MTN Buy Energizes EMEA M&A

Emerging markets in the Middle East, Africa, and Asia are proving to be ripe for carrier consolidation as subscriber growth picks up pace.

That has been made clear this week with South African MTN Group Ltd. 's acquisition of Dubai-based Investcom Holding for $5.53 billion, in one the African nation's largest cross-border takeovers. (See MTN Acquires Investcom.)

The offer represents a 27 percent premium on Investcom's share price, but analysts say the carrier's potential for growth in markets with low phone penetration more than makes up for the hefty price tag. In a prepared statement, MTN CEO Phuthuma Nhleko said it "substantially enhances MTN's growth prospects, securing a number of important new markets for the MTN Group."

The deal puts MTN behind Egypt's Orascom Telecom as the second largest mobile phone operator in emerging markets. It boosts the company's customer base from 23 million in 11 countries to 28.1 million in 21 countries and gives MTN inroads into high-risk markets like Afghanistan, Syria, Liberia, and the Sudan. Orascom has a lower enterprise value ($15 billion to MTN/Investcom's $23 billion) but a larger customer base at 30 million.

MTN, which has been on the acquisition trail over the last two years to beef up its subscriber base, has been thriving in such unstable economies and plans to launch a new network in Iran in August -- the license it acquired there last year marks its first foray into the Middle East. MTN could use the added benefit of Investcom's experience in the region and the economies of scale that will come from buying equipment for networks in 21 countries rather than 11.

Investcom's largest shareholder is M1, an investment firm owned by the family of former Lebanese Prime Minister Nagib Mikati, which holds a 70.6 percent stake. MTN says it will issue 204 million new shares to finance the acquisition, in addition to $3.85 billion in loans underwritten by Deutsche Bank AG .

With this somewhat unexpected agreement, Investcom has withdrawn its own $5 billion-plus offer for Swedish rival Millicom International Cellular SA (Nasdaq: MICC) , which has also set its sights on emerging markets. Millicom has more than 9 million subscribers in 16 countries across Africa, Asia, and Latin America.

China Mobile Communications Corp. was next in line after Investcom to pick up the carrier, but a spokeswoman for the company told Reuters today that it is not involved in any acquisitions abroad, while another source told the news agency that China Mobile dropped its bid in March. That leaves the likes of Orascom, Kuwait's MTC-Vodafone , Telenor Group (Nasdaq: TELN), and América Móvil S.A. de C.V. to duke it out for Millicom.

For these carriers, undeveloped markets in the Middle East, Asia, and Africa are an attractive proposition -- there is growing demand for telephone services in areas with phone penetration hovering around 10 percent, and little competition to deal with. And activity is clearly heating up, with deals routinely coming in at over $1 billion.

Last year MTC surprised investors with the $3.3 billion takeover of pan-African operator Celtel International B.V. , for which it outbid MTN. Orascom has taken a 19.3 percent stake in Hutchison Whampoa Ltd. (Hong Kong: 0013; Pink Sheets: HUWHY)'s emerging markets carrier, Hutchison Telecommunications International Ltd. (NYSE: HTX), for $1.3 billion, while Malaysia's Maxis Communications Bhd. acquired Aircel Ltd. in India for $1.08 billion. (See Orascom Buys Hutch Stake, Maxis Snaps Up Aircel, and Asian Carriers Indulge in January Sales.)

Despite the growth potential, Western carriers have been more reticent to tap into emerging markets to offset the effect of saturated markets at home. "Big European-based carriers like Vodafone and Orange are nervous about the relatively high-risk markets that these other pan-regional carriers are investing in," says Heavy Reading senior analyst Patrick Donegan. "Over time they might be able to offer economies of scale and experience of consolidating multiple operations as potential strategic investors or outright buyers of these companies."

There is some indication carriers are starting to move this way. Vodafone Group plc (NYSE: VOD) acquired a 10 percent stake in Bharti Tele-Ventures Ltd. last year and has increased its stake in South Africa's Vodacom Pty. Ltd. . (See Vodafone Buys Bharti Stake.) But so far, operators have stopped short of actual takeovers.

"It’s not clear that operations could be consolidated as effectively in these markets as they can in Western Europe, nor that the political and regulatory environments in some of these markets will become any more predictable," Donegan says. "In any event, there’s not much indication of this type of western investment happening in the near term."

He adds: "For now, the likes of Orascom and MTN seem to be happy growing their businesses on their own terms."

— Nicole Willing, Reporter, Light Reading

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