Fattening up, slimming down

Consolidation within the global carrier community continued in 2010, with deals large and small. For some it was growth through acquisition while for others it was safety in numbers.

In November Indian carrier Bharti Airtel began rebranding the African assets it had acquired earlier in the year from Middle Eastern player Zain. As the Airtel brand was rolled out across the 16 operations for which Bharti paid $10.7bn in March, it represented the final nail in the coffin of the Zain dream to become one of the top brands in Africa and one of the largest mobile operators in the world.

At the same time, of course, it represented Bharti’s ascendancy to the lofty heights of the heavyweight international players at which Zain had sought to establish itself. Bharti’s move into Africa was the biggest carrier M&A story of 2010, but not the only one. No matter how many manoeuvres we see, it seems, there are always more to come.

Bharti’s African deal resulted from Zain having woefully overstretched itself financially and operationally. For a time the firm had no rivals when it came to the size of the company coffers, but it lacked the experience of operating in extremely low revenue markets that was always going to be essential for a pan-African operator. When it became clear to the management that they had bitten off more than they could chew, Bharti was more than ready to leverage its scale and experience and try its own hand at mining the rich rewards of Africa.

Experience in India doesn’t guarantee success in Africa, of course, and Bharti faces a key challenge in dealing with 16 different governments and regulatory environments.

Nevertheless, this was not an impulse purchase from Bharti; in 2009 it came close to securing a deal to acquire Zain’s pan-African, South Africa-headquartered rival MTN after sporadic discussions that lasted a couple of years. Bharti blamed the collapse of that deal on the South African Government, although there were also tensions between the two carriers over which would have the upper hand in the post-deal structure.

Acquisitions from one carrier often bring on a process of soul searching from neighbours and competitors and MTN attempted some M&A activity of its own in the wake of its former suitor’s successful purchase. But once again it was not to be. MTN spent part of the year in discussions with Egyptian carrier Orascom and parent company Weather Investments over what was believed to be the sale of Orascom’s African Portfolio. Always the bridesmaid, never the bride, MTN then had to watch Weather Investments cosy up to Russian player Vimpelcom.

In October Vimpelcom announced a merger with Weather that will see the Russian carrier gain 100 per cent of Weather Investments (also giving it 100 per cent of Italian player Wind), and 51.7 per cent of Orascom, which has operations in Algeria, Bangladesh, Pakistan and Canada. (In November the two firms announced the disposal of Orascom’s Tunisian operation.) In return, Weather’s shareholders will gain 30 per cent of Vimpelcom. The deal will see Vimpelcom leap from 14th largest carrier in the world by subscriber numbers to seventh. With penetration in Vimpelcom’s core CIS markets reaching saturation, the move was driven by the need to find new growth opportunities.

Informa Telecoms & Media pointed out that the deal shows a trend for Vimpelcom towards merger rather than the kind of acquisition that Bharti made. “Following on from VimpelCom’s recent merger with Ukraine’s Kyivstar, the operator says it firmly believes that mergers are the way forward in terms of large-scale acquisitions,”wrote Informa analyst Gemma Bunting, quoting CEO Alexander Izosimov, as saying: “The only way to do this now is through large-scale mergers.”

The deal is scheduled for completion in the first quarter of 2011, but there remain a number of obstacles for the Russian carrier to overcome. Chief among these is the fate of Orascom’s Algerian operation, Djezzy. MTN’s failure to secure a deal with Orascom resulted from the Algerian Government’s objections. The Government sees any change in ownership of Djezzy as an opportunity to derive a windfall of its own—and there remains a distinct possibility that it may seek to partnationalise the operator in order to secure such an outcome.

It’s a tricky situation for Vimpelcom and Weather. The disposal of Orascom Tunisia to Qatar Telecom shows that there is flexibility in the two carriers’ approach to the deal— and it is conceivable that they could offload Djezzy in order to complete the merger. The problem is that Djezzy is by far the biggest earner in the Orascom portfolio that will be included in the merged entity. At the very least a disposal could lead Vimpelcom to revise its price downwards.

Vimpelcom has also faced questions over the benefits of it moving into the saturated Italian market as part of the deal. Wind sits in third place in Italy, some distance off the two market leaders, TIM and Vodfaone. With 19.6 million customes at the end of September according to Informa’s World Cellular Information Service, Wind is eight million behind Vodafone, itself three million adrift of TIM. Why Vimpelcom would look to Italy, where penetration is close to 150 per cent, in its search for growth has baffled some observers. But Vimpelcom has argued that experience in a market that is among the most advanced in the world for mobile broadband will be of benefit to it across its portfolio.

If this deal succeeds that portfolio will be diverse to the point where it might attract criticism for lack of focus. Vodafone, arguably the blueprint for the expansionist mobile operator, was divesting in 2010 rather than acquiring, in an attempt to streamline its operation and play to regional strengths. In September it offloaded its 3.2 per cent stake in the world’s largest carrier China Mobile, and a reorganisation of the structure left other assets, its stakes in Verizon Wireless and French carrier SFR, as well as minority holdings in Polkomtel and Bharti Infotel and Japanese carrier Softbank, outside of the new organisational units.

The firm said it intended to “maximise shareholder value” from these assets, which only meant one thing and the sale of the Softbank stake was announced in November. Under pressure to return cash to shareholders, Group CEO Vittorio Colao said that he was uninterested in managing minorities. It seems likely that Vodafone will complete the divestment of its remaining minor stakes as a matter of priority, although the 45 per cent Verizon Wireless holding can only really go to parent operator Verizon, so Vodafone maybe dependent on the American to set the timing of that deal.

Back in Vodfaone’s home market of the UK there was a significant merger, between the British outposts of Orange and T-Mobile. The carriers created a 50:50 joint venture dubbed Everything Everywhere, creating a market leader with more than 30 million customers and 43 per cent of the market. But the deal was pitched more as an exercise in reducing costs behind the scenes rather than the creation of one outsized British carrier. The two brands are being maintained, which makes sense given their established status in the market.

The deal was also designed to help the firms move into adjacent markets such as advertising and mobile commerce.

One key outcome of the deal will be the integration of the two firm’s UK network infrastructure. This will be a continuation of a project that was started with the creation of MBNL, the joint venture between T-Mobile and 3UK that was created to merge their 3G networks. That consolidation project was completed in November, with 12,000 sites merged.

Graham Payne, managing director of MBNL, who oversaw the project and will oversee the absorption of the Orange network into the fold, argues that such projects will force competitors to follow suit, given the savings that are available and the improvements in network quality that can be achieved. Indeed many industry players believe that advanced markets like the UK that have reached saturation point are likely to consolidate down to a smaller number of networks, even if separate brand competition remains. This may well be a driver of future carrier M&A in relevant markets in 2011 and beyond.

The creation of Everything Everywhere also raises the prospect of further consolidation in the UK because it asks questions about the future of the market’s smallest player, the self-styled disruptor 3UK. With 5.37 million subscribers at the end of September, 3 is now 25 million behind the new market leader. It doesn’t seem likely that the UK competition authorities would countenance the absorption of 3 by its network partner Everything Everywhere, but a purchase by either Vodafone or O2 would, of course, bring them into the shared network arrangement.

Interestingly 3 is in a similar market situation in Italy, where Vimpelcom will soon be arriving. That could be another situation to watch in 2011 because one thing’s for sure: carrier M&A is a trend that has far from run its course.