Consolidating Telecom Vietnam

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With seven mobile operators for approximately 87 million customers and a high penetration rate, the Vietnamese market is overcrowded. Some of the operators, most of which are state-controlled, are struggling to survive, partly because of generally low tariffs. But rumoured M&A deals may mark the beginning of a consolidation wave.

A highly fragmented market

Until 2003, the Vietnamese mobile operator market was a duopoly, split between Mobifone and Vinaphone, both controlled by government-owned telco VNPT. But in recent years, several state-owned companies and governmental bodies– including the Ministry of Defence, the Ministry of Post and Telecoms, and Electricity of Vietnam–launched their own mobile offerings, attracted by a fast-growing and young consumer market and an expected growth in 3G usage.

Although growth has now slowed down the mobile penetration rate is estimated to have reached between 95% and 130%. In comparison, fixed-line penetration is approximately 17.5%.

Licences were granted to increase competition and bring tariffs down, according to Tuan Nguyen, managing director at Vietnam-based ANT Consulting.

“This, in return, has benefited a majority of subscribers,” Mr Nguyen said.

But as a result, three operators dominate today’s market, while others are struggling financially.

The top players in the current market are Viettel (owned by the Ministry of Defence), Vinaphone and Mobifone.

The other four companies–S-Fone (a JV between Saigon Postel and South Korea’s SK Telecom), Vietnamobile (a partnership between Hanoi Telecom and Hong Kong -based Hutchison), GTel-Mobile (a JV between state-owned Global Telecom and Russia’s Vimpelcom) and EVN Telecom (owned by Electricity of Vietnam)–have a combined market share of 4% to 7% only.

Jonathan Dharmapalan, global technology telecommunications leader at Ernst & Young says that most joint ventures appear to be opportunistic, “while the role of operator has been assumed by players from other industry sectors, for example power and utilities and foreign tech firms.”

The situation has been complicated further by a mix of technologies.“GSM has dominated the landscape from a technology point of view and perhaps the government institutions were hedging as to the propagation of each of the technologies. Some CDMA players remain but their market shares are dwarfed by the leading GSM operators,”Dharmapalan points out.

Is consolidation on its way?

Two other companies, Vietnam Corporation (VTC) and Indochina Telecom, have yet to launch services, either on their own or as an MVNO. But it remains to be seen whether nine operators could survive.

With most mobile operators being majority state-owned, consolidation initiative are heavily dependent on the government. EVN Telecom, one of the smallest operators, could lead the way.”

The latest round of merger and acquisitions talks seems focused on consolidating a
loss-making cellular outfit, EVN Telecom, with a larger competitor,” explains Nicole McCormick, senior analyst at Ovum.

In early April, VTC reportedly consider buying a 12% stake in EVN for VND800bn (US$38m), following the withdrawal of technology company FPT from the acquisition process.

But it has now been suggested that Vietnamobile may be the most likely acquirer, after the company was quoted saying that it was looking to buy EVN’s 3G network.

Viettel, the country’s largest mobile operator, has also reportedly been approached for a stake in EVN.

Another potential transaction is the reorganisation plan submitted by VNPT to the government to merge its mobile phone units, Vinaphone and Mobifone.

The companies already share their network infrastructure in most of the country’s provinces.

The merger plan follows a new decree, effective since June, which prohibits a company which owns 20% or more in one telecom operator from controlling more than 20% of another operator in the same market.

VNPT needs to merge its subsidiaries into a single entity in order to comply with the new regulation. Otherwise it would have to dilute its stake in one of the companies below the 20% threshold.

Some experts fear that such a merger would result in a company with a 55%-60% market share, making survival for smaller operators even more challenging.

The role of foreign players

But Lam Nguyen, country director of IDC Vietnam, believes that the decree will create a more level playing field for all operators. “The next step chosen by VNPT will likely have a big impact on the development of the country’s telecom market in the next few years.”

This next step could be the long-awaited privatisation of Mobifone, expected to make the market more attractive in the eyes of both domestic and foreign investors. But earlier attempts never materialised due to valuation and regulatory issues.

However, some experts believe the government will continue encouraging foreign investments in the country’s telcos, despite some restrictions.

Vietnam entered the World Trade Organization (WTO) in January 2007 with a commitment to allow foreign ownership of up to 49% in telecom services providers, which control their own transmission facilities. Since January 2010, the country allows 65% of foreign ownership in telcos that do not own their own transmission capacity but contract it.

But under the country’s Telecom Law, one foreign investor cannot own more than 30% of charter capital in a telco.

Also, recently, Vietnamese Prime Minister Nguyen Tan Dung reportedly signed a decision, which will see the government own a majority stake in five telecom companies: Viettel, VNPT, GTel-Mobile, Indochina Telecom and Vietnam Maritime Communications and Electronics (Vishipel), a telecom infrastructure company.

The move indicates that the government is determined to continue having a role in this lucrative industry.

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