Valuing the Investcom deal

MTN is set to pay over US$1,000 per subscriber for Investcom. This appears to be a heavy price to pay for an operator that is not in many strategically significant markets.

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By  Tawanda Chihota Published  May 3, 2006

|~||~||~|A little over a year ago, Kuwait’s MTC agreed to pay US$3.4 billion for Celtel International, a company that at the time had just over 5 million subscribers across 13 sub-Saharan countries. This valued each subscriber acquired at approximately US$680, a price that many industry commentators considered too high. A year on, and South African operator MTN has announced details of a US$5.5 billion cash offer for London and Dubai-listed Investcom. Having counted 4.9 million mobile subscribers across 10 countries at the end of 2005, eight of which were operational at the time, the deal marks a significant premium to the amount paid by MTC to acquire Celtel a year earlier. If one estimates that Investcom added in the order of 250,000 subscribers in the first quarter of this year, that would bring its total base up to somewhere in the region of 5.15 million. MTN’s US$5.5 billion offer, which is at a 27% premium to the Investcom stock price at the end of trading on April 28, would work out at over US$1,000 per subscriber. This appears to be a heavy price to pay for an operator that is not in many strategically significant markets. MTN has built a reputation for prudent investment, choosing to back away from its pursuit of Celtel rather than embarking on a price war with deep-pocketed MTC last year. MTN had offered US$2.8 billion for Celtel, and analysts praised MTN’s discipline in walking away when MTC offered more cash. So it is interesting that MTN would now choose to pay such an amount for an asset that some argue does not warrant the price tag given its patch work of operations. MTN CEO Phuthuma Nhleko has emphasised the benefits of the two companies holding no overlapping investments, and the fact that this acquisition helps fulfil the African operator’s desire to build its presence in the Middle East. The deal with Investcom gives MTN access to markets such as Afghanistan, Syria and Yemen, which can easily be bolted-on to MTN’s impending move into Iran. MTN and Investcom confirmed that they had held discussions about coming together last year, and that the subsequent conversations occurred swiftly as the management of the two companies shared a common outlook. Though Investcom has continually tried to make out that it is a serious mobile operator with an independent long-term commitment to the industry, many industry commentators, including executives within its mobile operator peers had suggested that Investcom was on the path to acquisition. So while it comes as no surprise that a company like MTN has stepped forward to make an offer, what has gone against the script is the fact that the South African operator has chosen to swallow Investcom whole. Given Investcom’s diverse geographical and operational spread, it had been suggested that Investcom would best be sold off in separate pieces, with various interested parties picking off the parts of the business that were most relevant to their own businesses. As MTN did not choose this path prima facie, once the deal has been ratified, the next stage will no doubt be to review which parts of Investcom’s business can be easily integrated into MTN’s operations and which parts cannot. Two brands will initially exist within the combined MTN/Investcom entity and it is likely that Investcom’s Areeba brand will make way to the MTN brand over time. MTN therefore needs to be confident that the operations to which it extends its name and brand are able to align themselves with the overall MTN ethos. MTN’s acquisition of Investcom also has implications for another pan-regional mobile operator – Millicom International Cellular. Investcom was rumoured to have been in pole position to acquire Millicom with a bid estimated to be in the region of US$5 billion. On news of its combination with MTN, Investcom promptly announced its withdrawal from any pursuit of Millicom. ||**||

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