Confusion reigns over M&A in the Middle East and Africa

By Matthew Reed

Progress on the region’s big M&A deals – the prospective sale of Zain Africa or a stake in Zain; and the cash and share-swap deal between Bharti and MTN – appears to have stalled. There has been such confusion in the past few days over the possible sale of a large stake in Zain to an Indo-Malaysian consortium that it is at risk of descending into a debacle. A group of Kuwaiti shareholders in Zain said last week that they had agreed to sell a 46% stake to a consortium of buyers that included Indian operators BSNL and MTNL. But the two state-owned operators said subsequently that they had not decided whether to join the consortium. The Indian ambassador to Kuwait was later reported as saying that the Indian operators were carrying out due diligence on Zain.

Talks between Bharti and MTN, which began in May and have been extended twice, most recently to a deadline of end-September, seem to be heading toward the wire once again without resolution. And South Africa’s communications minister has made comments in the past few days about the proposed alliance that suggest that the South African government’s support for the deal is not certain. The South African government is MTN’s biggest shareholder, with a 21% stake, through the Public Investment Corporation, a state pension fund. An earlier round of talks between Bharti and MTN, in 2008, was unsuccessful. Reportedly, a factor in that failure was South Africa’s worry that control of MTN, which is perceived as a national champion, could pass into foreign hands. So what’s going on? Is it Mercury retrograde again, disrupting communications and deals? Well, perhaps. But this isn’t the astrology column.

More important are the broader themes. One of these is that some investors are deciding that it is time to take the profit on their African telecom investments. Most notably, that includes Zain and its investors. But Portugal Telecom and Telefonica also recently agreed to sell their shareholdings in Morocco’s Meditel. One-time prospective Zain Africa buyer Vivendi not only backed away from that acquisition but appears to have switched its focus from Africa to Latin America, with a takeover in Brazil now in the pipeline. The other theme is one that has been explored in this column before, which is that business cannot always easily be separated from politics. Political sensitivities in South Africa about the actual or perceived foreign takeover of a national champion derailed Bharti/MTN talks last time around, and they could do so again. In a development with some parallels, last week an Egyptian appeals court upheld the rejection by the country’s stock-market regulator of France Telecom’s offer to minority shareholders in Mobinil. Egypt’s stance on France Telecom’s efforts to raise its shareholding in Mobinil is seen by some as being motivated by a desire to prevent Egypt’s largest mobile operator from falling into foreign control.

So is it time to get out of Africa, now that the go-go years of the mid- and late 2000s are over? How are those big M&A deals going to shape up? And are governments becoming more nationalistic in their stances on telecom investment, or less so? Falling ARPUs, rising competition and the recession have certainly forced investors to reappraise African markets, and some have decided that it is time to head for the exit. In Zain’s case, the company’s soaring ambition and presentational verve has not yet been matched by the performance of its operations in sub-Saharan Africa, where many of its units are loss-making.

But there is still potential in Africa for the realistic investor. Mobile penetration in Africa was just 40.62% at end-June. The arrival of new undersea cables on the coasts of sub-Saharan Africa could foster the emergence of a new generation of data services (though the terrestrial networks also need to be extended if the potential of these cables is to be realized). And operators in India, for example, manage to run profitable businesses despite very low ARPUs. And many investors are just as eager to get into Africa as a few are to leave. Indian operators Bharti, Essar and Reliance are making various efforts to establish or expand operations in Africa. France Telecom is not only eager to take control of Mobinil but also recently acquired a new fixed-and-mobile license in Tunisia. Orascom, which quit most of sub-Saharan Africa in the early 2000s, has recently made a series of acquisitions in the region through its Telecel Globe unit. Vivendi-controlled Maroc Telecom bought a 51% stake in Malian operator Sotelma earlier this year.

Zain probably priced its business in sub-Saharan Africa too highly for Vivendi. The French group also got cold feet when it had a closer look at Zain’s operations. And Zain’s Kuwaiti investors might be pricing their assets too highly too, at US$13.7 billion for a 46% stake, which represents a considerable premium on Zain’s current market valuation. The idea that foreign operators can bring much-needed expertise is now so widespread that the nationalist impulse to block their investments is arguably less pronounced than might be expected. For example, it seems unlikely that Nigeria would prefer a local buyer for Nitel after the failed privatization sale to local conglomerate Transcorp. And although France Telecom has been frustrated in Egypt, it was able to take over Telkom Kenya, just as Vodafone was able to take control of both Vodacom and Ghana Telecom. But whether the South African government will take an internationalist rather than nationalist stance on the MTN/Bharti tie-up cannot be taken for granted.