Iraq: Analyzing the Mobile Market

After less than two years of operation, substantial infrastructure investments and with bullish expectations for the future, Iraq’s three mobile operators have embraced the recent news that the government will go ahead and terminate their licenses by December 2005. Moreover, the MoC has reaffirmed its pledge to open a fully competitive bidding process in which the incumbents would participate on equal terms with other bidders. Despite the market risk, we believe there will be substantial interest in the licenses, not least from the incumbents who are already producing handsome margins.

The relative success of Iraq’s mobile operators will undoubtedly work to their disadvantage in the bidding process. Iraqna’s 60 percent EBITDA margin for 1Q2005 and the rapid subscriber growth during the first half of 2005 are more than likely to attract bids far beyond the annual license fee paid by each incumbent for the first set of licenses, possibly exceeding US$100m. Following the last 3-4 years licensing spree in the region, few markets now offer additional opportunities, adding to the attraction of Iraq and, arguably, to the price of the upcoming three licenses.

We maintain our view that forecasting is not applicable to Iraq’s mobile market, ultimately because of the political uncertainties which are crucially interlinked with the economic development and the ability to convert Iraq’s vast oil reserves into cash. Our different scenarios cover a wide range of outcomes, sizing Iraq’s mobile market at between US$500m to US$2.5b and a base case scenario of around US$1b. We expect the incumbents to have superior insight to the potential of Iraq’s mobile market, although any bidder would have to take a substantial gamble on Iraq’s political future.

Exhibit: Subscriber Growth Scenarios in Iraq, 2004-2010

Source: Pyramid Research