Cover Story

New-age colonialist

MTN`s desire to capture Africa has no limits, but there are questions about whether or not it will succeed.
1 November 2007
Phuthuma Nhleko uses every opportunity to remind the market that MTN's initial vision of being the leading provider of communications services in Africa has extended to being leading provider of telecoms in emerging markets.

The British Empire`s 18th-century attempt at turning Africa into an extended arm of Queen Victoria`s realm ultimately failed. Now JSE-listed cellular company MTN is on a similar mission to conquer the continent, although its means of domination differ.

With group president and CEO Phuthuma Nhleko at the helm, MTN has already made serious strides into the continent. Starting off in 1994 as South Africa`s second cellular operator, MTN now has operations in 21 countries across Africa and the Middle East. Nevertheless, there is a quietly growing backlash against the company, which some describe as imperialistic. And there appears to be another battleship on the horizon. Can MTN succeed where Britannia failed?

Student prince

From its earliest beginnings, MTN had a voracious appetite that could not be quelled by the potential market in South Africa alone. Within four years of its inception, the company cast its eye north of the border, securing licences in Uganda, Rwanda and Swaziland. Within months, the company introduced services in those countries. Two years later, MTN made its first acquisition into the market, acquiring Camtel-Mobile through the Cameroonian government`s privatisation process. Nevertheless, it was MTN`s move into Nigeria in 2001 that provided the first glimpse into the company`s naked ambition.

It was only then that we understood that the expansion into Nigeria was a license to print money.
Irnest Kaplan, Kaplan Equity Analysts
Kaplan Equity Analysts managing director Irnest Kaplan explains: “At the time, investors were happy with MTN SA`s performance and its medium-term prospects. Then the company announced it was going into Nigeria at a cost of $285 million – for the licences alone.”

Additionally, MTN said it would need to invest $1.4 billion over the following ten years on operational start-up and infrastructure rollout. In the months following the announcement, the share price of MTN`s then parent company, M-Cell, almost halved. Just last month, MTN secured a $2 million loan to fund its infrastructure expansion.

“The market thought MTN`s management team had lost its marbles,” says Kaplan. “It was at the height of Nigeria`s reputation as a dodgy place to visit – never mind invest in – and investors voted with their feet.”

At the end of its 2001 financial year, MTN`s local operation had delivered on its promise, doubling its after-tax profit to R1.2 billion. In 2002 and 2003, MTN SA`s profit growth slowed, delivering R1.45 million and R1.48 million respectively. Comparatively, MTN`s African operations delivered sizeable losses in 2001 and 2002 of R68.8 million and R303 million respectively. However, by 2003 the promise of Nigeria delivered, with the region producing a R1.3 billion profit. Since December last year, Nigeria has overtaken South Africa as the region delivering MTN`s highest earnings.

Royal marriage

Although MTN`s entry into Nigeria is long forgotten by many, Kaplan says it was the success of this move that has brought MTN long-standing investor support for its expansion interests.

“You have to understand that MTN`s success in Nigeria was not a case of luck. As soon as it started offering services, it took a team of analysts to witness the interest in the region. There were people literally queuing around the block, holding plastic bags filled with cash,” he recalls.

“It was only then that we understood that the expansion into Nigeria was a licence to print money. They had known that all along. From that point on, MTN had the almost unwavering support of the market,” adds Kaplan.

Five years later, MTN tested this support with the announcement of its $5.53 billion acquisition of Investcom. The deal, said MTN, would double the number of countries in which it had licences to operate. Notably, the incoming regions included Afghanistan, Sudan and Syria – regions considered at the time by sceptical analysts to be suicidal.

Again the company`s share price took a hit as conservative investors feared the worst. But the damage this time was less extensive and the company lost only R18 off its R68 pre-announcement price before returning to its upward trend. Today, MTN trades upwards of R100 per share.

Kaplan is not the only investor analyst expressing praise for MTN. Frost & Sullivan ICT analyst Lindsey McDonald says the group fully deserves the benefits it is gaining from its first-mover advantage.

“MTN may be listed locally, but it is no longer a South African company – it is well and truly an African company. It made firm moves where others were hesitant and is now a force to be reckoned with. You only need to look at the attempts its local competitors – Vodacom and Telkom – have made to spread geographically to understand what MTN has achieved,” she says.

And still MTN`s appetite for growth has not been satiated. Nhleko uses every opportunity with analysts to remind the market that the company`s initial vision of being the leading provider of communication services in Africa has been broadened to being the leading provider of telecommunications in emerging markets. This will be achieved through a mix of organic, acquisitive and geographic growth, he says.

And if those close to the company are to be believed, MTN has a team of specialists dedicated to watching regional developments and identifying the best opportunities for the company.

This is, perhaps, why MTN has entered into talks with Telkom. The two companies have been linked by speculation for several years, although Telkom was always considered to be the one interested in buying MTN. Nevertheless, when Telkom acting CEO Reuben September said in July that it was “reviewing its mobile strategy”, market gossip suggested that MTN was now holding the cheque.

In September, the two companies issued cautionary announcements to shareholders, confirming that discussions were under way. MTN added that these discussions were in a “very preliminary stage” but “may or may not result in a transaction involving certain assets of Telkom”.

If we were to ask Nigerians what they thought of operators such as MTN, they will come up with words like 'arrogant South African' and 'imperialistic'.
Richard Hurst, BMI-T
The news left market spectators agog. Why would MTN want to enter the slowing fixed-line telecommunications market when opportunities in the cellular market were fast and plenty? Could MTN bring the slow-moving behemoth that is Telkom into the 21st century? Would it tame its highly unionised workforce and energise its oft-criticised management team? Interestingly, Nhleko`s counterpart at Vodacom, Alan Knott-Craig, provided some insight into the possible move months before the discussions were announced. At Vodacom`s annual results presentation earlier this year, Knott-Craig unveiled the company`s decision to invest in fixed-line infrastructure.

“There are two reasons why we are doing this. Firstly, we need to ensure there is enough infrastructure for the transmission of data as we just don`t have enough spectrum available. The second reason is price – we`re getting good prices now, but we can`t afford to be solely dependent on one provider or another. In all cellular companies around the world, you see a move to fixed-line interests and vice versa. The fact is the only part of mobile that is mobile is the last mile,” he said.

What`s more, MTN has already tested its interest in fixed-line infrastructure, Frost & Sullivan`s McDonald points out.

“MTN has fixed-line operations in Uganda and the growth there has been phenomenal. If MTN – as it contends – is looking to make a mark on the corporate market, the best way to do it may be to just buy its way in. Nevertheless, I would say that MTN`s biggest motivator is to reduce costs,” she says.

MTN's expansion timeline

Launch as South Africa's second cellular operator
Secures Ugandan license, launches services within four months
Acquires Camtel-Mobile, Cameroon
Secures Nigerian licenses at a cost of $285 million
Acquires ISP, CiTEC (changes name to MTN Network Solutions the following year)
Acquires 51 percent of Telecel Cote d'Ivoire for R1.4 billion
Acquires Telecel Zambia for R347 million
Indirectly acquires 44 percent of Mascom Wireless in Botswana for R846 million
Acquires Republic of Congo operator Libertis for R656 million
49 percent-held Irancell secures license in Iran (operations begin 2006)
Acquires Investcom for R5.5 billion and extends operational coverage to Benin, Ghana, Guinea-Bissau, Liberia, Sudan, Syria, Yemen and Cyprus. Also acquires Investcom's non-operational licenses in Afganistan and Guinea Republic. Acquires Nigeria-based VGC Telecommunications
Announces it is talks to acquire certain Telkom assets

Claiming the coast

Another contention is that MTN may be after Telkom`s share in the SAT-3 submarine cable. With this in its pocket, MTN would be able to reduce the cost of its international bandwidth and potentially gain access to new markets on the continent.

“If MTN does buy out Telkom – excluding Vodacom – it would make the group the biggest mobile and fixed-line infrastructure provider in Africa overnight. It would probably have to reduce international rates, but only just enough to satisfy the market,” comments McDonald.

Currently, SAT-3 lands in nine countries in Africa, of which MTN has a presence in six. Access to international bandwidth in the remaining 43 African countries is by way of satellite or backbone from the various landing points. Negotiations are under way to introduce more submarine cables to the African continent, but political wrangling is likely to stall infrastructure rollout for some time.

If MTN did acquire Telkom`s share in SAT-3 through a buy-out, it would be fair to assume that it would be able to access international bandwidth at a preferential rate. Additionally, MTN could undertake to provide consumers with cheaper access to international bandwidth when negotiating entry into new regions – particularly the three remaining landing points where MTN has no presence.

Emerging empire

Even without a Telkom purchase, MTN is a formidable player to encounter on the continent. Analysts McDonald and Kaplan agree that its process for entering a region by acquisition or new licence appears to be without fault. However, its growth has not gone unnoticed, says BMI-T senior analyst Richard Hurst.

“There is a growing perception in certain countries that MTN is too dominant. If we were to ask Nigerians, for example, what they thought of operators such as MTN, they will come up with words like ‘arrogant South African` and ‘imperialistic`. This sentiment is in the shadows and covert, but it is there. On the other hand, there is a certain pride that an African company has successfully developed the market,” he says.

But what of competitors? Do companies like Vodacom and France Telecom have a hope in hell of beating MTN at the African telecoms expansion game? While few would bet against MTN, one investor analyst, who preferred to remain anonymous, says the company`s most dangerous competition at this point is Celtel.

“Celtel has depth in management and telecoms expertise that MTN just can`t come close to. And it has the benefit of oil money behind it thanks to parent Zain (old MTC). In the countries in which the two companies have gone head-to-head, Celtel has been the winner more often than not,” he says.

Additionally, the analyst says he believes MTN has taken its eye off the ball.

“MTN is too focused on returns and margins – like its 58 percent margin in Nigeria – to realise that its quality of service is being affected in some of its regions. All it takes is one provider to deliver a better experience, at the same or slightly lower price, and MTN could find itself having to scramble. The company has yet to experience real competition, but I don`t think that will be the case for much longer,” he warns.

Note: MTN was invited to participate in this article, but was unable to meet Brainstorm`s deadline.