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Credit crunch to spawn African telecom deals

JOHANNESBURG - The global financial crisis could trigger a round of deal-making in Africa’s telecoms industry as the biggest mobile operators pounce on smaller players struggling to raise funds to expand their networks.

Analysts say the price of mobile assets on the continent has dropped amid market turmoil, despite resilient subscriber growth. At the same time, smaller operators may struggle to finance network expansion due to tight credit conditions.

That’s good news for big, relatively cash-flush operators like South Africa’s MTN, Egypt’s Orascom Telecom, Kuwait’s Zain and Vodafone’s Vodacom, which are scouring for acquisitions in Africa’s untapped markets.

“I think consolidation is going to be speeded-up because of the current economic crisis,” said Paul Booth, director at Dubai-based emerging market research firm Global Research Partners.

Africa’s big four mobile phone operators have made significant investments in their infrastructure networks, putting them ahead of foreign peers that may be looking for expansion opportunities.

Kuwait’s Mobile Telecommunications Co is sitting on $4.5 billion cash raised through a rights issue and wants to spend up to $4 billion on 4-5 deals in Africa before 2010.

Sub-Saharan Africa’s biggest mobile phone operator MTN is also looking for expansion opportunities. It has snapped up Arobase Telecom and Afnet in the Ivory Coast this year.

Orascom Telecom set up Telecel Globe in May to look for investment opportunities in Africa and Asia.

Small deals likely

Africa’s telecoms industry, which according to telecoms industry association GSM World had 270 million subscribers in 2007 compared to 50 million in 2003, has already started consolidating, with dozens of small deals over the past few years as well as some mega-mergers.

MTN bought Dubai-based Africa and Middle East operator Investcom for $5 billion in 2006 and Vodafone last month said it agreed to take control of South Africa’s biggest mobile phone operator Vodacom.

Merger talks between MTN and India’s Bharti Airtel and Reliance Communications earlier this year looked as though they might spawn another mega-deal, but fell apart. Some analysts believe MTN may seek another bid target, or even fall prey to a foreign buyer itself.

For now though, a rash of smaller deals looks more likely, with operators unlikely to take on a big risky deal in this environment. They will likely look at smaller operators, satellite firms and Internet Service Providers.

Vodacom, for example, snapped up pan-African network and satellite services firm Gateway in August for $700 million.

Vodafone has identified Nigeria as an attractive prospect and Vodacom says it is cautiously looking for more acquistions.

Emerging-markets telecom advisory firm Delta Partners—which manages an $80 million Middle East private equity fund—said in a statement last month it was planning to invest about $40 million of its fund in African telecoms.

“We are looking to make one or two investments in South Africa in the next six months and to then spread the equity fund further afield into the rest of Africa,” Kristoff Puelinckx, Delta Partners’ managing partner said in a statement.

Meanwhile small operators are struggling to raise funds to roll out networks that can compete with the likes of MTN, making them prime takeover targets.

France Telecom in October acquired a 53 percent stake in Hits Telecom Uganda. Telecoms journal Comm said Hits Telecom had been at risk of having its licence revoked because it had not met network rollout requirements.

Limited hit on growth

While the fallout from the global financial crisis will likely slow economic growth in Africa, the impact will be less severe than in the West due to the relative isolation of the continent’s economies.

Cell phone subscriber numbers in Africa are expected to jump 36 percent in 2008, according to telecoms research firm Informa.

“This will take the total number of subscriptions to 400 million by the end of 2008, just nine months after breaking through the 300-million mark,” said Informa’s chief research officer Mark Newman.

MTN CEO Phuthuma Nhleko was quoted this week as saying mobile spending remained “resilient” in many of MTN’s markets and that mobile firms in developing nations would not take a big hit from a global slowdown because wireless communications are viewed as an essential service not a luxury.

MTN shares have fallen about 28 percent so far this year, slightly outperforming the Johannesburg index of blue-chip stocks, despite taking a knock in recent sessions due to a drop in the value of Nigeria’s naira currency.

The Nigerian cell phone market—the most populous and lucrative in Africa—is far from reaching saturation. Telkom’s Nigerian private operator Multi-Links, for example, increased its subscribers by 18.5 percent in one month to 2.11 million at the end of October.

While a prolonged weakening of the naira would dent the unhedged earnings of foreign companies already running operations in Nigeria, it would also make assets cheaper and could even act as a further sweetener for potential overseas buyers.