Etisalat Third-Quarter Profit Drops 23% on Competition (Update2)

Emirates Telecommunications Corp., the United Arab Emirates’ largest phone company, posted a 23 percent decline in third-quarter profit after expenses rose and competition with its rival intensified.

Net income fell to 1.74 billion dirhams ($473 million), or 22 fils a share, from 2.25 billion dirhams, or 29 fils a share a year earlier, the company known as Etisalat said in a statement to the Abu Dhabi bourse today. That compared with the 2.02 billion dirhams median estimate of two analysts in a Bloomberg survey. Operating expenses rose 12 percent to 4.1 billion dirhams.

“Etisalat is facing much higher competition and that’s hurting overall performance, subscriber growth is suffering,” said Nishit Lakhotia, a Bahrain-based analyst at Securities & Investment Co. BSC. “If it were not for Etisalat’s international operations, the earnings would have been disastrous.”

Etisalat, which competes with Emirates Integrated Telecommunications Co. or Du, said it hasn’t reached a final agreement to buy a 46 percent stake in Kuwait’s biggest phone company Mobile Telecommunications Co. for about $10.5 billion. The company plans to borrow more than $9 billion to buy the shares, three bankers familiar with the deal said Oct. 13.

Middle East Reach

The deal would give Etisalat majority control of Mobile Telecommunications, also known as Zain, and will extend its reach in the Middle East, where Zain operates in countries from Kuwait to Iraq. Etisalat offers telecommunications services in 18 countries in the Middle East, Africa and Asia, counting more than 100 million customers, according to its website.

Etisalat said the number of mobile subscribers in the U.A.E. increased to 7.81 million in the third quarter, an increase of less than one percent from the second quarter. Etisalat had 1.25 million fixed-line customers and 1.35 million internet customers at the end of September, according to today’s statement. The seven emirates of the U.A.E. make up about 86 percent of Etisalat’s sales.

By contrast, rival Du expects earnings to continue to grow even as competition intensifies, Chief Executive Officer Osman Sultan said in an interview Oct. 17. Du may this week announce a 57 percent increase in third-quarter earnings to 123 million dirhams, according to the median estimate of two analysts in a Bloomberg survey.

Du, which was licensed in 2006 as part of a government plan to build competition in the telecommunications market, has 37 percent of the mobile market.

Merger Proposal

Etisalat is in talks over mergers and acquisitions with India’s Reliance Communications Ltd. to expand in the world’s second-largest wireless market, Chairman Mohammed Omran said on Sept. 29. Purchasing a stake in an Indian cellular operator would give the Middle East carrier a foothold in a market set to approach 1 billion users.

The company is considering investing in Idea Cellular Ltd., which provides mobile phone services in India, Jamal Al-Jarwan, Etisalat’s chief executive officer for international investments, said Sept. 6. The Abu Dhabi-based company is also interested in bidding for a third mobile phone license in Syria, he said.

The shares gained 2.6 percent to 11.85 dirhams at the 2 p.m. close in Abu Dhabi, giving the company a market value of about 93.7 billion dirhams. The stock has gained 19 percent this year.