October 25, 2013
Orange has put its Dominican Republic unit, Orange Dominicana, up for sale, kicking off a bidding process expected to attract a variety of regional players. Our analysis of Orange Dominicana shows a business with solid upside. To understand the potential of the acquisition, three fundamental questions must be answered:
Is the Dominican Republic an attractive market?
In short, yes. The Dominican Republic’s telecommunication market is the largest in the Caribbean: we expect it to generate service revenue of US$2.8bn in 2013. The overall outlook is promising, and revenue should expand at an annual average rate of about 4% over the next five years to reach $3.4bn, primarily because of strong growth in the mobile, fixed broadband and pay-TV segments.
In addition to the above, there are a number of more specific reasons why the Dominican Republic would be a good market to enter:
Mobile communications will account for an estimated 65% of the country’s telecom revenue in 2013 and will generate $2.2bn in 2018. In particular, mobile broadband growth has been strong, and that trend will continue for the next four years: we expect the segment to grow at a CAGR of 7.9% between 2013 and 2018. The mobile market, which will reach a 100% subscription penetration rate in 2015, is already dominated by 3G. Pyramid Research expects that by 2018, 3G will account for 53% of all subscriptions, but 4G subscriptions will ramp up in 2014 and will grow at a CAGR of 165% from 2013 to 2018.
The fixed broadband market is similarly attractive: We expect the segment to grow at a CAGR of 9.7% between 2013 and 2018. Although it will account for only an estimated 10% of the Dominican Republic’s telecommunication market in 2013, it is nevertheless expected to generate $459m in 2018.
The pay-TV market is also an important market: in July 2013, the number of pay-TV subscribers reached 446,368, a 5% increase from July 2012.
Is Orange Dominicana an attractive operation?
At the end of 2012, Orange had 3.2m subscribers in the Dominican Republic, and by September 30, 2013, it had reached 3.3m. This rate of growth is faster than that of the overall market during the 2010-2012 period (Exhibit 1).
Exhibit 1: Dominican Republic and Orange Dominicana mobile subscription totals and growth rates, 2010-2012
Sources: Orange, Pyramid Research
Two players dominate the mobile market: Claro and Orange (see Exhibit 2). Second-place Orange Dominicana had 35% of all mobile subscriptions at year-end 2012.
Exhibit 2: Operator mobile market shares based on subscriptions in the Dominican Republic, year-end 2012
Source: Pyramid Research
Orange Dominicana’s second-place status should put the new owner in a position to grow mobile revenue, and the company can build on its strength in the mobile segment to generate additional revenue from other fast-growing segments through up-selling and cross-selling with a complete service portfolio.
What are the risks involved in an acquisition?
Orange Dominicana does face some challenges in the market. First, its stand-alone mobile operation risks being marginalized as Claro Dominican Republic moves toward multiplay packages.
In addition, the company faces significant pressure from Claro’s challenge of the legality of Orange Dominicana’s LTE operation. Regulator Indotel has imposed a variety of conditions on the commercialization of the LTE services: the company can only offer USB modem devices for wireless Internet access, and only in the five districts in which the company initiated the project. These conditions will remain until the 4G LTE auctions take place.
In the end, Orange Dominicana has a privileged position in an attractive mobile market. Pyramid Research believes, however, that the operator’s limited presence in markets other than mobile services (fixed telephony, fixed Internet and pay-TV) creates a strategic gap for the new owner. To improve Orange Dominicana’s performance, the buyer will need to rapidly bulk up its presence in other segments through acquisitions or alliances.
— Daniel Ramos, Senior Consultant
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