Mergers, Acquisitions and Financial Results

A report from Merrill Lynch saying that MTN could muster about $2,6bn to invest in growth opportunities is quite staggering. But what is even more staggering is exactly how much each acquisition or new cellular licence actually costs these days.

Recent deals have seen operators in developed countries pay $1683 for each subscriber obtained through acquisitions. In emerging markets, the figure is $490 a subscriber, but that is still a lot of money for a customer who may spend only a few dollars a month on phone calls.What has fuelled the spiralling prices is the success of the cellular networks in Africa. That has kindled the interest of Middle Eastern operators with deep pockets and access to capital at far more reasonable rates than their South African counterparts.

"The presence of these operators as bidders for scarce telecoms assets in Africa has resulted in higher multiples being paid," says Merrill Lynch.

That saw MTN outbid for the pan-African operator Celtel by Kuwait's MTC. The Kuwaitis paid $3,4bn for Celtel, massively outstripping MTN's bid of $2,6bn. Since that inadequate $2,6bn is exactly how much Merrill Lynch says MTN can afford to invest in new opportunities, it may struggle to acquire a ready-made network spanning several countries.

MTN's $2,94bn bid for a licence in Saudi Arabia was also dwarfed by cash-flush Arabs, with Etisalat offering $3,25bn. So how can MTN keep growing revenue and profit? Its executives believe they can achieve them through single acquisitions, rather than buying a pan-African player. That led to acquisitions in Côte d'Ivoire and Zambia, which Merrill Lynch estimates to have cost $140m. The subscriber numbers it acquired are not exciting, but there are opportunities to grow the networks in both countries and tap into many more potential customers.

Merrill Lynch believes there may be a chance to buy into pan-African players Millicom or Investcom. Those would be exciting multicountry moves, but if they do come up for grabs, the Middle Eastern players will also jump at the chance. MTN could also bid for a third licence in Egypt, where it would again face Arabian rivals. Failing that, it could make a play for Westel, which operates in Ghana.

Whether MTN will grow piecemeal or through one big-bang acquisition is impossible to predict, but it must not allow the increased rivalry to derail it from its strategy of refusing to overpay for its assets.

Business Day