ANALYSTS AND INVESTORS recently returned from a trip to see MTN’s operations in Iran. Most were pleasantly surprised, though not all said it would influence their valuation of the company. <\/p>\n
It was the first trip to Iran for the South African investment community, despite MTN starting operations there in October 2006 and already having more than 9m subscribers at end-March this year. And the affirmation of how well it’s doing in Iran will serve to bolster the market’s unwillingness to accept anything short of a great offer for MTN if it does indeed prove to be somebody’s lunch. <\/p>\n
Stanlib telecoms analyst Zwelakhe Mnguni says: "The country is totally underrated. I was impressed." Mnguni says the capital – Tehran – exceeded his expectations in terms of the quality of infrastructure, such as roads and hospitals. And while you might expect to feel uneasy, Mnguni says he didn’t see a military presence at all. Rather he saw a modern, built-up, bustling city. <\/p>\n
The hotel rooms offered tele-vision channels ranging from CNN, to Sky and the BBC, but because alcohol isn’t allowed in the country, the restaurants served alcohol-free beer. <\/p>\n
Mnguni says MTN is doing a great job in the country. Although the network coverage wasn’t good in some parts of Tehran, that was because the city had held back some sites. However, once those issues were sorted out, significant subscriber growth should follow, as MTN’s products and service levels were better than those of its competitors. <\/p>\n
Although Iran wasn’t yet a meaningful contributor to MTN’s revenues or profits, it would be quite sizeable 18 months from now. "I’d be reluctant to sell without a significant premium," he says, referring to any potential corporate action. <\/p>\n
The only disadvantage for MTN in Iran is that it only owns 49% of the operation and has a 28,1% revenue-sharing arrangement with the government, in terms of its licence. <\/p>\n
The analysts also had an opportunity to meet the regulator in Iran, who informed them it would issue a third cellular licence within the next six months. However, Mnguni says it will take the new competitor some time to roll out its network and meanwhile MTN was going great guns. <\/p>\n
Old Mutual Investment Group SA head of equity research Steve Minnaar says although Irancell was a "good operation" he’d gone to Iran with positive expectations, which had merely been affirmed. So it wouldn’t change his valuation of the company. In terms of its contribution to the group it would also not be "another Nigeria" due to its high revenue share and strong competition. <\/p>\n
Whereas in most markets where MTN operates in Africa it virtually paints the entire country yellow – I’ve been to Nigeria and Cameroon – that wasn’t the case in Iran, Minnaar says. That was because advertising, and outdoor advertising in particular, was very expensive. <\/p>\n
Minnaar says his impression of Tehran was that, unlike most developing markets, its skyline wasn’t full of masts and satellite dishes on top of buildings, because Iran has a very good fixed line infrastructure. He also says it struck him what a green city Tehran was, with lots of parks and trees – like Johannesburg. <\/p>\n
Minnaar says Iran has a good education system, sponsored by the state, and people with good qualifications tend to do lower jobs. Given that its population is young (70% aged under 35, according to Pyramid Research, as cited in an MTN presentation), Minnaar says there is the risk that good people could leave the country. <\/p>\n
Citigroup Central Eastern Europe and Middle East and Africa telecoms analyst Rhys Summerton says his impression of Iran was "a lot better than anticipated". However, it wasn’t like any other markets MTN operated in but reminded him more of Eastern Europe, or how Russia was about five years ago. <\/p>\n
Summerton says whereas most of MTN’s operations were high tariff, low usage markets, Iran was a low tariff, potentially high usage market. The latter tended to garner higher multiples, he says. MTN had gone into Iran cleverly by outsourcing almost everything, from building its network to distribution. <\/p>\n
Summerton also says having seen Iran wouldn’t change his valuation of MTN, as the operation would only account for 10% of its market value because of its revenue share. He says likely contenders for the third licence in Iran were Russian operators Megafon and MTS, as well as Turkcell and China Mobile. <\/p>\n
Summerton also says he struggled to see why MTN would consider selling out "considering how well its operations are performing. Irancell is a good example of that".<\/p>\n