acquisitions or other strategic moves.
Over the past decade, many major telecom operators expanded far beyond their domestic borders, pursuing growth in new, undeveloped markets to counter slowing growth in saturated local markets. Operators pushed into new markets in Europe, Asia, Africa, and the Middle East. Today, several operators have achieved global status, deriving a significant portion of their revenue from international operations (see Exhibit 1). Some have footprints spanning multiple continents.
In the Middle East, and specifically in the Gulf Cooperation Council (GCC), incumbent operators, buoyed by strong balance sheets, participated in this strategy, consolidating within their region and beyond. Many operators, however, did not keep a close eye on how each newly acquired operation fit into their overall portfolio. During the rapid growth phase, a veritable land grab of assets, capabilities and capability systems were less important than getting big fast. As growth starts to level off and a certain level of maturity is reached, competition will increasingly be won on the basis of capabilities. Over time, operators acquired some assets that appeared attractive on a stand-alone basis; later, however, operators realized these businesses were not
adding value to their portfolio. Many international operators turned to group-level integration, intending to draw more value out of their investments, seeking to generate synergies, strengthen brands, and combine capabilities company-wide. In doing so, some divested holdings that they saw as non-strategic and others upped their stakes and took greater control of partly owned assets in an attempt to manage them more effectively. For example, Etisalat increased its stake in Atlantique Telecom, its West African operator, from 50 percent in 2007 to 100 percent in 2010. In April 2011, Saudi Telecom (STC) boosted its stake in Axis, an Indonesian operator, from 51 percent to 80 percent. And in November 2011, Qtel increased its Tunisiana stake from 50 percent to 100 percent.
International investments today have reached a critical mass and contribute significantly to the value of many large operators, elevating the importance of group-level integration. In several cases, because local markets are saturated international operations are contributing to more than 50 percent of revenues and are the growth drivers (see Exhibit 2).
As operators continue in their efforts to maximize the value of their portfolios, they can benefit from assessing their operations to recognize their essential differentiated capabilities—the combination of processes, tools and systems, skills and knowledge, and organization— that distinguish them from their
FROM GROWTH TO FOCUS
3Booz & Company
Source: Operators’ annual reports
Source: 2010 operator publications; Booz & Company analysis
Exhibit 1 Revenue Surged as Some Operators Expanded into New Markets
Exhibit 2 International Operations Account for More Than Half of 2010 Revenues for Some Operators
10%
Industry restructuring put the industry on a path to achieving
full return on invested capital
Industry restructuring helped to address fundamental weaknesses
but did not go far enough
Industry restructuring was a missed opportunity to address
fundamental structural weaknesses
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3,050
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9,800
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10,400
10,600
5/225/155/85/14/24
Nikkei
Nikkei
Sony
Sony
4/174/104/33/273/203/133/62/27
-1%
-18%
-12%
-19%
5/29
SONY CORPORATION VS. NIKKEI 225 INDEX(TOKYO STOCK EXCHANGE CLOSING PRICES IN JAPANESE YEN)
Japanese Earthquake Sony PSN Data Breach
Improves marketing effectiveness and efficiency of business units
26%
Leads company-wide marketing efforts
Sets growth targets
Drives organization change
Responsible for top- and bottom-line performance
Primary strategy advisor to CEO and/or individual business units
61%
51%
50%
44%
44%
43%
41%
Provides marketing services
Develops brands, products, and new businesses
2
136
156
166
4844
60
46
72
27
80
51
83
América MóvilTelenorTeliaSoneraMTN DTTelefónicaVodafoneFT
Footprint(Number ofMarkets)
6 22 14 23 12 21 8 18 22 40 31 48 17 33 14 20
2002
2010
OPERATORS’ REVENUES, 2002 AND 2010(IN US$ BILLIONS)
10%
Industry restructuring put the industry on a path to achieving
full return on invested capital
Industry restructuring helped to address fundamental weaknesses
but did not go far enough
Industry restructuring was a missed opportunity to address
fundamental structural weaknesses
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3,000
3,050
8,000
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8,800
9,000
9,200
9,400
9,600
9,800
10,000
10,200
10,400
10,600
5/225/155/85/14/24
Nikkei
Nikkei
Sony
Sony
4/174/104/33/273/203/133/62/27
-1%
-18%
-12%
-19%
5/29
SONY CORPORATION VS. NIKKEI 225 INDEX(TOKYO STOCK EXCHANGE CLOSING PRICES IN JAPANESE YEN)
Japanese Earthquake Sony PSN Data Breach
Improves marketing effectiveness and efficiency of business units
26%
Leads company-wide marketing efforts
Sets growth targets
Drives organization change
Responsible for top- and bottom-line performance
Primary strategy advisor to CEO and/or individual business units
61%
51%
50%
44%
44%
43%
41%
Provides marketing services
Develops brands, products, and new businesses
2
136
156
166
4844
60
46
72
27
80
51
83
América Móvil
TelenorTeliaSoneraMTNDTEtisalat Airtel STC Batelco FT Axiata Zain QtelTelefónica Vodafone
FT
Footprint(Number ofMarkets)
6 22 14 23 12 21 8 18 22 40 31 48 17 33 14 20
= 2002
= 2010
OPERATORS’ REVENUES, 2002 AND 2010(IN US$ BILLIONS)
89%80%
74%72%69%69%63%60%59%57%
49%
35%32%
23% 24%
ME Operators
PERCENTAGE OF REVENUE FROM INTERNATIONAL OPERATIONS, 2010
competitors. At the same time and based on their capabilities, operators need to determine the way to play for each of their subsidiaries—the strategy that will allow them to succeed and beat the competition in each of the markets in which they operate. These factors combine to
present an operator with the right to win that, in turn, will translate into stronger profits, increased market share, or a number of other results—the coherence premium that operators can achieve when their capabilities and way to play operate in concert. Along with the coherence
premium—an inherent advantage in focusing an entire company around a set of capabilities—there also is an incoherence penalty that can grow over time as companies expand into new markets and their strategic focus broadens.
4 Booz & Company
Companies can measure their coherence premium via a coherence index, determined by an algorithm that takes into account the different operations in a group’s portfolio and the capabilities required for each one to succeed. The more overlap companies have in terms of the
capabilities they require across the portfolio, the higher they will score on this index.
There is a demonstrable correlation between the coherence of operators’ portfolios—a focus on the factors that provided them a right to win—and strong financial returns (see Exhibit 3).
There is no single right to win formula that will apply to all operators. Each operator has a unique set of capabili-ties and conducts business in markets that have distinct characteristics and
are at different stages of development. An operator can have a set of capabili-ties that enables it to succeed in one market that is very different from what enables it—or a rival—to flour-ish in another. Ideally, an operator will have a single set of capabilities that will provide its coherence premium in the markets in which it operates. However, this is not always the case; sometimes an operator has to organize itself into what we call clusters—countries or regions that it can group together to leverage capabilities that are specific to those markets. Operators succeed by organizing their
FINDING THE RIGHT TO WIN
1 Average EBITDA margin for 2009–2010 Notes: R² = 0.62. The coherence index in this Perspective was calculated for illustrative purposes and uses comparable and publicly available criteria for the different operators, including geography, type of business, market position, and market maturity. To develop a thorough coherence analysis, operators will need to undergo a more comprehensive examination. Source: Informa; operators’ annual reports; Booz & Company analysis
Exhibit 3 Analysis Reveals Strong Correlation Between Profits and Coherence
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5/225/155/85/14/24
Nikkei
Nikkei
Sony
Sony
4/174/104/33/273/203/133/62/27
-1%
-18%
-12%
-19%
5/29
Japanese Earthquake Sony PSN Data Breach
Improves marketing effectiveness and efficiency of business units
26%
Leads company-wide marketing efforts
Sets growth targets
Drives organization change
Responsible for top- and bottom-line performance
Primary strategy advisor to CEO and/or individual business units
61%
51%
50%
44%
44%
43%
41%
Provides marketing services
Develops brands, products, and new businesses
2
136
156
166
4844
60
46
72
27
80
51
83
AmericaMovil
TelenorTelia Sonera
MTNDTEtisalat Airtel STC Batelco FT Axiata Zain QtelTelefonica Vodafone
FT
Footprint(Number ofMarkets)
6 22 14 23 12 21 8 18 22 40 31 48 17 33 14 20
= 2002
= 2010
OPERATORS’ REVENUES, 2002 AND 2010(IN US$ BILLIONS)
89%80%
74%72%69%69%63%60%59%57%
49%
35%32%
23% 24%
ME Operators
PERCENTAGE OF REVENUE FROM INTERNATIONAL OPERATIONS, 2010
0.850.65 0.70 0.75 0.900.80
EBITDA Margin1
50%
45%
40%
35%
30%
25%
20%
0.600.550.50 Coherence Index
Op 1
Size of the bubble reflects group’s revenues
Op 4Op 14
Op 3Op 2
Op 8Op 13
Op 9
Op 12
Op 7
Op 6Op 11Op 5
Op 10
5Booz & Company
investments in clusters—a grouping of investments with relative simi-larities such as geography, market maturity, ownership level, type of operations, and market position. That is not an exhaustive list; there are other clusters.
Geography:• A geographic focus provides operators with supply chain synergies, advantages in dealing with similar cultures, and the ability to provide offerings that cater to regional travelers’ needs. MTN is an example of a company that has used geography as a cluster to provide it with a coherent focus and augment its chances to succeed. The African operator centered its expansion on mobile telecom oper-ators within the African continent that are, or have the potential to be, first or second in market share in their region.
Market Maturity: • Markets and businesses with different matu-rity levels require different sets of capabilities across the value chain. Among other factors, operators need fundamentally different approaches to marketing and sales in a nascent market as opposed to a mature one. A global operator with operations in markets with different
maturity levels faces challenges in developing and implementing dif-ferent approaches successfully. For example, Telefónica has developed robust capabilities to operate in mature markets, and 80 percent of its operations are in markets where the penetration rate exceeds 90 percent.
Ownership Level: • Operators need different engagement models for dealing with operations that they control as opposed to those in which they own a minority stake: Majority-owned operations require greater operational involvement from telecom groups whereas minority-held operations require financial investment capabilities. América Móvil, for example, con-trols 100 percent of its operations, enabling it to enforce decisions at all its subsidiaries in order to create synergies and instill common mar-keting approaches.
Type of Operations:• Several telecom groups have invested in a mix of operations, from fixed to mobile operators, from network-based operations to service-based operations (such as MVNOs). Because each business requires a different set of capabilities,
some operators have succeeded by focusing on a specific part of the business. One such example is Zain, which focused exclusively on mobile telephony in emerging markets. By focusing on this area, Zain has been able to build a strong group products and services function and enjoy synergies in the markets where it operates.
Market Position:• An incumbent operator needs a radically dif-ferent set of capabilities from a market challenger. An incumbent, for example, might focus a lot of attention on reducing churn among existing customers, whereas a new entrant would set sights on attract-ing customers who have never used a phone before. Vodafone is an example of an operator with strong customer retention capabilities; more than 78 percent of its opera-tions are in markets where it is either the market leader or quasi-incumbent.
The cluster approach to capabilities reveals patterns that have formed successful platforms for operators. Operators can use the same methodology for measuring their overall coherence score to measure the coherence of their individual clusters.
6 Booz & Company
Some global operators already have undertaken substantive divestitures to focus on their differentiating capabilities. For example, Vodafone recently embarked on a program to divest all minority-held assets, seeking to focus on operations in which it could better deploy its capabilities (see Exhibit 4).
It is not always practical—or wise—for an operator to sell or spin off a unit that does not fit into its strategic strength, especially if that unit performs well on a financial basis (see “Asset Sales: Myths vs. Reality,” page 10). Nonetheless, operators can set aspirational targets or better understand the contribution to the company from each of its operating units by undertaking a
two-pronged assessment of strategic and financial considerations. The strategic assessment measures whether an operator’s investments or potential investments are a fit with its capabilities and ways to play; the financial assessment takes into account the needs of the corporation in terms of growth and profitability. Together, they give an operator the diagnostic tools to perform an ongoing evaluation of its portfolio to determine which of its operating units it should keep and which ones it might consider divesting. In addition, the methodology serves as a forward-looking tool to assess future acquisition opportunities by testing their anticipated impact on the coherence and financial performance of the portfolio.
MANAGING PORTFOLIOS FOR BETTER COHERENCE
Source: Reuters; Booz & Company analysis
Exhibit 4 Vodafone Embarked on a Program to Divest All Minority-Held Assets
June 2011, Vodafone agreed to sell 24.4% stake in Polkomtel
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5/225/155/85/14/24
Polkomtel
April 2011, Vodafone divested 44% stake in SFRSFR
November 2010, Vodafone sold interest in Softbank JapanSoftbank
September 2010, Vodafone divested 3.2% stake in China MobileChina Mobile
Divesture considerations frequently reported since 2008Bharti AirtelVerizon WirelessVodafone Egypt
Nikkei
Sony
Sony
4/174/104/33/273/203/133/62/27
-1%
-18%
-12%
-19%
5/29
Japanese Earthquake Sony PSN Data Breach
Improves marketing effectiveness and efficiency of business units
26%
Leads company-wide marketing efforts
Sets growth targets
Drives organization change
Responsible for top- and bottom-line performance
Primary strategy advisor to CEO and/or individual business units
61%
51%
50%
44%
44%
43%
41%
Provides marketing services
Develops brands, products, and new businesses
2
136
156
166
4844
60
46
72
27
80
51
83
AmericaMovil
TelenorTelia Sonera
MTNDTEtisalat Airtel STC Batelco FT Axiata Zain QtelTelefonica Vodafone
FT
Footprint(Number ofMarkets)
6 22 14 23 12 21 8 18 22 40 31 48 17 33 14 20
= 2002
= 2010
OPERATORS’ REVENUES, 2002 AND 2010(IN US$ BILLIONS)
89%80%
74%72%69%69%63%60%59%57%
49%
35%32%
23% 24%
ME Operators
PERCENTAGE OF REVENUE FROM INTERNATIONAL OPERATIONS, 2010
MINORITY-HELD ASSETS DESCRIPTION
7Booz & Company
Strategic AssessmentTwo questions will inform the strategic assessment, which allows a company to calibrate its set of capabilities against those required to succeed in each market or cluster. Is the market relevant? And does the company have the capabilities to be successful in the market? Ultimately these questions will assist the operator to identify the fit of specific operations with the cluster in terms of the capabilities it requires for success, or the coherence of a cluster within the overall multi-regional portfolio. The analysis will lead to a clear understanding of what set of capabilities the company would need to have in order to be successful in each market. If the analysis reveals some key capabilities are missing, the company then can assess the possibility of acquiring or developing these capabilities or phasing out from the market or cluster.
Is the market relevant? An operator needs to assess each market in which
it operates to ensure that the market meets the company’s investment guidelines, which ultimately stem from the shareholders’ vision and aspirations for inorganic growth. Those guidelines could include factors related to growth potential, market size, and the competitive landscape. This step of the strategic assessment process also involves developing an understanding of whether the market presents synergies with other markets.
Does the company have the capabili-ties to be successful in the market? Operating companies should identify what they do exceptionally well—their capabilities system. A company’s primary source of advantage is a system of three to six capabilities that together allow it to fulfill its way to play. The process of answering this question will enable a company to evaluate its overall coherence, first addressing whether each subsidiary has the capabilities to be successful in that market. If it does, the next question to address is whether those
capabilities fit the capabilities of the larger portfolio and thus contribute to the coherence of the group.
Financial AssessmentAs with the strategic assessment, two questions provide visibility into the financial viability of a company’s operating unit.
What is the business’s current financial situation? An operating company should have a clear view of its financial situation and priorities going forward. These priorities should then be used to rate portfolio companies. For example, a company can be looking to maximize profitability and cash. That would require it to have more mature and developed market-leading operations and fewer growing ones in its portfolio. Alternatively, an operating company could have revenue generation and growth as its top priority and thus would likely need to shift its resources to invest in growth companies in its portfolio.
The strategic assessment measures whether an operator’s investments or potential investments are a fit with its capabilities and ways to play.
8 Booz & Company
Is this investment maximizing shareholder value? A company should assess each of its portfolio companies on their ability to generate cash in the future. Then it can compare the net present value (NPV) of the portfolio company to the market value of its investment in that business using different valuation techniques. The relative value of the NPV to the calculated market value determines the financial assessment for the investment. The higher the NPV is relative to the market valuation, the higher the financial assessment.
The outcome of the strategic and financial analysis allows companies to plot each existing operating unit or new opportunity on a matrix that could provide guidance to management in performing portfolio decisions (see Exhibit 5).
This analysis might reveal that a particular asset is financially attractive and coherent with the overall portfolio and warrants further investment to unlock additional growth or increase exposure. If it is a case of limited coherence, a telecom operator might consider divestment,
especially if it can generate more value from disposing of the asset either on a stand-alone basis or by bundling it with a less-attractive asset. This is the concept of “best ownership.” If a subsidiary is profitable but does not fit in the wider group’s capabilities system, the operator could benefit from selling the asset to a company in whose capabilities system it would really fit.
Furthermore, management can rely on the assessment framework to demonstrate the appeal of acquiring new assets, as it reveals how an
Source: Booz & Company
Exhibit 5 Companies Can Use a Matrix to Guide Portfolio Decisions
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10,600
5/225/155/85/14/24
Nikkei
Sony
Sony
4/174/104/33/273/203/133/62/27
-1%
-18%
-12%
-19%
5/29
SONY CORPORATION VS. NIKKEI 225 INDEX(TOKYO STOCK EXCHANGE CLOSING PRICES IN JAPANESE YEN)
Japanese Earthquake Sony PSN Data Breach
Improves marketing effectiveness and efficiency of business units
26%
Leads company-wide marketing efforts
Sets growth targets
Drives organization change
Responsible for top- and bottom-line performance
Primary strategy advisor to CEO and/or individual business units
61%
51%
50%
44%
44%
43%
41%
Provides marketing services
Develops brands, products, and new businesses
2
136
156
166
4844
60
46
72
27
80
51
83
AmericaMovil
TelenorTelia Sonera
MTNDTEtisalat Airtel STC Batelco FT Axiata Zain QtelTelefonica Vodafone
FT
Footprint(Number ofMarkets)
6 22 14 23 12 21 8 18 22 40 31 48 17 33 14 20
= 2002
= 2010
OPERATORS’ REVENUES, 2002 AND 2010(IN US$ BILLIONS)
89%80%
74%72%69%69%63%60%59%57%
49%
35%32%
23% 24%
ME Operators
PERCENTAGE OF REVENUE FROM INTERNATIONAL OPERATIONS, 2010
Guiding Matrix for Portfolio Decisions
Financial ValueReturn or Growth Potential
A. Lone Star (Milk, sell, or isolate)
Attractive
A. Lone Star: Continue milking strong financial position and look for opportunities to monetize, as these units may be worth more to others. Build up to sell at the appropriate time or rethink the unit’s way to play as a stand-alone small business.
B. Relative Coherence: Further invest if the unit is expected to outperform competitors, if the capabilities system required overlaps with group capabilities, or if the sale price is unattractive. Divest otherwise.
C. Flagship: Create ways to accentuate growth and strengthen flagship business status
D. Detractors: Stop these units from hemorrhaging cash and consider divesting
E. Underleveraged: Invest in order to transform into Flagship if financial capabilities allow. Otherwise, divest.
UnattractiveHigh
Coherence with Your Capability SystemLow
B. Relative Coherence
(integrate or sell)
C. Flagship (grow)
D. Detractors (divest, disinvest)
E. Underleveraged (grow or divest)
9Booz & Company
operating company would fit into an existing cluster and the overall portfolio from both a strategic and financial perspective.
The process of conducting the strategic and financial assessments relies on a few considerations:
The assessment should be forward • looking: The assessment should not look at what has happened in the past as previous decisions do not have any bearing on future ones, other than to act as a yardstick to gauge future performance. Thus, any framework accounts for future expected returns and treats past decisions as sunk costs.
The assessment should be per-• formed periodically: The value of
an investment is a moving target that shifts with changes in market conditions, as well as factors specific to each company. As a result, companies should undergo assessments regularly to maintain the relevance of their investment decisions and ensure that they are regularly able to seize attractive opportunities.
Business plans should be objective • and realistic: As noted above, the value of the analysis hinges on a company’s forward-looking assess-ment of its portfolio companies. Accordingly, business plans on which the assessment is founded should be fair and realistic.
The assessment should consider • the value of synergies: The analysis
should incorporate potential syner-gies that a company can capture from its operating units, a benefit financial analysis often overlooks. Capturing potential synergies ensures that a company is assessing investments that are in the right context, enabling it to maximize the value of each of its business operations.
Full-fledged due diligence is man-• datory: Divestment or investment recommendations are guidelines and mandate further assessment. The framework provides manage-ment with a short list of poten-tial candidates for divestment or acquisition—but requires further validation from a detailed due diligence process before a company can make a final decision.
Companies should undergo assessments regularly to maintain the relevance of their investment decisions.
10 Booz & Company
ASSet SAleS: MytHS vs. ReAlity
Some telecom operators are reluctant to divest assets, preferring to appear as long investors. Empirical evidence shows that some common maxims that pertain to selling assets—“it’s bad to sell at a loss” and “don’t sell cash cows”—are not always true.
Selling at a Loss: It is not categorically unreasonable to sell an asset at a loss. Contrary to general perception, shareholders often are sympathetic to a company selling a non-strategic asset at a reasonable loss rather than keeping it in the portfolio (see Exhibit A).
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10,600
5/225/155/85/14/24
Nikkei
Sony
Sony
4/174/104/33/273/203/133/62/27
-1%
-18%
-12%
-19%
5/29
SONY CORPORATION VS. NIKKEI 225 INDEX(TOKYO STOCK EXCHANGE CLOSING PRICES IN JAPANESE YEN)
Japanese Earthquake Sony PSN Data Breach
Improves marketing effectiveness and efficiency of business units
26%
Leads company-wide marketing efforts
Sets growth targets
Drives organization change
Responsible for top- and bottom-line performance
Primary strategy advisor to CEO and/or individual business units
61%
51%
50%
44%
44%
43%
41%
Provides marketing services
Develops brands, products, and new businesses
2
136
156
166
4844
60
46
72
27
80
AmericaMovil
TelenorTelia Sonera
MTNDTEtisalat Airtel STC Batelco FT Axiata ZainTelefonica
FT
- Vodafone Group disposed of Vodafone KK, a struggling Japanese subsidiary, in March 2006
- Vodafone recognized an impairment charge in 2006 on the disposal of Vodafone KK that amounted to £4.9 billion
- T-Mobile merged its U.K. subsidiary and created a joint venture with Orange UK in September 2009
- T-Mobile wrote down the value of the U.K. operations by €1.8 billion
- Telefónica disposed of its UMTS license in Austria in December 2003
- Telefónica wrote off all its European UMTS assets (excluding Spain) with a value of €12 billion
6 22 14 23 12 21 8 18 22 40 31 48 17 33
= 2002
= 2010
OPERATORS’ REVENUES, 2002 AND 2010(IN US$ BILLIONS)
74%72%69%69%63%60%59%57%
49%
35%32%
23% 24%
ME Operators
PERCENTAGE OF REVENUE FROM INTERNATIONAL OPERATIONS, 2010
Vodafone Share Price Evolution
(Rebased at 100)(Jan–Jun 2006)
Guiding Matrix for Portfolio Decisions
Financial ValueReturn or Growth Potential
A. Lone Star (Milk, sell, or isolate)
Attractive
A. Lone Star: Continue milking strong financial position and look for opportunities to monetize, as these units may be worth more to others. Build up to sell at the appropriate time or rethink the unit’s way to play as a stand-alone small business.
B. Relative Coherence: Further invest if the unit is expected to outperform competitors, if the capabilities system required overlaps with group capabilities, or if the sale price is unattractive. Divest otherwise.
C. Flagship: Create ways to accentuate growth and strengthen flagship business status
D. Detractors: Stop these units from hemorrhaging cash and consider divesting
E. Underleveraged: Invest in order to transform into Flagship if financial capabilities allow. Otherwise, divest.
UnattractiveHigh
Coherence with Your Capability SystemLow
B. Relative Coherence
(integrate or sell)
C. Flagship (grow)
D. Detractors (divest, disinvest)
E. Under-leveraged (grow or divest)
DIVESTITURE OF ASSETS
IMPACT ON SHARE PRICES
Full Divestiture of Subsidiary
Partial Divestiture of Subsidiary
Disposal of License
0
50
100
Divestment of Vodafone KK
150
Jun-
06
May
-06
Apr
-06
Mar
-06
Feb-
06
Jan-
06
Divestment of Vodafone KK
Deutsche Telekom Share Price Evolution
(Rebased at 100) (Jul–Dec 2009)
0
50
100
Spin-off of T-Mobile UK
150
Dec
-09
Nov
-09
Oct
-09
Sep
-09
Aug
-09
Jul-0
9
Telefónica Share Price Evolution
(Rebased at 100) (Nov 2003–Jun 2004)
0
50
100
Disposal of Austria UMTS
License
150
May
-04
Jun-
04
Apr
-04
Mar
-04
Feb-
04
Jan-
04
Dec
-03
Nov
-03
Exhibit A Stock Performance of Groups That Sold Assets at a Loss
Source: Bloomberg; Reuters; Booz & Company analysis
11Booz & Company
Selling Profitable Investments: Itisneverapoordecisiontosellprofitable(but non-strategic) businesses as long as a company uses the proceeds togrowmorestrategicoperationsthatfitwithcorporatepriorities.Holdingon to a “cash cow” or a large, consistent revenue-generating operation shouldnotbeaprioritybyitself,especiallyifthatbusinessdoesnotfitwiththe company’s strategic focus. For one thing, the cash cow status of any unit is rarely permanent. In addition, a company can sell a cash cow at a premium and invest the proceeds in other promising businesses. Such moves might position a company to focus on another region, as was the case when Zain divested its African assets to Bharti in early 2010 because thoseoperationspresentedlittlestrategicfitwithitsremainingbusinesses.Similarly, Telefónica divested Méditel in late 2009 to sharpen its focus on other assets. Shareholders typically understand the strategic factors behind such moves and do not penalize the company for it (see Exhibit B).
32.8% n
TABLE HEADINGS
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Lines: 0,5 ptLines for legend: 0,5 pt d
Note:Please always delete all otherwise InDesign will imfile.These colors can’t be de
Approved Colors, Tints
STOCK PRICE PERFORMANCE—SELECTED EXAMPLES
Vodafone Share Price Performance(vs. FTSE 100 Index, 2005–May 2010)1
Zain Share Price Performance(vs. Kuwait Stock Exchange Index, 2005—May 2010)1
0
40
80
120
160
2005 2006 2007 2008 2009
2005 2006 2007 2008 2009 2010
2010
EuropolitanSweden
Divestment
Index
Vodafone
Index
Zain
EBITDA at sales: 22%
EBITDA at sales: 29%
EBITDA at sales: 20%
Bharti Divestment
Bharti Zain deal
0
50
100
150
200
250
300
350
400
450
500
550
Exhibit B Stock Performance of Groups That Sold Financially Well-Performing Assets
1 $1 = £ 1.61; Kuwaiti dinar 1 = $3.45; YTD is Apr 26, 2010 Source: Bloomberg; analyst reports; Booz & Company analysis
12 Booz & Company
A wave of expansion has trans-formed local telecom incumbents into regional operators, with footprints that span the Middle East, Asia, and Africa. For many of these GCC opera-tors, migrating to group-level operat-ing structures has enabled them to unlock value from this expansion. In the aftermath of the global economic slump and debt crisis, management and investors increasingly are clamor-ing for better performance. And, as international operations account for an increasing contribution to corpo-rate revenue, investors and manage-ment continue to scrutinize and rationalize their investments outside of their borders.
Telecom operators can undertake an effort to assess and manage their portfolio holdings more effectively by analyzing the concept of coherence across their footprints—a process that will inform and guide their portfolio
decisions going forward to generate sustainable growth and avoid the incoherence penalty.
Applying the coherence lens involves determining what specifically an operator does best—the ingredients that enable it to beat the competition. It also includes assessing each of the markets that an operator competes in, to ensure that the operator’s capabili-ties will help it succeed. The analysis is not only an assessment tool for the existing portfolio but also a great driver for growth as it can guide telecom group operators in their investment decisions by helping them focus on clusters of strength, the most relevant opportunities for them. The result will leave some global telecom operators with wide-reaching invest-ments that deliver the maximum value to customers and shareholders.
CONCLUSION
13Booz & Company
About the Authors
Karim Sabbagh is a senior partner with Booz & Company inDubaiandRiyadh.Heleadsthefirm’scommunications,media, and technology global practice.Hespecializesinsector-level development strategies, institutional and regulatory reforms, large-scale privatization programs, and strategy-based transformations focused on strategic planning, partnerships and alliances, marketing, and business process redesign.
Amr Goussous is a princi-pal with Booz & Company inDubai.Hespecializesininvestment strategies, global-ization, mergers and acquisi-tions, portfolio management, and business development within the telecommunications sector.
Chady Smayra is a princi-pal with Booz & Company in Beirut.Hespecializesinmerg-ers and acquisitions, invest-ment strategies, corporate strat egy, business develop-ment, CFO agenda, gover-nance and operating models, strategic partnerships, and marketing in the communica-tions, media, and technology industries.
Nans Mathieu is a senior asso ciate with Booz & Company in Beirut. Hespecializesinglobaliza-tion strategies for telecom operators including investment strategy development, M&A transaction monitoring, syner-gies realization, corporate gover nance, and operating model improvements.
Booz & Company is a leading global management consulting firm, helping the world’s top businesses, governments, and organizations. Our founder, Edwin Booz, defined the profession when he estab-lished the first management consulting firm in 1914.
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