Having long concentrated on Europe and Latin America, Spain-based operator Telefonica has turned its sights to the Middle East by signing a partnership agreement with UAE-based Etisalat. This could be a springboard into the region, writes Andrew Eatwell.

The deal, which will allow both companies to collaborate on a range of strategic areas, should foster a mutually beneficial relationship with neither partner stepping on the other’s toes, analysts said.

Telefonica, with revenues of €61 billion, serves 290 million customers in 25 markets throughout Europe and Latin America, whereas Etisalat, with revenues of €5.9 billion, serves 135 million customers in 18 countries throughout Africa, Asia and the Middle East.

“This is a logical tie-up with benefits for both companies … it gives Telefonica a foothold in markets where it currently has no presence,” says Javier Borrachero, an analyst at Kepler Capital Markets in Madrid.

The agreement covers collaboration on technological standardisation, new global technology initiatives, R&D, and new emerging products and services designed to capture digital growth opportunities such as M2M, financial services or cloud-based services. They will also jointly work on international capacity and wholesale services as well as benefitting from economies of scale on equipment purchases and other costs.

Being able to better serve multinational customers by using Etisalat’s networks and services in countries where Telefonica currently has no presence is probably the biggest benefit for the Spanish group, combined with the possible sale of technology, services and know-how.

“This isn’t going to dramatically change Telefonica’s balance sheet, but every little helps particularly when it is struggling so much in Spain,” Borrachero notes.

Telefonica announced last week that revenues in Spain dropped by 6.1 percent over the first half of the year to €8.75 billion, offset by a 5.6 percent increase in organic revenues in Latin America to €14.1 billion. Overall net profit for the second quarter fell 27 percent year-on-year to €1.54 billion.

On the other hand, Etisalat stands to gain from Telefonica’s marketing expertise at a time when the Middle Eastern operator is struggling to compete with domestic rival du. Etisalat reported a 15 percent decline in net income for the second quarter amid rising operating costs and a decline in subscribers.

du’s recent strong gains in customer share have undoubtedly been helped by a partnership deal it signed with Vodafone two years ago.

The agreement gave du exclusive access to Vodafone’s range of products, devices and services in the UAE and enabled it to draw on Vodafone’s experience in supply chain management, technology development, the acquisition of enterprise customers from multinational companies and improved inter-working between networks.

“We are seeing a lot of these deals and will probably see more. European markets are very mature and the big European operators need to look elsewhere to generate new revenue streams,” Borrachero notes.

In 2008, Etisalat signed a similar agreement covering technology and marketing collaboration with France Telecom.

“A few years ago there was a lot of direct investment … now you’re seeing more collaboration than mergers, partly because of the feeling that making small investments – 30 percent here, 40 percent there - is an unfocused approach from a shareholder’s perspective; either hold a clear controlling interest or don’t bother. But there are certainly benefits to be had with more collaboration and creating partner markets,” says James Barford at Enders Analysis.

As to whether there is any chance of Telefonica buying Etisalat outright, analysts remain sceptical: “I don’t think they’re thinking about buying Etisalat at the moment but in the future, who knows?” concludes Borrachero.