MTN STUMBLES ON INVESTCOM SUMS

Mergers, Acquisitions and Financial Results

MTN's share price took a dive yesterday as the cellular operator spelled out exactly how dilutionary its $5.5bn acquisition of Investcom would be initially. Beirut-listed Investcom serves 4.9-million customers in eight African and Middle Eastern countries, and holds licences to roll out networks in two more. Last week MTN issued figures showing the financial effects of the proposed deal based on the two company's results for the nine months to December 31.

Although MTN said the figures did not in any way constitute a profit forecast or an indication of its future earnings, it shed 250c, or 4,5%, to trade at R56.50. The figures show that if the deal had been concluded last year, MTN's actual headline earnings a share of 359.8c would have been 22% lower at 280,6c.

The net asset value a share of R11.83 would have been a massive 43% higher at R16.93. But the net tangible asset value a share of R8.18 would have plunged to a negative value of R3,29 after issuing another 204-million shares, giving Investcom's sellers a stake of about11% in MTN. The figures are based on an assumption that investors accept $2,08 in cash and 0,18 new MTN shares for each Investcom share.

MTN stressed that simply adding their historical earnings together did not do justice to the prospects of the combined entities. Investcom had experienced growth of more than 40% over the past two years, and some of its networks were yet to contribute to the profits as they only went live last year. Investcom had also recently increased its shareholdings in Yemen and in Sudan to capitalise on the "exceptional growth currently being experienced in the cellular industry in emerging markets", MTN said.

Analyst Meloy Horn of Merrill Lynch said the fee of $5,5bn was "high but not excessive", and could be justified by the scarcity of quality assets and to reduce the risk of a counter-bid by rival operators.

The fee reflects a historic price:earnings multiple of 26.5 times, compared with MTN's multiple of 12,6 times, so it was initially a dilutive deal. However, Investcom was an attractive target due to the low cellphone penetration rates in the countries where it operates, Horn said in a Merrill Lynch report.

The move should enhance MTN's growth profile as Investcom's licences cover a population of 147-million, of which only 9% have a cellphone. Horn sees the biggest potential in Sudan, with 34-million people and a penetration rate of 7%.

The move would also strengthen MTN's management capacities in the Middle East, helping with its current roll out of a network in Iran. Economies of scale achieved by covering 21 countries should also benefit the bottom line, Horn said.

Last week MTN announced a 55% year-on-year growth in subscribers for the three months to March 31. Its networks now serve 24,1-million users. In SA its subscribers of 10,2-million were up 27% from a year ago. The figure was down by 36000 from the previous quarter.

Business Day