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December 2009
The Delta Perspective
Growth through strategic
alliances has become more
relevant in the current
environment; successul
alliance has the potential
to achieve 1-4% revenue
increase, 4-6% OPEX
reduction and 5-9% CAPEX
optimization
Strategic Alliances in Emerging
Markets Auors Fd Mmbrra PartnerZdnk Ncas ManagerSon Gos Senior Researcher
Introduction
The irst wave o rapid expansion o
telecom operators in Western Europe
happened during the 1990s ollowing
industry liberalization. An industry
dominated by national monopolies
was suddenly open to other players
with access to technology and
unding. Debt was available to
support expansion programs uelling
greenield appetite ollowed by
regional consolidation. Ater the initial
expansion phase, operators started
to look at emerging markets (e.g.
Orange, Telenica or Vodaone are
clear examples o this). Again the
process ollowed was quite similar,
strong leverage on debt to und
acquisitions, Greenields or buying
regional players. Some players in
emerging markets, took a very similar
route, irst consolidating in operators
in the most immediate areas o
inluence ollowed by an aggressive
international expansion (Etisalat, Zain
or Qtel are good examples o players
that took this route).
Key hiGhliGhtS
Growth through strategic alliances
has become more relevant in
the current environment sinceprices are more attractive than
those 18 months ago, and debtis less available to und M&A and
Greeneld rollouts.
Value generated by strategicalliances can be substantial. Delta
Partners estimates that in successulstrategic alliances there is potential
to achieve 1-4% revenue increase,4-6% OPEX reduction and 5-9%
CAPEX optimization.
Strategic alliances, i properlyimplemented, can be an eectivetool to gain access to new markets
with limited cash commitment,
whilst generating a positive impacton revenues and relevant cost
optimization opportunities.
The sustainability and eventualsuccess o an alliance dependslargely on the commitment and
incentives o the parties involved.Clear indications include type o
resources assigned, empowerment
received by top management,governance model to guide the
alliances development, and nancialcommitment.
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Strategic alliances are not an entirely
new phenomenon. Their evolution
has ranged rom straightorward
collaborations aimed at adopting
best practices to create competitive
Today, in the scenario o shortage
o debt, growth through strategic
alliance oers a real alternative to
other orms o non-organic growth.
The purpose o this paper is toanalyze the opportunities or strategic
alliances under various market
scenarios, establish the beneits
presented by them, understand the
importance o selecting the right
partner, discuss applicable governance
models and outline key success actors
or a value creating collaboration.
Defnition o StrategicAlliances
A strategic alliance is the combined eort o twoor more entities, through establishment o a ormal
relationship to pursue a common goal. The objective
o both parties is to meet critical business needs
while maintaining their independent identities and
the alliance product. The rationale o such mutual
eorts is based on the belie that the sum is greater
than its parts.
advantage, all the way through to
strengthening an operators position
by leveraging economies o scale. At
the turn o the century, as additional
markets became accessible ollowing
EXHIBIT 1: FORMS OF COLLABORATION CONTRACTS AND CAPITAL
Source: Delta Partners Analysis
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EXHIBIT 2: ALLIANCE CLASSIFICATION INVOLVEMENT VERSUS OWNERSHIP
Source: Delta Partners Analysis
the liberalization process, operators
began to increasingly seek cross-
border alliance opportunities.
As outlined in Exhibit 1, collaborations
amongst two entities can take the
orm o contractual agreements
or minority stakes. In the event o
non-equity contracts, we consider a
partnership a strategic alliance when
cooperation is established in several
key areas, such as marketing, Product
and Services (P&S) development,
consolidation o purchasing power, or
the exchange o best practices. At the
other end o the spectrum, non-equity
agreements are simple sales contracts
limited in time and scope, lacking any
strategic intent.
With regards to equity agreements,
the key dierence between M&As
and strategic alliances is the level o
equity involved. In the event o an
M&A transaction, a controlling or
majority stake is acquired and oten
one or more entities involved cease
to exist. Strategic alliances typically
involve minority stake investments or
collaboration based on joint venture
with equal equity participation and
the creation o a new entity.
Another consideration when
classiying strategic alliances is
the level o involvement o each
o the partners. Typically, strategic
partnerships based on management
contracts will be characterized by a
high degree o involvement without
requiring any signiicant investments.
Collaboration in speciic unctional
areas such as R&D will require less
involvement with higher capital
contributions rom partners as
shown in Exhibit 2. In both cases, a
path to ull M&A transaction may
become apparent as the partnership
progresses.
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Airline Industry Pioneering AllianceNetworksOne o the pioneering industries o
strategic alliances has been the airline
industry. The inherent competitiveness
o the industry along with chronically
low margins orced players to explore
co-operative and collaborative options
in the orm o alliances. As illustrated
in Exhibit 3, the aviation sector
witnessed a gradual and progressiveevolution o alliance arrangements,
today boasting some o the most
prominent partnerships. It started with
simple interline arrangements involving
commercial agreements between
individual airlines to handle passengers
traveling on itineraries across multiple
airlines. Later, this evolved into what
began to be known as code share
fights operated by one airline and
jointly marketed as a fight or one ormore other airlines. The success o this
model was based on the premise that it
maintained a competitive market place,
whilst making thin routes easible.
During the last decade, players started
entering into strategic partnerships
and global alliances an approach that
witnessed the increased integration o
capabilities and operations. Noteworthy
amongst them have been three global
airline alliances; Star Alliance, Sky Team
and One World, consolidating some
previous one-to-one partnerships. These
global alliances deliver additional valuethrough clearly dened operating and
decision structures, ensuring consistency
o service and customer experience
across all partners. Airlines that choose
not to or cannot be part o a global
alliance continue to pursue one-to-one
partnerships leaving them with less
nancial upside but greater fexibility in
terms o partner choice and commercial
/ operational models they wish to ollow.
The value derived rom such alliances
ranges rom increased revenues (rom
retaining higher value clientele and
increased occupancy rates) to reduced
expenditures (both OPEX and CAPEX)
through inrastructure sharing and
improved Eciency o Service (EOS),
and knowledge and skills sharing.
Noteworthy is the Air France KLM
alliance ormed in May 2004. Thetransaction was never perceived as an
acquisition o KLM by Air France despite
the 80% premium paid over spot price
and dierence in sizes. The overriding
principle o the combination has been
balance o growth and airness o
derived benets. Focus has remained
on the top line and not cost synergies
allowing appropriate implementation
pace as both Air France and KLM
continue to operate as two separateairlines. Clear governance rules are in
place supported by assurances to the
Dutch state and KLM.
EXHIBIT 3: EVOLUTION OF PARTNERSHIPS IN THE AIRLINE INDUSTRY
Source: Delta Partners Analysis
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purchase o US$1 billion worth o
stock in each other making the Spanish
operator the largest single investor
in the company with 8% o shares.
China Unicom would in turn acquire a
0.9% stake in Telenica, the ormer
Spanish telecoms monopoly, which
owns the European mobile operator
O2 and is the largest mobile operator
in Latin America. The alliance betweenTelenica and China Unicom dates
back to 2005 when Telenica invested
in China Netcom, that was acquired by
China Unicom ater the restructuring
o the Chinese telecom industry. As a
result o this recent development, China
Unicom subsequently repurchased
a 3.8% stake held by SK Telecom.
A separate alliance between China
Unicom and SK Telecom was ormed in
2006 to exploit potential synergies ortheir respective CDMA networks. The
divestment was uelled by the act that
the alliances rational ceased to exist as
China Unicom sold its CDMA network
to China Telecom.
Case: Vodafone-led alliances
Vodaone is an organization that has
traditionally used strategic alliances to
uel its growth. Leveraging its brand and
advanced P&S suite, it allows partneroperators to benet rom its R&D eorts
and brand recognition while in turn
expanding its geographical ootprint and
seamless service to its own customers
with minimal capital investment.
The Vodaone alliance with Telekom
Malaysia, signed in 2006, is a good
example o a successul Vodaone-
led partnership. Vodaone signed a
Partner Network Agreement withTelekom Malaysia covering the three
TM subsidiaries; Celcom (Malaysia), XL
(Indonesia) and Dialog (Sri Lanka). The
Telecom strategic alliances can take
various orms depending on the entities
involved and the overall intent o the
relationship. Market actors such as
penetration, levels o competition and
technological advancement also play a
role in shaping a specic alliance. This
paper ocuses on three key alliance
types between operators.
Opraor Opraor1.Aanc
Alliances involving two independent
operators may include partnerships
between equally sized operators or
between local players teaming up with
bigger, more established international
players. Such alliances involve leading
global or regional operators seeking
growth outside o their existing (otensaturated) markets and smaller players
seeking urther growth in their domestic
markets. By way o their network o
aliates and partners, the global or
regional operator can extend their brand
and value proposition into new markets,
creating global brand recognition and,
entering high growth markets with
minimal investment. The local operator
in turn gains access to an extended suite
o Products & Services (P&S) and anattractive brand. In some cases, global
operators may also oer their partner
urther value through savings in OPEX
and CAPEX.
Case: Telefnica and China Unicom
In September 2009, Telenica and
China Unicom announced a partnership
including cooperation in R&D, roaming,
joint procurement o equipment,
inrastructural development, jointdevelopment o mobile services and the
provision o services to multinational
clients. They also announced the
Scenarios o TelecomStrategic Alliances
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the quality o their customer base whilst
sharing the costs.
Case: Bridge Mobile Alliance
Bridge Mobile Alliance is a business
alliance o eleven major mobile
companies in Asia and Australia.
Members include Singtel (Singapore),
Airtel (India), AIS (Thailand), CSL
(Hong Kong), CTM (Macau), Globe
(Philippines), Maxis (Malaysia), Optus
(Australia), SK Telecom (S. Korea),
Taiwan Mobile (Taiwan) and Telkomsel
(Indonesia). The alliance is built on
seamless service connectivity and a
suite o integrated value-added services
or all alliance members subscribers,
roaming across each others networks.
The alliance acts as a commercial vehicle
in which all the operators jointly invest
to build and establish a regional mobile
inrastructure on a common service
platorm enabling seamless experience
or customers while roaming. The
alliance also serves as a ocal point to
develop new P&S on a regional basis
and creates competitive advantages and
dierentiation or the mobile operators
in their respective markets, wherein the
objective is to be a magnet to attract
leading handset, network equipment
provider, and technology and content
players to establish high value-added
mobile activities.
Aancs bwn3.opraor and non-
opraors
Alliances between operators and other
telecom players have existed in the
past. However, the trend has recently
witnessed an uptake as operators look
at outsourcing some o their traditional
core unctions previously regarded
as key dierentiators. Most common
are alliances between operators and
equipment vendors or the purposes o
planning, deployment and build-outso networks and providing back oce
unctions such as IT, billing and business
intelligence. In the areas o Network
deal allowed the three operators to gain
access to Vodaones international voice
and data roaming services, together
with Vodaones suite o business
solutions. In return, Vodaone extended
its brand and services into high-growth
mobile markets, pursuing a low-risk,
non-equity strategy and provided its
customers with access to preerential
roaming rates.
Another example o a successul non-
equity strategic agreement is the du
and Vodaone alliance ormed in 2009.
The essence o the partnership is to
better meet the needs o their respective
customers in the UAE. The rst phase
o the agreement allowed du, a new
entrant in the UAE market, to gain
access to Vodaones extensive suite o
products, services and devices or the
UAE market. Both Vodaone and du
customers gained preerential roaming
rates on the partners networks. du is
also able to leverage Vodaone Groups
procurement to achieve cost reductions.
During the second phase o the
agreement announced in late October
2009, additional joint initiatives were
explored including mobile broadband
connectivity products, secure remote
mobile access or small business users,
converged email solutions, aster and
exclusive access to new models o
handsets.
Aancs poong 2.
rsourcs o mupopraors
Another proven strategic alliance
scenario is partnership between
multiple operators, both incumbents
and challengers, aimed at providing
customers seamless services and
customer experience across wider
region. Alliance partners may also
collaborate in P&S development
and jointly invest to build a regionalinrastructure. By doing so, operators
are able to attract and retain high value
customers, maintaining or increasing
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pricing modalities are measured by way
o network usage in terms o US$ per
erlang while the recurring payments are
linked to usage and assured quality as
per stipulations in predened SLAs. Inthe IT area, IBM signed a partnership
that would include management o all
o the operators IT unctions wherein
the pay-out to the vendor was a % o
the operators annual revenues. Such
mechanisms ensure a close integration
between operator and vendor stressing
the essence o commitment in
successul alliances.
Case: Celcoms association on mobilecontent
In 2007, Zingmobile and ESPN STAR
Sports announced a partnership
to launch mobileESPN on Celcoms
network in Malaysia. The content
platorm enabled sports ans to access
premium customizable sports content
in the orm o live news coverage,
in-depth match analysis, breaking
news and top stories, allowing
subscribers to get updates and access
their avorite sports. The services were
oered by subscription or as on-
demand download.
and IT, the alliances are urther evolving
towards a managed services model
which, in addition to prior tasks, takes
into account end to end maintenance,
operations and system integration.
Alliances between operators and
content providers are also increasingly
popular with the spread o data
enabled phones and the deployment o
advanced networks.
Case: Bharti Airtels association with
telecom vendors
One o the rst alliances on outsourcing
o core unctions to vendors was
ormed by Indian operator Bharti
Airtel in 2004. The operator stunned
the telecom world when it partnered
with established players such as
Ericsson, Nokia Siemens, IBM, and
six BPOs in multi-million dollar deals
to outsource its network, IT, and call
centre unctionalities. The concept
led to some very innovative business
models o managed capacity and
revenue-sharing. In the network area,
the operator opts or a pay-per-use
model or network capacity usage,
hence avoiding the upront capital
expenditure. The capacity usage and
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EXHIBIT 4: SOURCES OF VALUE FROM STRATEGIC ALLIANCES
Source: Delta Partners Analysis
Value generated bystrategic alliances
Commitment rom the parties
involved: To guarantee an allianceslong term success, partners need
to pursue a common interest which
is most eciently met through the
ormation o an alliance. Synergies
that result in mutual benet is
usually the strongest guarantee o a
successul partnership.
Clearly dened roles and
responsibilities or each party:
The alliances ull potential can
be achieved only when there is
no ambiguity about the roles and
responsibilities within the alliance.
The amount o value creation rom a strategic
alliance depends on the individual circumstances
o each o partnership. Some o the most relevant
elements required to ensure ull potential value
creation are:
Mechanisms need to be in place
allowing or regular tracking o theperormance / results achieved.
Strong governance model: The
rules and processes shaping the
alliance and guaranteeing smooth
decision making need to be clearly
dened rom the beginning o
the partnership. Weak corporate
governance will cause unair
distribution o both eort and
generated value leading to the
erosion o the alliances ull potential
and ultimately to its demise.
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as call centre, distribution and back-
oce can also lead to signicant cost
reductions or both parties. Billing,
payment and collection are common
units considered as shared services.
The value generated by increased
revenues and reduced costs can be
substantial. Delta Partners estimates that
in successul strategic alliances there is
potential to achieve increased revenues
o 1-4%, OPEX reductions o 4-6% and
CAPEX optimization o 5-9%.
EXHIBIT 5: PARTNER SELECTION
Source: Delta Partners Analysis
The sources o value in an alliance can
be two-old, tangible and intangible
depending on i) the type o alliance and
ii) collaborative areas. Exhibit 4 describes
the dierent sources o value generated
by strategic alliances.
Bnf: Rvnu grow
Strategic partnerships drives the
opportunities or new revenue streams.
The magnitude o these opportunities
depends on the partnerships scope and
objectives. The main drivers are:
Access to new markets: Geographic
expansion resulting rom a strategic
alliance allows the operator to expand
their addressable market, delivering
an increased customer base and
revenues.
Access to new products: An alliance
can allow an operator to expand
its P&S portolio, delivering new
oerings such as m-commerce,
navigation services and a range o
additional value-added services,strengthening its value proposition
to deliver improved acquisition and
retention capabilities.
Dierentiation: Additional revenues
rom a strategic alliance do not need
to be linked with a new market or
product, rather rom enhancement
o an operators positioning in
their respective market(s). Brand
enhancement through co-branding
initiatives between a domestic
operator and globally recognized
operator can lead to both acquisition
and retention benets.
Bnf: Dcrasd coss
Strategic alliances are also oten ormed
to achieve signicant reductions o both
OPEX and CAPEX. Key drivers include
asset/inrastructure sharing, resource
sharing, and knowledge transer.
Procurement: Increased economies
o scale through access to vendor
rame agreements can signicantly
reduce procurement costs, especially
in the case o smaller players lacking
sucient volume and scale.
Network: Application o best practice
in such areas as network maintenance
and management can generate
reductions in OPEX, and cooperation
and optimization in network build
(and sharing) can deliver CAPEX
reductions.
Research & Development: Alliance
partners can share nancial and
intellectual capital resources, and
make joint investments to collectively
reap the benets o innovation in
technologies, products & services.
Other areas: Sharing unctions such
EXHIBIT 6: ILLUSTRATIVE EXAMPLE OF A TYPICAL OPERATOR
Source: Delta Partners Analysis
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EXHIBIT 7: PARTNERSHIP GOVERNANCE MODEL
Source: Delta Partners Analysis
Partner Selection &Governance Model
Subsequently, a company screens the
portolio o available partners with
potential to oer the desired assets /
resources. Using clear selection lters
is critical during this phase. Delta
Partners recommends that the ollowing
approach should be employed when
identiying suitable partners:
Once a company sees the value in orming a
strategic alliance, it has to select the right partners
and establish a solid governance model to ensure
transormation o the initial strategic intent into
uture value. When selecting a suitable alliance
partner, a company must rst determine which
assets it seeks and what it can oer in exchange.
Simple supply and demand economics apply here as
shown in Exhibit 5.
Simultaneous negotiations: Lead
several negotiations in parallel in
order to select the most suitable
alliance partner(s).
Top management involvement: The
top management should be involved
in the negotiations in order to provide
credibility and commitment.
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Conclusion
The current economic climate means
that growth through strategic
alliances becomes more relevant or
operators than in times o debt and
equity abundance. For many telecom
players, growing by pooling resources
with other industry participants might
be the only option to achieve their
growth targets together with gaining
other benets such as increased
operational eciency.
Even though the credit markets will
eventually open up and valuations will
recover, Delta Partners expects that
telecom executives will continue to
leverage strategic alliances fexibility,
low risk and eciency as they
continue to expand their ootprint,
P&S portolio and to reduce costs.
The impact and diversity o strategic
alliances, especially in a competitive
sector such as telecoms, will ensure
their longevity and replication across
geographies and along the telecom
value chain.
benets in the alliance arrangement are
ullled. Although the details o every
alliance are unique, there are a common
set o characteristics that guide the
governance model set up:
Decision making: Establish clear
hierarchy o decision making, leaving
no ambiguity in terms o decisions
concerning the alliance.
Results monitoring: Introduce
monitoring o the results achieved to
ensure that the agreed cooperation
delivers the quality standards and
objectives.
Dispute resolution: Dene an eective
dispute resolution mechanismenabling the ecient resolution o
any conficts that may arise during the
existence o the alliance.
The actual governance model set-
up revolves around the scope o
cooperation and the need or ormal
management structure and control.
Simple non-equity agreements will
require a less complex governance
model than partnerships with a high
degree o involvement or investment
as shown in Exhibit 7.
Asset dilution prevention: Do not
orm alliances with partners that have
the potential to dilute the quality o
your core assets such as brand and/or
service level.Competitors: Operators should
avoid orming alliances with direct
competitors and partners that run the
risk o being absorbed by competitors
or players rom other alliances. They
should also avoid developing alliances
with players with overlapping
capabilities and interests. Finally, the
most advanced abilities and expertise
should not be shared unless the risks
o leak can be suciently mitigated.
The biggest hurdle during the initial
negotiations is oten a lack o trust.
Scoping the objective o the alliance
clearly at an early stage and limiting
the inormation sharing to the dened
scope can oten overcome such issues.
Leveraging the clean room approach
with the assistance o third parties can
also prove benecial.
Once agreement to orm a strategic
alliance has been reached, a governance
model has to be established to ensure
that partners expectations o the
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Delta Partnersis the leading management advisory and investment rm specialised in Telecoms, Media and Technology (TMT) in
high growth markets. It has more than 130 proessionals operating across 50 markets in the Middle East, Arica, Eastern Europe and
Emerging Asia. From its oces in Dubai, Johannesburg, Bahrain and Barcelona, Delta Partners provides three highly synergistic services:
Management Advisory, Private Equity and Corporate Finance.
Advisory: Delta Partners advisory proessionals partner with C-Level executives in telecom operators, vendors and other TMT
players to help them address their most challenging strategic issues in a ast-growing and liberalising market environment in over 50
markets.
Private Equity: As a und manager, Delta Partners manages a $80M private equity und, targeting investment opportunities in
the TMT space in high growth markets. The ocus is the Middle East, Arica, Eastern Europe and Emerging Asia. Delta Partners
private equity und leverages the rms unique TMT industry expertise to create value or its investors throughout each stage o the
investment cycle, rom deal sourcing to supporting portolio companies in driving value extraction.
Corporate Finance: Delta Partners provides corporate nance services and has been involved in several buy-side and sell-side
telecom transactions in the region. As true industry specialists, the rm oers a dierentiated value proposition to investors
and industry players in the region. Delta Partners actively leverages its close link to its private equity arm to access the investor
community as well as top-level nancial talent.
Delta Partners delivers tangible results to its clients and investors through an exclusive sector, geographic ocus and its synergistic
business model.
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