MTN looks to consolidate African leadership via Orascom deal

MTN's bid to acquire most of Orascom Telecom's African mobile assets will see the South African firm's subscriber base surpass the 100 million mark and strengthen its position as the leading mobile operator group in Africa. According to Wireless Intelligence data, the addition of the Orascom assets would increase MTN's customer base by over 20 million, reaching almost 110 million in total on a 1Q10 pro forma basis. This would mean MTN would serve a customer base that is over twice the size of its pan-African rivals such as Orange and Bharti Airtel.

The Johannesburg-based firm announced last month that it is in talks to acquire the majority of Orascom's African assets, including Algeria's Djezzy, Orascom's 50 percent stake in Tunisia's Tunisiana, and the four African networks that form part of Orascom's Telecel Globe subsidiary: Burundi, the Central African Republic, Namibia and Zimbabwe. The deal is not thought to cover Orascom's equity interest in Egypt's Mobinil, which is currently in the process of being consolidated by France Telecom, nor any of its operations outside of Africa.   

The key attraction for MTN in the portfolio is Djezzy, the Algerian market-leader and the largest single Orascom group subsidiary in terms of revenue and earnings. The unit generated revenues of US$1.9 billion in 2009, accounting for 37 percent of the group's overall total, while EBITDA was US$1 billion, acconting for 49 percent of the group total. However, Djezzy has been beset by problems in recent quarters. Orascom was hit by a US$597 million tax bill at the unit late last year, which led to Orascom tumbling to a net loss in the fourth quarter (it recently lost its appeal against the bill). During the same quarter, Djezzy's headquarters and shops were targeted by rioters following the high-profile – and bad–tempered - World Cup qualifier between Egypt and Algeria in November.

These problems have served to heighten already strained tensions between Orascom and the local Algerian regulator, which recently moved to block Orascom from selling the unit to a third party such as MTN. The regulator claims that the Algerian state has first right of refusal to acquire a majority stake in the network if it is put up for sale and has threatened to withdraw Djezzy's license if Orascom proceeds with an unauthorised sale. Orascom is currently in talks with the Algerian government to resolve the impasse. Such stumbling blocks will need to be resolved for MTN to proceed with a transaction as the Algerian network is by far the most desirable part of the deal. As our data shows, Algeria would become MTN's third-largest African market after Nigeria and South Africa (in terms of connections) and give it its first major foothold in Northern Africa.

MTN is reportedly less concerned with Orascom's assets in neighbouring Tunisia, where Orascom controls the country's second-largest mobile operator – Tunisiana – as part of a 50/50 joint venture with Kuwaiti-based Wataniya. The unit accounted for 7 percent of revenue and 9 percent of earnings at Orascom (on a proportionate basis) in 2009. Tunisiana had 5.2 million connections in 4Q09, which would make it MTN's sixth-largest subsidiary by connections. Unlike in Algeria, the Tunisian regulator has indicated it will not block a sale of Orascom's stake in the firm. 

Elsewhere, MTN has long been linked with the mobile networks owned by Orascom's Telecel Globe, as these will allow the firm to fill in many of the remaining gaps in its Southern African footprint. Telecel Globe was created by Orascom in 2008 as a vehicle to oversee small-sized acquisitions in Asia and Africa, though its original aim to enter at least six new African mobile markets within the first year has not been achieved. Based on 4Q09 connections data, the four Telecel Globe subsidiaries would be among the five smallest markets in the enlarged MTN group. Although Telecel Globe is growing fast, it generated revenues of just US$81 million for Orascom last year.

Matt Ablott, Analyst, Wireless Intelligence: "Despite comments earlier this year from chairman Naguib Sawiris that Orascom is not for sale, the recent deterioration in its fortunes has made it a prime candidate for consolidation. However, it remains to be seen exactly which parts of the company will form part of a transaction, with the Algerian business the only certainty to be included, assuming the regulatory issues can be resolved. For MTN, Algeria could become a bridgehead into the relatively high-value Northern African markets where the South African group currently lacks presence. As we discussed in an earlier edition of Snapshot, North Africa remains the largest and most technologically advanced sub-region in the continent. This means that Djezzy – which has previously been looked at by Etisalat and others – is likely to become MTN's largest revenue generator outside of its home market. As a highly-profitable market leader, Djezzy boasts ARPU and margins that are among the highest in Africa. But such an operation will come at a high price with analysts predicting a final fee of between US$5 billion to US$7 billion for the Algerian unit, which is not far below Orascom’s overall market valuation. This could see MTN spending as much as US$8 billion to acquire all of Orascom's African assets. The other businesses likely to be included in a deal are less valuable but will serve to allow MTN to fill in gaps across the continent, strengthening its position against dangerous new African rivals such as Bharti."

MTN/Orascom African mobile units: MTN 1Q10, Orascom 4Q09
Source: Wireless Intelligence, company data