Tuesday, March 14, 2017

Orange-directed Korek Telecom's Future Looks Bright if Iraq Recovers

Preamble - Cisco Ericsson partnership deal highlights little-known Iraqi operator Korek Telecom

On March 1st, Cisco and Ericsson announced that through their cooperative marketing agreement signed in November 2015 Korek Telecom, a 16 year-old mobile telecommunications provider headquartered in Erbil in the Kurdistan region, with whom Ericsson has a longstanding relationship, had selected Ericsson and Cisco to transform its IP core network using integrated solutions based on Ericsson services and Cisco ASR 9000 routers.

Although Korek is for the moment only the third operator in Iraq and Iraq itself is a deeply divided country whose society and economy are in near chaos, nonetheless the country hosts the world's fifth largest oil reserves and ranks somewhere in the lower half of the world's Top 10 countries with the largest natural gas reserves and could grow quite a bit (particularly in natural gas exports where it lacks the necessary infrastructure). Iraq still has an operational though weak government but 93% of the state budget is dependent on oil production. Still, there is a strong probability that with western help it will recover over the next five years and of the three Iraqi operators Korek looks to be the most competent and fastest growing and could have a good future. The general situation of Korek today is that it dominates the Kurdistan region, which constitutes about one sixth of Iraq, and from that stable profitable base is now beginning to grow its share in the rest of the country. The increasing tendency has been for Kurdistan, the most stable part of Iraq during the last few years, to seek more autonomy and a crucial issue related to the Kurdistan economy has been a dispute with the central government over the sharing of oil revenues, which as shown below seems at last to have been  resolved.


Up-to-date fundamentals about Iraq

The two following quotes are key extracts from a 45 page official letter, entitled Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding, of December 2016 by Iraqi PM Dr Haider Al-Abbadi to Christine Lagarde, MD of the International Monetary Fund, which is currently providing financial support to the government in exchange for various specific social and economic commitments.

Quote on status of internally displaced persons and refugees:

-    "The ISIS attacks have boosted the number of internally displaced persons - estimated at 3.3 million in September 2016… close to 10 million Iraqis (26% of the population) need humanitarian assistance…. with 225,000 Syrian refugees, Iraq is the fourth largest hosting country in the region for people fleeing Syria... refugees, 60% women and children, mostly reside in the north, including in the Kurdistan region where they have been granted residency status including the right to work".

Quote on the latest oil-revenue sharing agreement between the Iraqi government and the local government of Kurdistan:

-    "According to the agreement the revenue from the oil extracted in the KRG accrues to the federal government and the federal government makes transfers to the KRG equivalent to 17% of non-sovereign spending in the federal budget (i.e. total spending minus expense of the parliament, the presidency, the cabinet, the Ministry of Foreign Affairs, the Ministry of Defence, the federal court, federal government commissions and debt service)… in the revised program for 2016 presented in this MEFP, the oil revenue projected for KRG is IQD 7.8 trillion and the transfers to the KRG IQD 8.5 trillion".

Background and news about Korek Telecom

Prior long historical relationship with Ericsson and other vendors

Korek was co-founded in 2000 reportedly by four Kurdish businessmen including the company's current chairman, Sirwan Mustafa Baser, vice president Dr. Hamid Akridi, plus Jeksi Hama Mustafa and possibly the company's current MD Sirwan Barzani, who is said to have a stake in the company and is the nephew of Massoud Barzani, the acting president of the Kurdistan region and head of the Kurdistan Democratic Party (KDP) (Sirwan Barzani is not shown as a director possibly because he has had an active parallel role in the Kurdish military). The company initially focused on mobile services in Kurdistan, but in 2007 obtained a nationwide operating license and now operates across Iraq.

In November 2009 Korek awarded a contract to Ericsson for the deployment of a billing post-paid system in the country. In September 2011 Korek, which served about 3 million subscribers at that time, said it had contracted Ericsson to upgrade and expand its network to make it ready for 3G and LTE, including the deployment and integration of multi-standard radio base stations, RBS 6000, across the country, and a core network expansion including EPC and mobile packet backbone. 

In March 2011 Orange, in a JV with Agility, a large international logistics and infrastructure investment group, acquired a 44% share of Korek Telecom for a combined $295 million, plus about $285 million in loans. Through this JV Orange held an indirect 20.24% and Agility the remaining 24% in Korek, while the remaining 56% majority stake was held by CS Limited, an SPV reportedly owned by the four Kurdish businessmen who founded the company. Reportedly, Orange also acquired an option to increase its indirect stake in Korek to 27% in order to gain indirect control of the company.

In July 2012 Korek signed a three year managed services agreement with Ericsson to provide field maintenance services including day-to-day services for Korek’s network in Baghdad. In April 2013 Korek hired Ericsson to deploy a new convergent charging and billing system designed to provide subscribers with greater personalisation, control and quality of service. In July 2013 Korek selected Nokia (NSN) to deploy advanced radio, microwave transmission and packet core network elements and to expand its 2G network in southern Iraq. The operator also renewed its care and managed services contract with Nokia.

In February 2015 it was announced that Korek Telecom had chosen Ericsson to provide a spare parts management service, designed to deliver a higher standard of network performance to subscribers which would cover operations of warehouse storage in Erbil and Baghdad, as well as logistics such as transporting parts between Ericsson's global replacement warehouse to different delivery points across Iraq.

In March 2015 Korek announced at MWC that it had chosen Ericsson's Telecom CRM system to automate its sales, marketing and customer care processes, which would include the consolidation of user data and the capability to expose user data in real time through the system's User Profile Gateway. In October 2016 Ericsson announced it was helping Korek prepare for a predicted strong growth in traffic as well as for the implementation of LTE by transforming and expanding its WCDMA core network for greater capacity and scalability with new SGSN and GGSN platforms from Ericsson.

Other developments affecting the company

Asiacell and Zain Iraq execute successful IPOs of 25% of their equity

According to the terms of their 2007 national licences all three operators were required to offer 25% of their equity to the public through IPOs and in 2012 it was reported that all three companies were being fined for not having done so. In February 2013 Asiacell, majority owned by Qatar's Ooredoo, raised $1.24 billion through its 25% IPO. In June 2015 Zain Iraq listed on the Iraq Stock Exchange as Al Khatem Telecom. At the end of its first day of trading its market capitalisation was $9.4 billion, which added almost 50% to the exchange’s total value. Korek Telecom has made several moves towards an IPO in the past but has not yet gone ahead with one.

Korek litigation against Zain Iraq

In May 2014 the National reported that Zain Iraq was being sued for $4.5bn by Korek Telecom, which claimed that Zain's acquisition of the mobile operator Iraqna in 2007 had stopped Korek from buying the unit, resulting in huge losses.

Possible approval of a 4th Iraqi mobile operator

At the end of 2015 the Iraqi regulator, the Communication and Media Commission, called for expressions of interest regarding a 4th mobile license. However, as of early 2017 no decision had been made on that issue.

Agility reported to be claiming confiscation of its Korek stake

On February 10, 2017 Capacity Magazine, a specialised source, reported that Agility, a global logistics company based in Kuwait, had filed a complaint with the World Bank’s International Centre for Settlement of Investment Disputes, claiming that the government of Iraq had 'indirectly confiscated' its 54% stake in Korek, worth $380 million . However, it said that so far it had been unable to ascertain what the fundamental reason was for the complaint.

Summary


As of January 2016 Korek Telecom was reported to employ about 2,500 people, to have deployed 3,500 towers and to be serving 7 million subscribers, giving it just over 20% of an estimated national Iraqi subscriptions base of about 34 million and showing a roughly doubled market share since 2011. In competing with Asiacell Iraq and Zain Iraq Korek's revenue may be somewhere in the range $500-$1,000 million and some estimates have suggested it is worth around $2 billion. Korek has some advantages, i.e. a relatively secure base in Kurdistan, where it has been reported to have a 70% share, and a good relationship with the local government, which now has an assured income from its 17% share of national oil revenue. Through further market share gains, Iraqi national growth, diversification into markets like banking and social stabilisation, as well as the lack of fixed infrastructure in Iraq, it is possible that Korek could double in size in the next five years. However, in January 2015 Orange CEO Stephane Richard, reviewing some of Orange's investments, said that although Korek Telecom was performing well it was very unlikely that the group would increase its involvement and exposure in Iraq.

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