Sunday, Mar 03, 2013

(This article was first published on Thursday)

By Rory Jones

DUBAI (Zawya Dow Jones)--Abu Dhabi's Etisalat and Dubai's Du are locked in negotiations with the United Arab Emirates Ministry of Finance over the details of their royalty payments, analysts say, as the two telcos attempt to save billions of dirhams in fees to the government.

The two telecoms operators are in talks with the Ministry of Finance about the types of revenues that would come under the new royalty scheme introduced on both net profits and revenues in December last year.

Already, the telcos have saved about 12% in fees payable to the government on last year's revenues after negotiating that some low margin businesses, such as interconnection between operator networks, are not included in the revenue element of the royalty payment, analysts say.

"They are debating what further could be reduced," said Nishit Lakhotia, analyst at Bahrain's Sico.

The telcos are seeking to exclude revenues on handset devices sold as bundle packages to entice customers into a post-paid contract from the royalty plan as they make very little profit on the sale of devices. "Currently they have to pay royalty on devices and there's no margin on that business," Mr. Lakhotia said.

Du and Etisalat do not break out what percentage of their revenues is made from sales of handset devices in bundle offers, but analysts say it is a significant percentage--up to 10%--which if discounted from the royalty rate, would save Du and Etisalat billions in fees to the government.

"I would say it's interesting for both telecom companies because it's a sizable amount of revenues," said Petr Molik, group chief financial officer and head of financial advisory at Menacorp Finance.

Moves by the Ministry of Finance to apply the royalty rate to revenues on handsets sold in bundles might encourage the telcos to stop offering bundled deals and sell the phones separately, disadvantaging consumers, analysts added. Devices sold separately are not subject to the revenue royalty, they said.

Analysts expect full clarity on the royalties by the end of the first half.

Etisalat, which is present in 15 countries, posted revenues of 32.9 billion dirhams ($8.96 billion) last year, while Du reported revenues of AED10.1 billion. Etisalat said it paid AED6.4 billion in royalty, while Du paid AED844 million, but was allowed deductions of more than AED1.2 billion, according to Mr. Lakhotia.

Du confirmed it was still in negotiations with the Ministry of Finance. Etisalat declined to comment, but said in a published analyst presentation that it was still in negotiations. The Ministry of Finance declined to comment.

The Ministry of Finance announced a new set of royalty rates in December for both telcos for the five years until 2016, without disclosing the details of how the new rates would be applied.

The royalty level paid by Du has been consistently lower than Etisalat since it broke the number one player's monopoly in 2007 and the new structure announced will see the two companies' rates converge by 2016.

In the December announcement, the Ministry of Finance said Du would pay 5% of revenues and 17.5% of net profit earned from its U.A.E. operations in 2012. Du will pay 7.5% of revenues and 20% of net profit in 2013; 10% and 25% in 2014; and 12.5% and 30% in 2015, respectively, the statement added.

Meanwhile, Etisalat will pay out 15% of its revenues to the government and 35% of net profit in 2012, the statement said. The royalty fee will not be applicable to Etisalat's operations overseas, the statement added, unless the tax levied by an overseas country is less than the fee imposed by the U.A.E. In this instance, the difference in the overseas tax rate and the local royalty fee will be paid by Etisalat to the U.A.E. government.

Write to Rory Jones at rory.jones@dowjones.com

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03-03-13 0341GMT