The new scramble for Africa – acquisitions reshaping the communications landscape

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A new scramble for Africa is under way as multinationals from all over the world take a new interest in acquiring communications companies on the continent. The temperature for fresh deals has also been raised by a number of companies on the continent itself seeking to shape a regional or indeed international strategy for themselves. A dizzying succession of deals and announcements of acquisition strategies means that even if only half of what is announced happens, the landscape of the communications sector may look very different over the next three years. Russell Southwood identifies the players and looks at which strategies might succeed.

The largest of the international players with an interest in the continent is Vodafone. Because of a past agreement, it has until recently only operated as Vodafone above the Sub-Sahara leaving its minority partner Vodacom a free hand across the territory in the south. In late 2005, it upped its stake in Vodacom from 35% to 50% in deal worth US$2.4 billion. However, getting complete control will not be easy as Telkom South Africa has the remaining half of the shares.

Vodacom’s existing relationship with Telkom South Africa has not been all plain sailing. Originally the two bid for the Nigerian incumbent Nitel but Vodacom dropped out of the deal.

Vodafone has also tried to buy control of the largest of Kenya’s two mobile operators Safaricom, again without success as it was unable to agree a price with the Kenyan Government for the shares. The latter needs the money to fund a redundancy package at the incumbent Telkom Kenya. However the interest is there and the opportunity may arise again in more favourable circumstances.

The other large multinational with an interest in the continent is France Telecom and its mobile subsidiary Orange. France Telecom has always seemed to be the preferred buyer for incumbent telcos in francophone Africa, acquiring majority or controlling interests in Senegal (Sonatal), Mali (the SNO Ikatel), Cote d’Ivoire (Cote d’Ivoire Telecom) and Mauritius (Mauritius Telecom). However it lost out in Niger to a consortium that combined Libyan money with state-owned Chinese equipment manufacturer ZTE, more of which later.

Through its Orange subsidiary, it has operations in Botswana, Ivory Coast, Cameroon and Madagascar. It wanted Sonatel’s mobile operation (currently branded Alize) to take on the Orange brand (and pay for the privilege) but this was fiercely resisted by Sonatel’s own workforce and the idea has been dropped for now. But France Telecom’s continuing interest in the sale of francophone incumbents means that more mobile operations may fall into Orange’s lap.

However its Internet expansion strategy through its subsidiary Wanadoo appears to have had something of a less firm touch. Originally Wanadoo had minority partnerships in both Algeria and Morocco but of these two, only the 25% shareholding in the Algerian company EEPAD survives.

One of the big issues for France Telecom is language. It has only really managed to venture out of the francophone area in one country (Botswana) and in two other countries where it has a presence, French is at least as well used as English. It is unfortunate for French businesses like France Telecom that the current President of France takes such a dim view of them speaking English. They may need it if companies like France Telecom are to become truly global businesses outside of former colonial possessions.

The other French company that is a “would-be” player is Vivendi, one of those dot-com created conglomerates that describes itself as a leader in media and telecommunications with activities in music, interactive games, television and film and fixed and mobile telecommunications. It claims to be “a major player in each of its activities” but has only two operations: a 56% interest in France’s number two mobile operator SFR and a 51% stake in Maroc Telecom, Morocco’s former incumbent.

It recently told French business newspaper Echos that it would be interested in buying a stake in Gabon Telecom (with its Libertis mobile subsidiary) and the incumbent in Cameroon, Camtel. It is also believed to be interested in bidding for the Senegalese SNO when it is finally tendered. It bid for Tunisie Telecom but lost out to the eventual winner Tecom. It looks set to become the alternative bidding favourite for francophone incumbents being privatised.

But the most substantial recent deal-makers have been the Gulf-based, Arab telcos. MTC Kuwait bought Celtel for US$3.4 billion and has announced its intention to spend a further US$1 billion plus to gain control of the contested V-Mobile in Nigeria. Last December it added to its 13 existing country operations by buying a controlling share in Madagascar’s Madacom from the Distacom Group. On a buying roll, it has also set its hat on acquiring the new third mobile operator’s licence in Egypt.

The other Arab company that has entered the ring is UAE incumbent Etisalat. In April 2005 it bought Atlantique Telecom and as part of its assets got mobile operations in six countries: Benin, Burkina Faso, Cote d’Ivoire, Gabon, Niger and Togo. However the local owner of the Ivorian operation has pre-emption rights. It is also behind the new Sudanese SNO Canartel in which it has taken a 40% stake. Finally the Dubai-based SNO Tecom recently won the bidding for a 35% stake in Tunisie Telecom in a US$2.27 billion deal. It was only to be expected that Arab companies would seek to expand their markets to North Africa but the wide range of purchases made show they are seriously interested in making money on the continent.

The interesting outsiders are the Chinese. As noted earlier, state-owned ZTE won the tender for Sonitel in Niger and has also appeared on tender lists for other privatising incumbents. It was also in serious discussions with Zambia’s Zamtel at one point about buying a stake. So what is a Chinese equipment manufacturer doing bidding for telecoms operations? It seems that as it has not been able to break into developed world markets and has not gained (along with privately-owned Huawei) a significant market share in Africa despite considerable effort. So maybe it’s a case of if you can’t win the bid, why not buy the company?

Almost as interestingly, state-owned China Mobile is one of the bidders for Nasdaq-listed Millicom International, which is a global mobile operator with African subsidiaries in Chad, DRC, Ghana, Mauritius, Senegal, Sierra Leone and Tanzania. According to the Financial Times, its bid is over $4 billion and forms part of the Chinese Government’s “Go Global” policy which has been encouraging overseas expansion by state companies to ensure they will be able to compete with US, European and Japanese multinationals in the long-term. However it faces stiff competition from a number of players including Egypt’s Orascom and Kuwait’s MTC. There have also been rumours in the market that Lebanese-owned Investcom will be sold if the price is right.

An interesting independent player is Gateway Communications which has steadily been building up its portfolio of companies. In April 2005 it bought for Celtel’s international wholesale carrier Link Africa for US$50 million and is steadily building its business and making acquisitions when attractive.

A wild card is India’s Tata Group. It has invested in the South African SNO and although it will take time to create a business in an increasingly competitive market, it cannot surely rest content with only operating in one market.

There are also a number of what can only really be described as “international oddities”. South Africa’s third mobile operator Cell-C is 60% owned by Oger Telecom South Africa, a subsidiary of the Saudi incumbent Oger. However it is the only operation Oger has on the continent, although it was recently one of the losing bidders for Tunisie Telecom with Italian incumbent Telecom Italia.

Hong Kong’s Hutchinson Telecom has one mobile operation called Kasapa in Ghana. Logic dictates that if it is successful in its current phase then Hutchinson will be faced with the possibility of looking for other opportunities. Rwanda Telecom was purchased by US-owned Terracom and although it is developing ambitious plans within that country, does not appear to have wider expansion plans.

If all those looking to invest in the continent were walking the same street, they’d meet a couple of operators going the other way, looking to leverage their regional position into something more like a global foothold. Egypt-based Orascom Telecom has dumped most of sub-Saharan mobile operations (with the exception of the troublesome Zimbabwe and Algeria in North Africa) and is increasing its stake in Hutchinson Telecom to 23%. Its acquisition strategy is Europe-facing: it currently owns Italy’s Wind and is looking for other European opportunities. As it Chairman Naguib Sawaris says:”It’s very clear that size matters.”

South Africa’s MTN is another company looking to break out of the region. It is one of the region’s most successful mobile operators and is cash-rich but somehow has not managed to parlay this into growth through acquisition. Recently, it has been “always the bridesmaid and never the blushing bride” in bidding for regional tenders, most notably losing out in Kenya to Celtel. To be fair, it did acquire shares in Botswana’s Mascom from Econet and an operation in Congo-Brazaville at the end of 2005 but otherwise there have been slim pickings.

By a stroke of luck, it inherited an Iranian licence when the winning bidder dropped out and is working hard to get it up-and-running to tight deadlines. The sceptics are saying that it has neither the management, nor the capital resources to play on a global stage and as a result is a prime target for acquisition. Although it is a quoted company, the MTN Group owns 72% of its own shares and staff and management the balance so any acquisition would not come cheaply.

The wild card of those looking externally is the Nigerian SNO Globacom. According to its COO Mohammed Jameel “We are a cash-rich company keen on foraying into India, as the telecom market here is booming. We are not averse to investing in call centres, banking and petroleum sectors in India. We have decided to make India the Asian hub for our manpower needs for telecom,” he says adding that, “we are looking at a strategic partnership with one of the existing telecom operators. Globacom is going to invest $500-700m in India.” Globacom is owned by Nigerian Mike Adenuga’s MA Group that it has been claimed is worth US$5 billion.

Beyond those coming in and those going out, there are deals that flow from the fall-out of international acquisitions and mergers and from struggling international companies concentrating on their “core business”. Verizon has recently sold its Latin American assets and when the dust settles on its purchase of MCI, it might well look at whether it wishes to retain UUNet. Cable and Wireless’s new CEO is trying to concentrate on high-value corporate business and may well decide that its international wholesale business could be a disposal.

Various European telcos have been bid targets but this deal traffic is largely irrelevant to Africa. However when recently there was talk of a bid for Portugal Telecom, speculation was rife that any buyer would dispose of its African assets and indeed Telkom South Africa seemed to be encouraging this kind of talk. Portugal Telecom’s assets in Africa are a mixed bag. With the exception of Angola (Unitel), Morocco (Meditel minority share) and Cap Verde, its other interests in Mozambique, Sao Tome and Guinea Bissau are largely stagnant.

Undaunted, Executive Chairman of PT Investimentos Internacionais (PTII) said in July 2005 "This is the moment” to invest in Africa. Also he believes that there are great business opportunities in Brazil. He is probably right but for Portugal Telecom any sustained international strategy based on its current assets is a fantasy that it does not seem to be acting on. Like France Telecom, language is a factor that restricts its ability to grow into a truly global company. Therefore, whether or not Portugal Telecom is sold, it may not be long before the sale signs go up over PTII.

At a more modest level, there are a number of regional players with continental aspirations. The prize for the most confused must go to Telkom South Africa. At various points over the last two years it announced its intention to purchase national incumbents that were being privatised or could be bought, including Nitel, Telkom Kenya, Zantel and DRC’s OPCT. In every case, these bold intentions have come to nothing. Perhaps the idea of being a regional telco was tied up with its idea for how the EASSy fibre project might be run as a consortium and whatever happens, that moment will not return.

More recently it bid R2.4bn for Business Connexion which seems to presage an attempt to find companies that “add-value” to its underlying voice and data assets. But although Business Connexion is energetic in pursuing continental business, only 14% of its revenues come from outside South Africa. Nevertheless it has put aside R30bn for growth and acquisitions over 5 years. The key question is how will it keep its eye on South Africa as competition challenges all of its markets if it is seeking to have a coherent regional growth strategy?

Others in the same hunt for “value-added” acquisitions include Didata and its subsidiary Internet Solutions. The latter announced publicly last year that it wanted to take a significant position in the East African market.

Nigeria’s SNO Globacom has announced that it hopes to explore new markets in Morocco, Ivory Coast, Cameroon, Ghana and Benin Republic and has also announced it will build a fibre between London and Lagos that may connect most of these countries if it bought interests in them.

Another potential purchaser is South Africa’s Altech which is currently sitting on a cash pile of R1.5 billion. Altech CEO Craig Venter recently said: "We are keeping everything and will complement with some large acquisitive growth."

A regional wild card is Namibia Telecom. It took a minority position in the South African SNO and it bought into Mondu Startel of Angola.

The really sad case is Econet Wireless. It has not really been able to leverage itself into the international arena (a small franchise in New Zealand doesn’t really count) and its expansion plans on the continent seem to have been stalled by the loss of its income flow from its Zimbabwean licence. Although it has an option to buy V-Mobile in Nigeria it is highly unlikely that it will be able to find the US$3.4 billion being offered by MTC. Its third licence in Kenya is still in the courts.

It has an option to buy Telecom Lesotho but that’s not exactly a major league deal. And although it was to have partnered with Altech (see above) the two companies had a very public falling-out. Its “share-option” approach was always perhaps a creative way round not having enough of its own cash but it seems to have reached the end of road. Although it has announced that it is preparing an IPO, this is actually the second time the bride has gone to that particular altar and the previous nuptials were cancelled. It would a “buy” opportunity but potential investors might well be cautious based on its public falling-out with Altech.

However what it does focus on is the limitation on raising capital within the continent itself that would allow any regional player to do deals at a large scale. Those with longer memories will remember MTN had to clear the scale of its bid for its Nigerian licence with the Government because of South African currency restrictions. Kenya mobile operator Safaricom last raised significant capital through a loan facility. The sum raised – US$166.6 million – looks like “lunch money” alongside the larger deals being made on the continent. However it was announced as the largest loan deal of its kind in Kenya and again had to be approved by both the Ministry of Finance and the Ministry of Information and Communications. Not exactly the Chinese approach to encouraging companies to get ready for global growth….

So what can be said about possible, successful acquisition strategies? Acquisitions of things like mobile licences are relatively straightforward: the “metrics” of the market are known to the key players and they broadly function in similar ways. Local “cultures” may be different but the business fundamentals are not. Outright purchases of larger assets often prove harder to digest. Whilst acquisitions is an accepted route to growth and positively encouraged, too little attention is paid to the number of unsuccessful large acquisitions.

Most buyers agree that the mantra to keep repeating is “buy customers, not assets”. There are lots of African companies (particularly incumbent telcos) with infrastructure assets. However once competition is introduced, there is no guarantee that these customers will want to stay with you. It may be that a buyer of an incumbent can turn previously legal monopolies into de-facto monopolies by defending past privileges successfully.

But there will come a point where it is necessary to run a successful business on its own merits and this requires a very different mentality. Telkom South Africa is the company most publicly going through this change but it’s worth noting how many of the large mobile operators are acquiring incumbent behaviour just as the incumbents themselves are beginning to shed some of these vestiges of the past.

The incumbent mindset is to look for “franchises” that can be bought and defended to the last ditch. Mobile franchises are seen as the most valuable of these long-term money-making franchises. They are viewed by those punting on large deals as “cash-cows” that once established will turn out a predictable income over ten years at least. The cash piles generated by MTN and Vodacom are a tantalisingly attractive indication that this proposition has at least been true historically.

However, disruptive technologies are about to do to the mobile companies what they in their turn have done to the national incumbents. If Nokia and Motorala are producing IP-phones, then the direction things are going in is clear, even if the timetable is not. Therefore what is needed (and currently largely appears to be lacking) is an attitude of looking at emerging business opportunities that can take market share at lower prices and work from an even lower cost base.

Inevitably the next generation of market opportunities will challenge established players and particularly those that have significant market share or are monopolies. The new generation of players might be any of the following:

- Wireless broadband operators with the capacity to do mobile IP voice when the moment arrives as it will do before too long.

- Incumbents capable of transforming themselves into “triple-play” operators and making a swift transition to IP networks.

- Incumbents capable of becoming “carriers’ carriers” and drawing back from defending every last vertical business they hold.

- Value-added operators servicing multinationals and the financial sector. These will not be people who just sell bandwidth but staff that can understand client businesses and make them work better.

- Mobile operators capable of preparing for the moment when the “high-price voice franchise” runs out and will genuinely innovate. These will not be companies that produce interesting tactical marketing ideas but those who start to operate new services like data and e-cash.

- Convergent operators capable of challenging DSTV’s content monopoly across large parts of the continent.

So what’s up for grabs? There are a number of incumbents that are making stately progress towards being privatised. The difficulty for all purchases of incumbents is that the Government as seller generally has an exaggerated view of their value and not much information to support its view. Malawi is a recent example of the expectations gap.

Incumbents up for sale with mobile operations include: Camtel (Cameroon); Gabon Telecom (with Libertis); Gamtel (Gambia); Ghana Telecom (One Touch); Nitel (Nigeria); and Sotelma (Mali). TDM (Mozambique) and Zamtel (Zambia) are both at the stage in the political cycle where privatisation is off the agenda but it may yet come round again.

Incumbents for sale without mobile operation include: OPCT (DRC); Telkom Kenya; and Westel (Ghana). These are all operations for buyers with strong nerves and probably long pockets.

And of course, there are always smaller scale companies for sale but no-one likes to be flattered by seeing their name in print as a potential acquisition target. However, they are out there and the better buyers know who they are….