The Delta Perspective
December 2009
Strategic Alliances in Emerging
Markets
Authors
Growth through strategic
alliances has become more
relevant in the current
environment; successful
alliance has the potential
to achieve 1-4% revenue
increase, 4-6% OPEX
reduction and 5-9% CAPEX
optimization
Introduction
The first wave of rapid expansion of
telecom operators in Western Europe
happened during the 1990s following
industry liberalization. An industry
dominated by national monopolies
was suddenly open to other players
with access to technology and
funding. Debt was available to
support expansion programs fuelling
greenfield appetite followed by
regional consolidation. After the initial
expansion phase, operators started
to look at emerging markets (e.g.
Orange, Telefónica or Vodafone are
clear examples of this). Again the
process followed was quite similar,
strong leverage on debt to fund
acquisitions, Greenfields or buying
regional players. Some players in
emerging markets, took a very similar
route, first consolidating in operators
in the most immediate areas of
influence followed by an aggressive
international expansion (Etisalat, Zain
or Qtel are good examples of players
that took this route).
Fede Membrillera – Partner
Zdenek Necas – Manager
Shohinee Ghosh – Senior Researcher
Key highlights
• Growth through strategic alliances
has become more relevant in
the current environment since
prices are more attractive than
those 18 months ago, and debt
is less available to fund M&A and
Greenfield rollouts.
• Value generated by strategic
alliances can be substantial. Delta
Partners estimates that in successful
strategic alliances there is potential
to achieve 1-4% revenue increase,
4-6% OPEX reduction and 5-9%
CAPEX optimization.
• Strategic alliances, if properly
implemented, can be an effective
tool to gain access to new markets
with limited cash commitment,
whilst generating a positive impact
on revenues and relevant cost
optimization opportunities.
• The sustainability and eventual
success of an alliance depends
largely on the commitment and
incentives of the parties involved.
Clear indications include type of
resources assigned, empowerment
received by top management,
governance model to guide the
alliance’s development, and financial
commitment.
 Today, in the scenario of shortage
of debt, growth through strategic
alliance offers a real alternative to
other forms of non-organic growth.
The purpose of this paper is to
analyze the opportunities for strategic
alliances under various market
scenarios, establish the benefits
presented by them, understand the
importance of selecting the right
partner, discuss applicable governance
models and outline key success factors
for a value creating collaboration.

Definition of Strategic
Alliances
A strategic alliance is the combined effort of two
or more entities, through establishment of a formal
relationship to pursue a common goal. The objective
of both parties is to meet critical business needs
while maintaining their independent identities and
the alliance product. The rationale of such mutual
efforts is based on the belief that the sum is greater
than its parts.

Strategic alliances are not an entirely
new phenomenon. Their evolution
has ranged from straightforward
collaborations aimed at adopting
best practices to create competitive
advantage, all the way through to
strengthening an operator’s position
by leveraging economies of scale. At
the turn of the century, as additional
markets became accessible following

EXHIBIT 1: FORMS OF COLLABORATION – CONTRACTS AND CAPITAL

Source: Delta Partners Analysis

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 the liberalization process, operators
began to increasingly seek cross-
border alliance opportunities.
As outlined in Exhibit 1, collaborations
amongst two entities can take the
form of contractual agreements
or minority stakes. In the event of
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 of purchasing power, or
the exchange of best practices. At the
other end of 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 difference between M&As
and strategic alliances is the level of
equity involved. In the event of an
M&A transaction, a controlling or
EXHIBIT 2: ALLIANCE CLASSIFICATION – INVOLVEMENT VERSUS OWNERSHIP
Source: Delta Partners Analysis
majority stake is acquired and often
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 of a new entity.
Another consideration when
classifying strategic alliances is
the level of involvement of each
of the partners. Typically, strategic
partnerships based on management
contracts will be characterized by a
high degree of involvement without
requiring any significant investments.
Collaboration in specific functional
areas such as R&D will require less
involvement with higher capital
contributions from partners as
shown in Exhibit 2. In both cases, a
path to full M&A transaction may
become apparent as the partnership
progresses.
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 Airline Industry –
Pioneering Alliance
Networks
One of the pioneering industries of
strategic alliances has been the airline
industry. The inherent competitiveness
of the industry along with chronically
low margins forced players to explore
co-operative and collaborative options
in the form of alliances. As illustrated
in Exhibit 3, the aviation sector
witnessed a gradual and progressive
evolution of alliance arrangements,
today boasting some of 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 –
flights operated by one airline and
jointly marketed as a flight for one or
more other airlines. The success of this
model was based on the premise that it
maintained a competitive market place,
whilst making thin routes feasible.
During the last decade, players started
EXHIBIT 3: EVOLUTION OF PARTNERSHIPS IN THE AIRLINE INDUSTRY
Source: Delta Partners Analysis
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entering into strategic partnerships
and global alliances – an approach that
witnessed the increased integration of
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 value
through clearly defined operating and
decision structures, ensuring consistency
of service and customer experience
across all partners. Airlines that choose
not to or cannot be part of a global
alliance continue to pursue one-to-one
partnerships leaving them with less
financial upside but greater flexibility in
terms of partner choice and commercial
/ operational models they wish to follow.
The value derived from such alliances
ranges from increased revenues (from
retaining higher value clientele and
increased occupancy rates) to reduced
expenditures (both OPEX and CAPEX)
through infrastructure sharing and
improved Efficiency of Service (EOS),
and knowledge and skills sharing.
Noteworthy is the Air France KLM
alliance formed in May 2004. The
transaction was never perceived as an
acquisition of KLM by Air France despite
the 80% premium paid over spot price
and difference in sizes. The overriding
principle of the combination has been
balance of growth and fairness of
derived benefits. 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 separate
airlines. Clear governance rules are in
place supported by assurances to the
Dutch state and KLM.
Scenarios of Telecom
Strategic Alliances
Telecom strategic alliances can take
various forms depending on the entities
involved and the overall intent of the
relationship. Market factors such as
penetration, levels of competition and
technological advancement also play a
role in shaping a specific alliance. This
paper focuses on three key alliance
types between operators.
1. Operator – Operator
Alliance
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 of their existing (often
saturated) markets and smaller players
seeking further growth in their domestic
markets. By way of their network of
affiliates 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
of Products & Services (P&S) and an
attractive brand. In some cases, global
operators may also offer their partner
further value through savings in OPEX
and CAPEX.
Case: Telefónica and China Unicom
In September 2009, Telefónica and
China Unicom announced a partnership
including cooperation in R&D, roaming,
joint procurement of equipment,
infrastructural development, joint
development of mobile services and the
provision of services to multinational
clients. They also announced the
purchase of US$1 billion worth of
stock in each other making the Spanish
operator the largest single investor
in the company with 8% of shares.
China Unicom would in turn acquire a
0.9% stake in Telefónica, the former
Spanish telecoms monopoly, which
owns the European mobile operator
O2 and is the largest mobile operator
in Latin America. The alliance between
Telefónica and China Unicom dates
back to 2005 when Telefónica invested
in China Netcom, that was acquired by
China Unicom after the restructuring
of the Chinese telecom industry. As a
result of 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 formed in
2006 to exploit potential synergies for
their respective CDMA networks. The
divestment was fuelled by the fact that
the alliance’s rational ceased to exist as
China Unicom sold its CDMA network
to China Telecom.
Case: Vodafone-led alliances
Vodafone is an organization that has
traditionally used strategic alliances to
fuel its growth. Leveraging its brand and
advanced P&S suite, it allows partner
operators to benefit from its R&D efforts
and brand recognition while in turn
expanding its geographical footprint and
seamless service to its own customers
with minimal capital investment.
The Vodafone alliance with Telekom
Malaysia, signed in 2006, is a good
example of a successful Vodafone-
led partnership. Vodafone signed a
Partner Network Agreement with
Telekom Malaysia covering the three
TM subsidiaries; Celcom (Malaysia), XL
(Indonesia) and Dialog (Sri Lanka). The
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 deal allowed the three operators to gain
access to Vodafone’s international voice
and data roaming services, together
with Vodafone’s suite of business
solutions. In return, Vodafone extended
its brand and services into high-growth
mobile markets, pursuing a low-risk,
non-equity strategy and provided its
customers with access to preferential
roaming rates.
Another example of a successful non-
equity strategic agreement is the du
and Vodafone alliance formed in 2009.
The essence of the partnership is to
better meet the needs of their respective
customers in the UAE. The first phase
of the agreement allowed du, a new
entrant in the UAE market, to gain
access to Vodafone’s extensive suite of
products, services and devices for the
UAE market. Both Vodafone and du
customers gained preferential roaming
rates on the partners’ networks. du is
also able to leverage Vodafone Group’s
procurement to achieve cost reductions.
During the second phase of the
agreement announced in late October
2009, additional joint initiatives were
explored including mobile broadband
connectivity products, secure remote
mobile access for small business users,
converged email solutions, faster and
exclusive access to new models of
handsets.
2. Alliances pooling the
resources of multiple
operators
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 regional
infrastructure. By doing so, operators
are able to attract and retain high value
customers, maintaining or increasing
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the quality of their customer base whilst
sharing the costs.
Case: Bridge Mobile Alliance
Bridge Mobile Alliance is a business
alliance of 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 of integrated value-added services
for all alliance members’ subscribers,
roaming across each other’s networks.
The alliance acts as a commercial vehicle
in which all the operators jointly invest
to build and establish a regional mobile
infrastructure on a common service
platform enabling seamless experience
for customers while roaming. The
alliance also serves as a focal point to
develop new P&S on a regional basis
and creates competitive advantages and
differentiation for 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.
3. Alliances between
operator and non-
operators
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 of their traditional
core functions previously regarded
as key differentiators. Most common
are alliances between operators and
equipment vendors for the purposes of
planning, deployment and build-outs
of networks and providing back office
functions such as IT, billing and business
intelligence. In the areas of Network
and IT, the alliances are further 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 of data
enabled phones and the deployment of
advanced networks.
Case: Bharti Airtel’s association with
telecom vendors
One of the first alliances on outsourcing
of core functions to vendors was
formed 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 functionalities. The concept
led to some very innovative business
models of ‘managed capacity’ and
‘revenue-sharing’. In the network area,
the operator opts for a ‘pay-per-use’
model for network capacity usage,
hence avoiding the upfront capital
expenditure. The capacity usage and
pricing modalities are measured by way
of network usage in terms of US$ per
erlang while the recurring payments are
linked to usage and assured quality as
per stipulations in predefined SLAs. In
the IT area, IBM signed a partnership
that would include management of all
of the operator’s IT functions wherein
the pay-out to the vendor was a % of
the operator’s annual revenues. Such
mechanisms ensure a close integration
between operator and vendor stressing
the essence of commitment in
successful alliances.
Case: Celcom’s association on mobile
content
In 2007, Zingmobile and ESPN STAR
Sports announced a partnership
to launch mobileESPN on Celcom’s
network in Malaysia. The content
platform enabled sports fans to access
premium customizable sports content
in the form of ‘live’ news coverage,
in-depth match analysis, breaking
news and top stories, allowing
subscribers to get updates and access
their favorite sports. The services were
offered by subscription or as on-
demand download.
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 Value generated by
strategic alliances
The amount of value creation from a strategic
alliance depends on the individual circumstances
of each of partnership. Some of the most relevant
elements required to ensure full potential value
creation are:

• Commitment from the parties Mechanisms need to be in place

involved: To guarantee an alliance’s
long term success, partners need
to pursue a common interest which
is most efficiently met through the
formation of an alliance. Synergies
that result in mutual benefit is
usually the strongest guarantee of a
successful partnership.
• Clearly defined roles and
responsibilities for each party:
The alliance’s full potential can
be achieved only when there is
no ambiguity about the roles and
responsibilities within the alliance.
allowing for regular tracking of the
performance / results achieved.
• Strong governance model: The
rules and processes shaping the
alliance and guaranteeing smooth
decision making need to be clearly
defined from the beginning of
the partnership. Weak corporate
governance will cause unfair
distribution of both effort and
generated value leading to the
erosion of the alliance’s full potential
and ultimately to its demise.

EXHIBIT 4: SOURCES OF VALUE FROM STRATEGIC ALLIANCES

Source: Delta Partners Analysis

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The sources of value in an alliance can
EXHIBIT 5: PARTNER SELECTION
be two-fold, tangible and intangible
depending on i) the type of alliance and
ii) collaborative areas. Exhibit 4 describes
the different sources of value generated
by strategic alliances.

Benefit: Revenue growth

Strategic partnerships drives the

opportunities for new revenue streams.
The magnitude of these opportunities
depends on the partnership’s scope and
objectives. The main drivers are:

• Access to new markets: Geographic

expansion resulting from a strategic
alliance allows the operator to expand Source: Delta Partners Analysis

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 portfolio, delivering new
offerings such as m-commerce,
navigation services and a range of
additional value-added services,
strengthening its value proposition
to deliver improved acquisition and
retention capabilities.
• Differentiation: Additional revenues
from a strategic alliance do not need
to be linked with a new market or
product, rather from enhancement
of an operator’s 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 benefits.
Benefit: Decreased costs
frame agreements can significantly
reduce procurement costs, especially
in the case of smaller players lacking
sufficient volume and scale.
• Network: Application of 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 financial and
intellectual capital resources, and
make joint investments to collectively
reap the benefits of innovation in
technologies, products & services.
• Other areas: Sharing functions such
EXHIBIT 6: ILLUSTRATIVE EXAMPLE OF A TYPICAL OPERATOR
as call centre, distribution and back-
office can also lead to significant cost
reductions for 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 successful strategic alliances there is
potential to achieve increased revenues
of 1-4%, OPEX reductions of 4-6% and
CAPEX optimization of 5-9%.

Strategic alliances are also often formed

to achieve significant reductions of both
OPEX and CAPEX. Key drivers include
asset/infrastructure sharing, resource
sharing, and knowledge transfer.

• Procurement: Increased economies

Source: Delta Partners Analysis
of scale through access to vendor
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 Partner Selection &
Governance Model
Once a company sees the value in forming a
strategic alliance, it has to select the right partners
and establish a solid governance model to ensure
transformation of the initial strategic intent into
future value. When selecting a suitable alliance
partner, a company must first determine which
assets it seeks and what it can offer in exchange.
Simple supply and demand economics apply here as
shown in Exhibit 5.

Subsequently, a company screens the • Simultaneous negotiations: Lead

portfolio of available partners with
potential to offer the desired assets /
resources. Using clear selection filters
is critical during this phase. Delta
Partners recommends that the following
approach should be employed when
identifying suitable partners:
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.

EXHIBIT 7: PARTNERSHIP GOVERNANCE MODEL

Source: Delta Partners Analysis

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• Asset dilution prevention: Do not
form alliances with partners that have
the potential to dilute the quality of
your core assets such as brand and/or
service level.
• Competitors: Operators should
avoid forming alliances with direct
competitors and partners that run the
risk of being absorbed by competitors
or players from 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
of leak can be sufficiently mitigated.
The biggest hurdle during the initial
negotiations is often a lack of trust.
Scoping the objective of the alliance
clearly at an early stage and limiting
the information sharing to the defined
scope can often overcome such issues.
Leveraging the ‘clean room’ approach
with the assistance of third parties can
also prove beneficial.
Once agreement to form a strategic
alliance has been reached, a governance
model has to be established to ensure
that partners’ expectations of the
Conclusion
The current economic climate means
that growth through strategic
alliances becomes more relevant for
operators than in times of 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 benefits such as increased
operational efficiency.
Even though the credit markets will
benefits in the alliance arrangement are
fulfilled. Although the details of every
alliance are unique, there are a common
set of characteristics that guide the
governance model set up:
• Decision making: Establish clear
hierarchy of decision making, leaving
no ambiguity in terms of decisions
concerning the alliance.
• Results monitoring: Introduce
monitoring of the results achieved to
ensure that the agreed cooperation
delivers the quality standards and
objectives.
• Dispute resolution: Define an effective
dispute resolution mechanism
enabling the efficient resolution of
any conflicts that may arise during the
existence of the alliance.
• The actual governance model set-
up revolves around the scope of
cooperation and the need for formal
management structure and control.
Simple non-equity agreements will
require a less complex governance
model than partnerships with a high
degree of involvement or investment
as shown in Exhibit 7.
eventually open up and valuations will
recover, Delta Partners expects that
telecom executives will continue to
leverage strategic alliances’ flexibility,
low risk and efficiency as they
continue to expand their footprint,
P&S portfolio and to reduce costs.
The impact and diversity of strategic
alliances, especially in a competitive
sector such as telecoms, will ensure
their longevity and replication across
geographies and along the telecom
value chain.
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 Delta Partners is the leading management advisory and investment firm specialised in Telecoms, Media and Technology (TMT) in

high growth markets. It has more than 130 professionals operating across 50 markets in the Middle East, Africa, Eastern Europe and

Emerging Asia. From its offices in Dubai, Johannesburg, Bahrain and Barcelona, Delta Partners provides three highly synergistic services:

Management Advisory, Private Equity and Corporate Finance.

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players to help them address their most challenging strategic issues in a fast-growing and liberalising market environment in over 50

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the TMT space in high growth markets. The focus is the Middle East, Africa, Eastern Europe and Emerging Asia. Delta Partners

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Corporate Finance: Delta Partners provides corporate finance services and has been involved in several buy-side and sell-side

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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 financial talent.

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