MTN, Reliance need each other

Hilton Tarrant

Hilton Tarrant is production editor at Moneyweb. He also project manages new website launches for the company and covers ICT issues, chiefly through his weekly...

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It was nine months ago when MTN failed to complete a tie-up with India’s largest mobile operator Bharti.

That deal, the second time the two groups were trying to hammer out a transaction that appealed to both companies’ shareholders, was meant to be Phuthuma Nhleko’s swansong. His long-term contract finishes at the end of this month, but he will stay in his role until March next year.

The group, who failed in three attempts to complete a transaction with an Indian operator, then plotted its next move. If those deals proved to be too complex, why not plug the holes in Africa?

It made its move for Orascom Telecom in April and was negotiating a purchase of some of the company’s units. Orascom operates in Algeria, Tunisia, Central African Republic, Burundi, Namibia, Zimbabwe, Egypt, Bangladesh, Pakistan and North Korea. The stumbling block, aside from the steep valuation, was the Algerian government’s insistence that it would buy the 51% it didn’t already own in Djezzy, the most attractive asset in the portfolio. MTN was also unlikely to venture too far eastwards, and would almost definitely not have purchased the (hot potato) North Korean asset.

MTN would’ve also looked at Zain’s (struggling) African operations when they were put up for sale – even Vodacom admitted it took a glance.

These operations – later bought by Bharti Airtel for around $10bn – covered Ghana, Burkina Faso, Sierra Leone, Nigeria, Niger, Chad, Gabon, DRC, Congo Brazzaville, Zambia, Uganda, Tanzania, Kenya, Malawi and Madagascar.

One major problem was that MTN would’ve had to immediately divest the Zain entities in Uganda, Zambia, Congo Brazzaville, Ghana and Nigeria – markets where it already operated. That didn’t exactly leave many attractive operations. Finding a buyer for the portfolio of five countries would’ve also been tricky.

MTN has said it wanted to lessen its reliance on its South African, Nigerian and Iran operations. Orascom’s Algeria unit would’ve offered that – except government was having none of it.

So MTN is looking for a sizeable asset, preferably with operations in a few other markets to help colour in its Africa and Middle East coverage map. Problem is, there are very (very) few opportunities remaining, aside from greenfields licences in largely unattractive markets.

It faces strong competition from France Telecom (the Orange brand), which has stated that it will continue to focus on Africa. On the continent, it already operates in Egypt, Niger, Mali, Senegal, Guinea Bissau, Guinea Conakry, Ivory Coast, Cameroon, Central African Republic, Uganda, Kenya, Equatorial Guinea, Madagascar and Botswana. Thankfully Vodafone (and Vodacom) are slow to move in Africa, and up until now have not pushed too hard.

The threat then is from Bharti. It is looking to appoint 100 executives for its African headquarters in Nairobi to run the Zain operations it purchased. Bharti is not just focused on mobile telephony, but has specifically stated it will launch data and IPTV services on the continent. This will provide stiff competition for MTN in markets where they compete.

The Indian operator has deep pockets and will likely look to add to its African portfolio if it’s able to find single-country assets to buy. Most will argue it overpaid for the Zain portfolio, which gives you a sense of how badly it wants to compete in Africa.

Bharti competitor Reliance Communications is not going to lie down. The non-compete clause between Reliance Communications and Reliance Industries, controlled by brothers who have been feuding for years, is no more.

Ironically, Reliance Industries, with no interests in telecoms made the first move. It bought Infotel Broadband in India for $1bn and has earmarked $5bn for acquisitions in the space.

Reliance Communications has put a 26% stake in itself up for sale to raise funds to repay debt, as well as to help it roll out a 3G network in India. Likely suitors are Reliance Industries and Middle Eastern operator Etisalat.

There are a few murmurs that MTN would try again with Reliance. The reason the deal failed the first time – the feud between the brothers and the non-compete clause – is no longer a problem.

Reliance needs MTN if it does not want to fall behind Bharti. Reliance only has an operation in India. It surely needs to look beyond its borders.

MTN needs Reliance to provide a springboard into Asia, and the 26% stake in Reliance Communications is valued at $2bn – very affordable for MTN.

A deal structured in a similar way to the most recent one proposed by MTN and Bharti would work well. Each operator would take a stake in the other, with a view to a full merger down the road. They can both learn tremendous amounts from each other.

MTN’s market cap is around R200bn, with Reliance sitting at the equivalent of R60bn.

A proper tie-up between these two is too compelling to ignore. Nhleko will be tempted to have one final (final) swing of the bat.

MTN and Reliance << comments and views

* Hilton Tarrant contributes to “Broadband”, a column on Moneyweb covering the ICT sector in South Africa. Bharti is going to take time to get going in Africa, giving MTN a chance to pull off something big.