MTN, the great consolidator?

MTN released a cautionary this morning virtually confirming speculation that a possible $10 billion deal with Egyptian operator Orascom is imminent.

Africa's largest mobile phone operator has reportedly approached banks for $5 billion to help fund the acquisition of several units of Orascom Telecoms Holding. MTN's cautionary is bare bones and reveals no details about which company it is in discussions with, however, media speculation has it that MTN is looking to take up at least four of the Egyptian operator's divisions.

MTN was recently pegged by analysts to become the next great African consolidator, expected to either be a takeover target, or to snap up other African operations. MTN's recent failed discussions left many analysts stumped as to what its next move would be on the continent.

A deal with Orascom would give MTN access to several African countries it does not yet have a presence in, with Egypt, Tunisia and Algeria being the most attractive. Orascom also has a presence in Central African Republic, Burundi, Zimbabwe and Namibia.

The company runs three operations outside of Africa, including a large operation in Pakistan, a smaller one in Bangladesh and a tiny business in North Korea.

At last count (September 2009), Orascom has a total of 88 million subscribers, however, over the last year, the company has seen a serious slump in revenue. Since Orascom is a holding company, the business gains its income from dividends declared by each for the businesses in each country.

Over the last financial year, the company dropped from almost 14 billion Egyptian pounds in income from dividends, to three billion Egyptian pounds. Several of the company's operations did not declare dividends at all. The company has also recently settled a protracted dispute with France Telecom over the ownership of the Egyptian mobile business.

Dobek Pater, director of African Analysis, says the company may well be looking to get out of the telecoms space entirely. This could mean that MTN could possibly take up the operations in the Middle and Far East, or it could sell them off individually at a later stage.

Pater says the three North African countries in Orascom's portfolio, Tunisia, Algeria and Egypt, would be an excellent bridge into the Middle East for MTN. A deal of this nature would certainly make it the largest Middle East and African operator, he adds.

Chris Gilmour, Absa Investment analyst, says several of the possible buyout targets, including Central African Republic and Namibia, are a strange choice for MTN. While they are both countries that MTN does not yet have operations in, they are also tough markets to tackle.

Namibia has similar penetration in the mobile space to SA, and the market share has been dominated by the country's incumbent, MTC.

Gilmour says it will be interesting to see which operations MTN actually takes, and how much the company ends up paying for those businesses.

It is likely that MTN would rather avoid Namibia, but Pater says Zimbabwe could be a future goldmine for MTN. “In five years, if the country stabilises, it could be a brilliant opportunity for any company,” he says.

Orascom, in Algeria, has 14 million subscribers, in Tunisia the company has 4.8 million subscribers and in Egypt it has 24 million people on its network. The other operations in Africa have between 140 000 and 250 000 subscribers.