Exploding into Africa

MTC's acquisition of Celtel is significant for a number of reasons, not least because of the sheer size of the investment.

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By  Tawanda Chihota Published  May 5, 2005

|~|Saad-image-200.jpg|~|Al Barrak wants to see Celtel in 20 African countries by 1Q06.|~|MTC last month announced a spectacular deal to acquire pan-Africa mobile operator, Celtel International for US$3.4 billion. The deal is significant for a number of reasons, not least because of the sheer size of the investment, but also because it stands as the most dedicated attempt yet by a Middle Eastern investor to participate in the subscriber boom occurring in sub-Saharan Africa. In an exclusive interview with MTC Group managing director Saad Al Barrak, CommsMEA asks him about the origins of the deal and its implications on the ongoing operations of MTC and Celtel.

CommsMEA: How long ago did MTC Group identify Celtel as a potential acquisition target and when did negotiations on the deal actually commence?
Saad Al Barrak: Celtel was recognised as a target about a year ago and the negotiations on the deal started four months ago. It took that amount of time because Celtel needed to go through an initial public offering, which was set for the end of April 2005. But we managed to convince them to take a private acquisition proposal upon which they asked us for an indicative price range to decide the attractiveness of taking this option rather than completing the IPO. They developed the idea and it was open to everybody and six international companies expressed interest in the acquisition of Celtel. In the end, three companies competed in the final offer.

CMEA: Why did MTC choose Celtel specifically as an acquisition target? And why is 85% of Celtel stock going to be acquired now and the remainder within the next two years?
SAB: Africa is the fastest growing market worldwide in terms of telecommunications. Following the World Bank report, the five regions that have the highest economic growth are China, Russia, India, Brazil and Africa. Looking at our geographical location and history, Africa would be the closest region to us. Therefore, we had the strategic focus on Africa. It’s the fastest growing market with 850 million people, 240 million of whom live in the sub-Saharan region that Celtel serves. In this area, penetration stands at less than 4% so the potential for growth is high.
We also chose Celtel because of its business model as it operates as a single company in 13 countries. Furthermore, Africa has a number of small countries where it is no longer economically or logistically viable to operate in each individual market. Therefore, to manage them all through a single company based in Holland, which has European corporate governance standards, and international KPIs and benchmarks, makes Celtel attractive to us. When we conducted the due diligence we were very impressed by the management, the know how, the dedication, the company’s culture, the systems they have in place and their track record of achievement. Our offer was for 85% to leave the 15% with these partners so they could stay on board as long as possible as strategic partners. So we retained the full management of Celtel in addition to five original board members out of nine.
||**|||~||~||~|CMEA:The price being paid by MTC is huge. US$3.4 billion for Celtel’s 5 million subscribers at the end of 2004 works out roughly at US$680 per subscriber. How does MTC justify this price given analysts having estimated Celtel’s value at closer to US$2 billion if it had undertaken the IPO?
SAB: Value is like beauty; it is in the eye of the beholder. Number wise, US$680 seems to be a very reasonable price because usually mobile subscribers worldwide are valued at between US$600 and US$800. There is no growth in developed countries, so I would put more value on subscribers in developing countries because the growth is still very high. We are talking about growing this company’s subscriber base 300% in four years’ time, up to 15 million subscribers, based on our most conservative scenario. Secondly, an IPO is not a fair indicator of value because where a single entity makes an acquisition; it is often willing to pay a large premium on the value. The IPO was expected to value Celtel at between US$2.2 and US$2.5 billion, so if we take a 30% premium, which is very moderate, we are up to US$3.4 billion.

CMEA: This acquisition is very different to those already in the MTC portfolio in so much as the MTC brand will not be extended to the newly acquired company, and Celtel remains outside the MTC Group of Companies. What value does MTC believe it can transfer to Celtel following the acquisition and what synergies/efficiencies does MTC believe can be leveraged from this deal?
SAB: Celtel would be part and parcel of the MTC group. The fact that it will continue to operate under the Celtel brand is because of the significant role the brand plays in the African market. It would not be clever to try to change it, but integration with Celtel’s management and synchronisation and harmonisation of synergies within the group will continue to be pursued aggressively.

CMEA: In its 2004 results, Celtel reported a 16% fall in ARPU year on year to US$21. Are there any concerns that as Celtel grows its subscriber base, ARPU and more importantly average margin per subscriber will continue to fall significantly, impacting on overall profitability over time?
SAB: ARPU declines worldwide. With the growth in subscribers you take-on less affluent segments of the market and this results in an overall reduction in ARPU, but you compensate that by volume. So we are not worried at all.
||**|||~||~||~|CMEA: Celtel management are set to remain in place, at least for the meanwhile. What managerial changes are being effected at MTC to accommodate this relationship - will MTC be creating a management position that is focused on liasing with the African side of the business, or will that relationship be managed through MTC presence on the Celtel board?
SAB: The new structure is going to work in two ways. First there will be board representation from MTC. There will also be a management committee that coordinates the relationship between both parties. So there’s a mechanism on the management executive level as well as the representation on the board. I would also like to point out that we are committed to a policy of employing local staff wherever we go. We want to be perceived as a good investor that contributes significantly to the development and the economic advancement of Africa. We would like Africa to be proud of MTC.

CMEA: Celtel continues to lack a presence in Africa’s most significant mobile markets - South Africa and Nigeria. How important is it to MTC to gain a foothold into these markets and how would MTC describe its strategy for further subscriber and geographic expansion in Africa?
SAB: MTC’s interest in Africa has always existed. We did not want to come to Africa and start from zero because we knew there are big names and big players who already operate there. So we had to leap frog into the market as we usually do in accordance to our ‘3x3x3’ strategy, which requires us to execute 27 years worth of work in just nine. Therefore we view Celtel as the bridge to leadership in the African mobile telecommunication market. MTC has also recognised a number of opportunities in several countries in terms of licences and acquisitions, and we will now pursue these through Celtel. Our target is to be in 20 countries in Africa by the first quarter of 2006, up from 13 countries presently.

CMEA: This acquisition falls squarely within the parameters of MTC’s ‘3x3x3’ strategy, as you have already mentioned and surpasses the company’s target to have 5 million subscribers in place by the end of this year. It also places the operator on track to achieve the end-2011 target of possessing a subscriber base of 15 million ahead of time. How does this deal modify this strategy?
SAB: We link numbers to the strategy because they are benchmarks to measure our progress. But let’s not forget the objective of the strategy is to go regional, meaning to be in five countries and have a minimum of 5 million subscribers, then international with a minimum of 10 million subscribers and finally global with 20 million subscribers as a minimum. But that’s just the minimum, so we will stick with the full nine-year implementation of the ‘3x3x3’ strategy.

CMEA: Are we likely to see MTC becoming less acquisitive for the meantime, while it digests the Celtel acquisition?
SAB: MTC: is a very pragmatic company. We’re driven by opportunities, so if tomorrow we find a great opportunity for acquisition we will restructure financially and gear up to make this acquisition.

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