The recent announcement of the likely merger between VimpelCom Ltd. (NYSE: VIP) and Orascom Telecom serves as a reminder that the Africa & Middle East (AME) market is arguably the last great untapped telecom goldmine. (See VimpelCom Gets Wind.)

As developed markets mature and margins tighten, operators are casting an eye over the low mobile penetration rates in some parts of the region and working out how they can get a piece of the potential growth action.

Against this background, the latest edition of Pyramid Research 's AME Telecom Insider, "M&A Activity Expected to Increase for AME Mobile Operators," is timely.

The study, written by Kerem Arsal, analyzes what Arsal calls the "competitive dynamics" of the region, and how they might be affected by merger and acquisition (M&A) activity.

As the author points out, the biggest deal the AME region has seen in 2010 is Bharti Airtel Ltd. (Mumbai: BHARTIARTL)'s acquisition of Zain Group 's African assets -- encompassing 15 markets -- for more than US$10 billion. This deal extends Bharti's reach into sub-Saharan Africa, where mobile penetration rates are as low as 21 percent (Democratic Republic of Congo). (See Bharti Takes Its Smarts to Africa and Bharti Secures $10.7B African Acquisition.)

Rich pickings there may be, but easy pickings they aren't, says Arsal, as the costs of operating in many sub-Saharan and West African countries are sky-high, the last-mile access often requiring an expensive mix of technologies rather than a single standard. In addition to the cost issues, many of these markets have suffered severe declines in average revenue per subscriber (ARPS), as new mobile operators joined the fray and effectively diluted the market -- hence the appeal of merger and consolidation to would-be telecom entrants to Africa.

The situation is different in North Africa and the Middle East, where ARPS is higher and the markets more stable. Such factors, however, mean that the premiums demanded for acquiring operators are high, says the report.

In the light of this, the planned merger of VimpelCom and Orascom, with its extensive North African assets, represents a seismic change in the competitive dynamics of the region.

Arsal told Light Reading: "Many operators will be watching the VimpelCom-Orascom deal with some jealousy due to the access that the latter provides to the North African markets, where revenue growth is still at acceptable levels. The premium that VimpelCom will have to pay appears in the operational and financial difficulties that Orascom is going through, but when compared to MTN’s reported valuation of Orascom at around $10 billion in the spring of 2010, the debts that the acquirer will take over is a reasonable price to pay."

One of those jealous onlookers is likely to be Orange (NYSE: FTE), which is known to have North African ambitions, most recently manifested in its purchase of 40 percent of Morocco's Médi Télécom S.A. (Méditel) . The report looks closely at France Telecom's other M&A options in the region, with Orascom tipped as a likely partner. VimpelCom, however, seems to have beaten the French giant to the punch, as Arsal acknowledges. (See France Telecom Buys Into Meditel.)

"Orascom would have been a natural fit for France Telecom. We [Pyramid] saw it as a quick way to expand from Egypt to Algeria. And with a move to Méditel, the initial maneuver would have been completed in North Africa. VimpelCom acted faster. This deal may also complicate things for France Telecom in Egypt, in the case of Mobinil [which it co-owns with Orascom]."

But all is not lost for FT, believes Arsal. "France Telecom still has options. In particular, the Western African belt still looks attractive. There, we would not be surprised to see France Telecom test the waters with operators, such as Globacom and Comium. France Telecom is in little direct competition with these operators and the absence of market overlaps should decrease competitive and regulatory resistance during any transaction."

In AME, it seems, the M&A story is only a few pages in.

— Paul Rainford, Assistant Editor, Europe, Light Reading