Du royalty has Kipp confused

Du royalty has Kipp confused

Du has been ordered to start paying a royalty to the UAE government, reducing the profits that can be distributed to the company’s shareholders (mostly the UAE government).

February 15, 2011 2:03 by Samuel Potter

The UAE government has ordered UAE-government owned telco Du to pay it 15 percent of its net profit from 2010 as a royalty. The move is sure to disappoint shareholders of the company, a group for the most part comprised of the government.

If you’re scratching your head right now, you’re not alone. Let Kipp lay it out for you: Du, once known as the Emirates Integrated Telecommunications Company, is owned as follows: 40 percent by the UAE federal government; 20 percent by Mubadala Development Company (itself owned by Abu Dhabi government); 20 percent by Tecom Investments (a subsidiary of Dubai Holding, itself owned by the Government of Dubai); and 20 percent by public shareholders. So 80 percent owned by UAE government, then.

So, Du (80 percent owned by the government) released a statement this week announcing that the Ministry of Finance has ordered it to commence paying a 15 percent royalty to the Federal government on its 2010 earnings. The level of the royalty in future will be announced ‘in due course.’ In the meantime the royalty must be paid (to the government) before any distribution of profits to shareholders (mostly the government).

Kipp is sure there are perfectly sensible reasons for this financial maneuvering, we just can’t for the life of us work out what they are. It feels like we’re watching one of those games where a guy shuffles three cups so that you can’t follow the ball. Then again, we have been known not to understand stuff before, like the guy in the office who can detach the top half of his thumb and slide it up his hand.

Anyway the royalty was apparently expected, but the 15 percent was a welcome surprise – analysts expected much higher. Why was it expected to be higher? Well because of what Etisalat has to pay, of course.

Ready? Okay, here we go: Etisalat, 60 percent owned by the UAE government, has to pay 50 percent of its profits in royalty charges. Apparently the government owned company has asked the government if it can get a reduction in the money it has to pay to the government; the government is considering it and many analysts are predicting that the royalty will drop. This, presumably, will allow Etisalat to pass on more of its profits to its shareholders, more than half of whom are the UAE government.

It’s confusing enough to have Kipp curled in a tight ball in the corner, rocking back and forth. It reminds us of the time we found ourselves on a boat with a senior telco exec in the UAE (long story). We were asking him if there would be network sharing (and hence some real competition in the market), and he said to us: “What does it matter? The money is all going the same way.” Presumably to the man holding the cups.