Cross-border opportunities are there, but Telenor has work to do in Bulgaria

By Elson Sutanto

Pan-European operater group Telenor is making another move into Eastern Europe, this time buying Bulgaria’s Globul. The move makes sense for several reasons, but success won’t come easy in a country with high mobile penetration and a sluggish economy.

On April 26, Telenor agreed to buy Bulgarian telecoms operator Globul from Greek operating group OTE for €717m ($934m) in cash (provided that Globul is debt-free). The purchase includes the Bulgarian subsidiary of Pan-Balkan retail distributor Germanos.

Telenor says it can use its experience running telecoms operators in neighboring Serbia, Montenegro and Hungary, where it has been operating since 2002, 2004 and 2006, respectively, to turn Globul into a profitable telecoms player. It has effectively challenged the market leaders in those countries.

However, Bulgaria still presents Telenor with harsh operating conditions that OTE has frequently cited as the catalyst for year-on-year declines in Globul’s consolidated revenues since 2008. These conditions include the country’s high mobile penetration (170 per cent); fierce price competition, fueled mainly by third player Vivacom; regulatory-enforced mobile termination rates; and the country’s listless economy.

Furthermore, generating revenues by offering mobile services as stand-alone products is no longer the best route for operators to take in Bulgaria. As rivals Mobiltel and Vivacom have done, Telenor must form a strongly packaged converged plan to offer its subscribers. Globul began offering fixed telephony in 2011 and must continue to offer and further develop multiplay plans comprising fixed broadband, TV and mobile services.

Still, Telenor emphasizes that part of the attraction of both acquiring Globul and moving into Bulgaria is the country’s economic state relative to some other Eastern European markets. In 2012, Bulgaria’s GDP growth was higher, and its debt as a percentage of GDP was lower, than those in other European markets, including countries in which Telenor already operates such as Serbia and Hungary.

Telenor still has to work out how to deal with Bulgaria’s unemployment rate, which was higher than that of Serbia and Hungary in 2012. Furthermore, Bulgarian consumers are highly price-sensitive, implying that Telenor will have to deploy affordable and innovative data, voice and device offers to attract these consumers.

Telenor can build upon some of the successful approaches that OTE took to attract users in Bulgaria. For example, in 2010 and 2011 Globul became the first operator in the country to launch a series of affordable, own-branded smartphones, namely the Globul Q1 and Globul Q1 second edition.

Telenor will have to diversify Globul’s revenue portfolio over the next few years, possibly by moving into noncore telecoms areas, such as energy and e-health. Market leader Mobiltel has already entered the mobile-online-advertising market, to generate additional revenues, providing information on its smartphone users’ behavior to Bulgarian bank DSK, e-commerce and direct-to-consumer-platform provider Studio Moderna, automaker Honda Bulgaria and gambling site Bet365.

Even though a large part of the growth in Telenor’s consolidated revenue in the 12 months to end-1Q13 came from emerging markets, such as Thailand and Bangladesh, which feature low mobile penetration and rapidly growing demand for voice and data, Telenor has outlined several reasons for buying an operator in a more-developed market. These include building upon Telenor’s strategic operational experience from operating in neighboring Serbia, Globul’s already established strong market position in Bulgaria – the operator is already in second place in Bulgaria’s mobile market with a 36 per cent share of the country’s subscriptions; and, the potential for Telenor to use Globul to drive both data and smartphone penetration in Bulgaria, both of which are at low levels compared to other Eastern European markets.

Telenor sees strong cross-border cooperation opportunities between Globul and Telenor subsidiaries in the neighboring Eastern European markets of Serbia and Hungary. Telenor is not the only operating group in Europe to employ cross-border strategies in the past few years. In May 2011, TeliaSonera lowered its data-roaming rates 90 per cent across its Nordic and Baltic areas of operation in order to encourage its smartphone users in these areas to remain loyal to TeliaSonera’s subsidiaries when using data outside of their home markets.

Owning the Bulgarian arm of Pan-Balkan retail-distributor Germanos is an important part of Telenor’s acquisition of Globul. OTE fully purchased the Germanos group in 2006. Germanos’ aggressive expansion of its retail distribution-outlet base, since 2006, in Bulgaria, Albania, Greece and Romania helped the retailer account for a significant, increasing share of OTE’s mobile net adds in all four markets from 2006 to 2012.

Globul says it has the widest-reaching distribution network, geographically, in Bulgaria, though its rivals have increased their number of retail outlets in the country rapidly over the past few years. Globul has partnerships with more than 3,000 distributors and has more than 430 points of sale and 145 showrooms in the country. In comparison, rival operator, Vivacom has more than 200 retail outlets and more than 300 point of sale locations, while Mobiltel has more than 180 stores in operation.

Telenor plans to apply the same transformational changes to Globul that it previously made to Telenor Serbia from 2006 onwards. In terms of revenue generating initiatives, Telenor plans to make Globul focus on developing a number of areas. These include providing attractive voice, content and data plans alongside high-demand devices, such as smartphones, creating Bulgaria’s most efficient network, in terms of geographical coverage and speed at which data is transferred, to take advantage of growing demand for data from smartphone users, as well as Bulgaria’s low smartphone penetration, and, finally, migrating prepaid subscribers onto postpaid plans. Telenor also plans to reduce Globul’s network-maintenance costs and overall opex by modernizing the operator’s networks.

Telenor highlights that its valuable experience gained from operating in Serbia will help it turn Globul into a profitable telecoms players in Bulgaria. Key achievements achieved in Serbia by Telenor include growing its market share of the country’s telecommunications revenues from 38 per cent in 2009 to 42 per cent in 2012, maintaining operational excellence as reflected in Telenor Serbia’s OPEX as a proportion of sales decreasing from 34 per cent in 2009 to 25 per cent in 2012, and leading the Serbian market in terms of postpaid subscriptions and number of business users.

Telenor, however, does understand that OTE put Globul up for sale primarily to help reduce OTE’s €3.4bn ($4.4bn) in debt that is due to mature in 2014, not because OTE thought Globul was a bad investment. But Telenor must be fully aware that turning Globul into a profitable operator will still be difficult. OTE struggled to cope with Bulgaria’s extremely challenging economic and operational environment, especially the steep mobile-terminate-rate decline since January 2009; MTRs fell more steeply in Bulgaria than in OTE’s other Balkan markets from July 2010 to July 2012. The MTR decline has eaten away at Globul’s revenues, leading to a 12.9 per cent year-on-year drop in Globul’s service revenues in 4Q12 – the highest decline over this period among OTE’s Balkan markets.

Time will tell whether Telenor can reverse the decline. One thing’s for certain: It will take all of the experience Telenor has had in running operators in markets with similar operating conditions to make a success of its most recent purchase.