E&’s big bold bet on tech

First published on Termsheet, a newsletter with commentary on startups and venture capital in emerging markets by Zubair Naeem Paracha. 

Careem’s Super App spinout had been in the works for over 18 months at least. The company reportedly held talks with different investors in the UAE & Saudi and finally announced a $400 million deal with E& (formerly Etisalat Group) earlier this month. As a result of the deal, E& acquired a 50.03 percent stake in Careem’s Super App business. It is a very interesting development for different reasons.

a) The ability of Careem’s founders and leadership to pull this off.
b) The complex structure of the post-deal company.
c) The absence of Saudis.
d) Giving up the majority.
e) The investor.

I’d love to discuss a and b in detail at some point but today’s issue is about e. E& to be precise. A global technology and investment group, as they call themselves.

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Formerly known as Etisalat Group, the company is primarily recognized as the owner and operator of UAE’s first and largest telecommunications company, Etisalat. In February 2022, it rebranded as E&, possibly to reflect its diversified portfolio of businesses. The ‘E’ in the name stands for Etisalat, while the word ‘and’ apparently refers to everything else that the company owns and operates.

E& started its operations in 1976, initially focusing solely on the United Arab Emirates (UAE) for 28 years. In 2004, they expanded regionally after winning the second license to establish a mobile operator in Saudi Arabia.

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Prior to this, the telecom sector in Saudi Arabia was monopolized by STC (also known as Saudi Telecom). Etisalat’s Saudi unit, Mobily, in which they own a 27.99 percent stake, made mobile phone services more accessible. Before Mobily’s entry, as is typical in monopolies, the prices for mobile services in the Kingdom were excessively high.

Since its entry in Saudi, Etisalat has grown its presence to 16 markets, serving over 150 million subscribers in the Middle East, Asia, and Africa.

It is currently the largest private shareholder (and has management control) in the second largest mobile operator in Saudi, third largest in Egypt, fourth largest in Pakistan (could become second largest with another Pakistan acquisition very soon), and the largest in Morocco.

(In Pakistan it also owns the largest fixed-line network of the country: PTCL).

In addition to these markets, E& has presence in 11 African and Asian countries – with stakes ranging from 27 percent to 100 percent in different telecom companies. The African companies are part of Maroc Telecom Group, in which it owns a 53 percent stake. It is also the single largest shareholder in Vodafone Group with a 14 percent stake in the British firm. It first acquired a 9.8 percent stake in May 2022 by paying $4.4 billion and then kept buying more shares to take its shareholding to 14 percent.

The Emirati telecom company has done a bit of both – acquisition of companies and building from scratch by bidding and winning mobile licenses in different markets. In Saudi and Egypt, it entered by winning licenses, and in Pakistan and Morocco, it acquired local telecom players. And both these strategies have seemingly done well.

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Throughout its 45-plus years of existence, E& has undergone various evolutions. In the first three decades, the company focused exclusively on expanding its services within the United Arab Emirates. In the subsequent phase, the Abu Dhabi-headquartered firm expanded its presence across the Middle East, Asia, and Africa by starting or acquiring telecom companies in different markets. Starting from 2015, the company shifted its focus towards developing digital products in-house. While continuing this approach, E& has also begun acquiring large stakes in technology companies to further expand its digital footprint over the last 24 months.

(It obviously never stopped investing in growing and expanding the network of its telecom services at any point but started diversifying its efforts to also offer digital services to consumers in the markets it serves. Even today, E& continues to expand its telecom services, as evidenced by its offer to increase its stake in Mobily to 50 percent in 2022, and its interest in acquiring another mobile operator in Pakistan.)

Here’s a note from its 2022 annual report.

“E& continued its journey ‘from Telco to Techco’ in 2022, following the adoption of a new 2030 strategy and the implementation of a new operating model to underpin it. The strong ambition to become a leading global technology company of choice, with standout digital products and services, provides very attractive opportunities for growth that come with significant risks that must be proactively identified and effectively mitigated.”

I am not sure if the shift from building in-house to M&A was a result of the apparent failure of its own products to achieve the scale it had hoped for but it is obvious that the company has been gradually moving away from building in-house.

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A quick scan of reviews on the E& Money mobile app (a mobile wallet by E&), previously known as Ewallet, suggests that the product has failed many users. There are multiple reviews from users complaining that their transfers were unsuccessful and the money had been deducted from their wallets. Some users transferred money from their bank accounts to E& Money, but it never arrived.

To be fair to E&, it is obviously very normal for any mobile app to have critical reviews. But some of the issues being pointed out in the reviews of E& Money are basically the bare minimum a mobile wallet is supposed to do, and it is failing at that. We’re not talking about whistles and bells here.

Here’s one review from E& Money’s PlayStore listing, to give you an idea of what I am talking about.

“Worst application & worst support. Not recommended at all. Added money Dhs. 440 using this app on 08th March. But not reflected in my wallet. I contacted customer service they told [me] it will reflect within 72 Hrs. After 3 days I contact customer service again through call and chat service they told me to approach my bank branch to reverse the transaction. Finally, I approach my bank to recall the transfer and there will be charges for that. Better to use money exchanges to send money home.”

Surprisingly, the rating of the iOS App is 4.7 out of 5 – from 5,000 reviews. On PlayStore, it is 3.7 out of 5 from close to 7,000 reviews.

Telecom companies are generally legacy players that are generally proficient at building telecom infrastructure and offering telecom services to both businesses and consumers. However, they rarely have the ability to build digital products at scale. That’s for builders.

Paul Graham very recently tweeted something that explains this really well.

A pattern I’ve noticed: things with the word “innovation” in their name tend to have little effect. Innovation doesn’t happen by seeking innovation. It happens by trying to build or improve some specific thing. That’s why bureaucrats and politicians, much as they’d love to, can’t make innovation happen. They’re not builders. If you’re not a builder and you want to make innovation happen, the best thing you can do is probably just to get out of the builders’ way. Only when you’ve mastered that level of “fostering innovation” should you try more active measures.

E& apparently realized this and made a change in its strategy to use the money sitting in its bank accounts for making strategic acquisitions. The strategy also helps the company accelerate its roadmap.

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The timing makes a lot of sense, as valuations have significantly decreased over the last twelve months due to the funding crunch. As a result, many startups could run out of cash in the next 12-24 months. Instead of disappearing completely, some of them may end up becoming part of E& through fire sales or other means.

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Here’s a list of all tech companies E& has acquired or invested in, in the last eighteen months.

The acquisition of majority stakes in Careem and Starzplay makes a lot of sense as there are possibly many synergies between them and E&. However, it is one thing to have these synergies, and another to turn them into something meaningful. We’ll probably have to wait at least a few years to see how it plays out.

(Another potential acquisition that would make sense is a regional music streaming player.)

And as mentioned earlier, the current market favors E& as startups are likely to face challenges in raising funds over the next two years. This gives E& an advantageous position to negotiate terms, particularly when acquiring 100 percent stakes in companies.

Even looking at the two full acquisitions E& has made already, ServiceMarket and ElGrocer, both seem to be decent deals for the company at $22 million and $10 million, respectively. ServiceMarket had previously raised at least $8 million in disclosed financing, which includes $4 million from its last investment round in September 2018. ElGrocer had raised slightly over $500,000 in a crowd equity round in 2017 and $2 million in a Safe Note, as noted in one of E&’s filings.

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It will be interesting to see how E& is able to retain the founders of companies it acquires fully, such as ElGrocer and ServiceMarket, beyond their earnout periods. Retaining these founders could be the deciding factor for the success or failure of the acquisitions, as these companies are more likely to succeed under the leadership of their founders rather than someone else.

E& is not running a private equity firm that has the expertise to make these companies work without the founders. It may get there at some point but that’s not the case today.

Nor is it a Delivery Hero that has built a playbook for M&As over the last ten years and can replicate it easily to acquire companies and then install new CEOs and leadership teams if the founders don’t stay – and still do exceptionally well.

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E&’s interest to acquire startups in the region is a positive development for the local ecosystem, as it offers startups a new avenue for exit or growth capital.

Traditionally, the majority of exits in the region have come from acquisitions by international players seeking to enter or expand in our markets. While SPACs briefly emerged as a reliable option, we have seen how that landscape has rapidly shifted in the past year. Although we hope to witness more local IPOs in the coming years, in cases where that may not be feasible, corporates like E& can step in and help fill the gap.

E&’s growing interest in M&A may also influence other corporates in the region to reevaluate the notion that they must always build digital products themselves. As a result, we may see more companies diverting their capital towards M&A activity in the region.

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In addition to making large investments and acquisitions, E& has also launched a corporate venture capital fund, E& Capital, to invest in early-stage technology startups. The $250 million fund has already made a few investments including three which it has disclosed. Two of those three are MENA-based startups and are listed in the chart above.

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All the major telecom companies in the Middle East & North Africa have tried to become technology players by offering various digital services. However, E&’s latest strategy of acquiring majority or full stakes in established technology startups or companies is relatively novel in the region. We haven’t seen anything like this previously. Not at this scale at least.

Most mobile operators have primarily focused on developing their own digital products, but this approach has not been very successful. STC Pay is a rare example that comes to mind, which was developed by a telecom company and has performed exceptionally well. However, even STC Pay was created as an independent subsidiary and has subsequently attracted external investment from Western Union.

Some telecom companies have also attempted to invest in startups and, in some cases, venture capital funds. However, despite claims that these investments are strategic, this is rarely the case. It’s hard to understand why a leading telecom company in the region would choose to invest its money in a mobility startup, for example, and label it as a strategic investment.

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I’d like to highlight some parallels between Jio and E&’s tech ambitions. But before I do that, it is important to note that E& is no Jio. There are many differences between the two companies.

Launched just seven years ago, Jio has grown to become the largest mobile operator in one of the largest markets of the world with over 420 million subscribers and a 38 percent market share.

Reliance, the Indian conglomerate that owns Jio, invested billions of dollars in setting up the infrastructure before launching the company. It then offered free voice calls and incredibly affordable, fast, and reliable internet to attract subscribers from other networks.

Through this strategy, Jio was able to democratize internet access for hundreds of millions of Indians, bringing many of them online for the first time and bridging the digital divide in the South Asian nation.

Jio’s efforts also led to an acceleration in the growth of the Indian startup ecosystem, as the cheaper and faster internet created a larger audience for Indian startups to offer their services to.

No other telecom company in the world comes close to what the Reliance-owned firm has achieved in such a short time. Definitely not E&.

But both these companies are trying to find ways to keep their subscribers engaged with digital services – which will ultimately result in higher ARPU (average revenue per user). Jio has done a much better job in building digital products in-house but it has also spent hundreds of millions of dollars on shopping tech startups and companies where it needed help. And that’s what we’re seeing from E&.

On the surface, it looks like a promising strategy but only time will tell if the tech ambitions of these companies bear fruit.

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