Power Player

By his own admission, MTN's US$5.5 billion bid for Dubai-listed Investcom is not the cheapest deal, according to MTN Group CEO Phuthuma Nhleko. However, he tells CommsMEA why the cost is palatable and how the combined entity is set to become a juggernaut across two continents.

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By  Alex Ritman Published  June 14, 2006

|~||~|The combination of MTN and Investcom has brought together a community of 28 million mobile subscribers as of the end of 2005.|~|MTN Group's swoop on Dubai-listed Investcom last month heralded a whole new chapter in the development of Africa's most profitable operator. Just a matter of weeks prior to the announcement of MTN's stunning US$5.5 billion offer for 100% of Investcom, the company's CEO Azmi Mikati had told CommsMEA of his satisfaction with the progress his company had made in 2005, and expressed his confidence regarding the prospects faced by the operator in the year ahead. No mention was made of his ongoing talks with Africa's thoroughbred operator MTN, and a mere three weeks later, MTN Group's unassuming CEO Phuthuma Nhleko stepped forward to announce the deal to acquire all of Investcom. The two operators had previously made contact last year, with Investcom deciding to seek its listing on the London and Dubai bourses rather than consider a takeover bid. Given the 27% premium MTN's offer represents to Investcom's trading price as at April 28, Investcom's shareholders are set to make some serious cash from the transaction. Nhleko has many points to justify the price his company has offered. “You have to accept that multiples in the last year-and-a-half have risen and in recognising that fact, you must realise that almost 30-40% of this transaction has been paid for using MTN paper,” Nhleko tells CommsMEA. “Our share price has also risen in the last eighteen months, so that sort of neutralises that, or mitigates the price that we have paid. Secondly, when they (Investcom) listed they raised some cash, so we are also using cash to buy cash,” he adds. “If you look at those two things and then obviously the growth in the sense that Investcom has only 9% penetration in most of the countries, and what that does for us strategically, I think we are comfortable with the price, it's palatable, a bit expensive, but palatable,” Nhleko asserts. Analysts' initial surprise from the speed of the transaction has given way to mild scepticism in some quarters as they continue to crunch the numbers and assess the wider implications of the deal. Mohsen Malaki, IDC programme and consulting manager, communications for the MEA region is not convinced that the tie-up will make MTN any stronger as a contender for forthcoming licence opportunities in the Middle East. “We do not see Investcom as particularly strong or well positioned in the Middle East, as the company's holding are mainly in sub Saharan Africa, Cyprus, Syria and Yemen,” comments Malaki. “The operator does not have a strong presence in the Middle East as yet.” At over US$1,000 paid per Investcom subscriber, some analysts have drawn a comparison to the price paid for the last mega African acquisition - the purchase of Celtel International by MTC Group last March. MTC's deal valued each Celtel subscriber at approximately US$680, and on the face of it appears to have been better value for money to the MTC/Investcom transaction. Analysing the pricing a little closer, the issue of proportionate rather than controlled subscribers becomes a crucial differentiation when comparing the deals. “When calculating the per subscriber cost of these deals, the number of proportional subscribers is what needs to be used not the consolidated number of subscribers,” a Johannesburg-based investment banker familiar with the MTN/Investcom deal tells CommsMEA. “If you actually calculate the per subscriber value of the MTC/Celtel deal in terms of the number of proportionate subscribers acquired, you'd see the figure rising closer to the US$1,000 figure paid by MTN for Investcom,” he adds.||**|||~||~||~|While MTN openly acknowledges that Investcom is not necessarily present in the most significant mobile markets in the Middle East region, Nhleko is satisfied that the combined entity is stronger than as separate groups in both the Middle East as well as Africa. “You must remember that Ghana is a very important country in West Africa. After buying Ghana we've then got three of the largest properties in West Africa,” Nhleko explains. “In East Africa, Sudan represents the biggest growth that we gain access to. And in the Middle East we get two more countries - Syria and Yemen, which helps our Middle Eastern strategy. If you take those put together, that is almost 90% of the value.” The fact that 90% of the value of Investcom's 11 properties reside in just four markets, assumes that that remaining seven, which include investments in markets such Guinea Republic, Benin, Guinea Bissau and Liberia, are of limited value, and obvious spin-off targets. Nhleko, however, is of a different view, believing that a full integration of Investcom into MTN would produce significant advantages in terms of economies of scale. “(We are not considering off-loading any Investcom properties) at this stage, because remember that technologies are also advancing and you are starting to look at, say West Africa as a contiguous seamless footprint,” Nhleko asserts. “You start having cross-boarder tariffs, you start all sorts of things that help you to create value for the company as well as the customers. The fact that some of them (the properties) might be small countries does not mean as they become part of a bigger consolidation, they don't create value.” Speaking to Investcom's Azmi Mikati in last month's issue of CommsMEA, he spoke of the company's interest in exploring opportunities in Saudi Arabia, Egypt and Iraq. Earlier this year, Nhleko also identified Egypt as a potential area of interest for the South African group, and it appears that the two executives' outlook remains similar in terms of the expansion prospects of the combined entity. “I think Azmi and I are quite consistent on that, to say that yes, Saudi Arabia's second private licence; and Egypt's third licence are big enough to think about,” Nhleko points out. “I'm not saying we'll actually bid for them, but we do need to explore them and take a considered view whether it is something that is worth pursuing or not. So I think strategically we both agree that this group has still got a long ways to go in terms of after this positioning, there is still some fairly significant potential for us.” The numbers that the combined MTN/Investcom represent do seem impressive - 28 million subscribers across the Middle East and Africa as at the end of 2005, second only to Orascom Telecom. The highest EBITDA in the region in 2005, amounting to US$2.726 billion; as well as the highest enterprise value, estimated at US$23 billion. These are the types of numbers and reach that help a regional operator evolve into a global one, should it continue to find growth opportunities at the right price. The consolidation of emerging market operators continues to progress in earnest, with the likes of Luxembourg-based Millicom International Cellular (MIC) remaining up for sale. Investcom had in fact bid the highest for MIC at the time of the withdrawal of its interest in the pan-African and Latin American operator on account of the MTN offer, and Nhleko confirms that MTN too had reviewed MIC as a potential acquisition target. “There are many issues (as to why Investcom made a better acquisition than Millicom for MTN), but I think that firstly one of the primary things is that Investcom has properties in the footprint that is consistent with where we want to be,” Nhleko says. “I don't think we can get too much in the Americas at this stage.” Going forward MTN is keen to see Investcom operations integrated completed into the MTN Group, and this exercise is set to extend to branding issues, where Investcom's Areeba brand could be replaced by the MTN brand over time. “Operationally, we intend to have this as a full integration otherwise it would not make any sense. Full integration just means we are getting economies of scale in many areas including systems and so on,” Nhleko says. “It will be very much the same people who run the operations, because why take away local knowledge that is already there and so on, that wouldn't make sense. And then branding is a far more involved discussion that we need to look at case by case.”||**||

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