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Consolidating in Africa

01 October 2006

Investcom has been running mobile networks successfully in the Middle East and Africa. Now it is merging with MTC

Read more: Investcom MTC Africa mobile phones Med Net South Africa Iran Kuwait Zambia

 

Above: Azmi Mikati: The combination is great from all perspectives. The industry we're in is one where scale definitely matters, and you can build quite a lot of efficiencies as you increase the size of your footprint

There's an intriguing coming together of mobile telephone groups across the Red Sea, merging businesses in Africa with operations in the Middle East.

In 2005 Kuwait-based MTC took over Celtel, previously headquartered in the Netherlands but with operations throughout Africa. MTC also owns Atheer, the mobile operator in Iraq: see pages 12-15 in this issue.

And in July 2006 South African group MTN — the initials stand for, simply, Mobile Telephone Network — completed its $5.5 billion acquisition of Investcom. This has brought 21 networks under one management team, with operations from South Africa itself to Iran — where a new network began pilot operations in August.

The new company, which will be called MTN, has a total customer based of 31.5 million, using June figures, as well as a wholesale network based in Monaco. Formerly part of Investcom, Med Net will be extended to serve the operations of the new parent company.

Weeks after the takeover was completed, Azmi Mikati, the CEO of Investcom and son of the founder, joined the MTN board. Global Telecoms Business spoke to him about the opportunities that the merger will create.

"That combination is great from all perspectives," says Mikati. "The industry we're in is one where scale definitely matters, and you can build quite a lot of efficiencies as you increase the size of your footprint." MTN and Investcom are "extremely complementary", he says. The combined companies are in 21 countries, with "not one single overlap".

Countries where the combined group has operations include Zambia and Uganda in east Africa, Nigeria and Côte d'Ivoire in the west, and Swaziland and Botswana in the south. There's an operation in the Mediterranean island republic of Cyprus, part of the European Union. Just before the merger Investcom launched a network in Sudan, and in August the merged group started pilot operations in Iran, and it aims to have a million customers by the end of 2006.

The resulting company is "the largest emerging market mobile operator", he says. What does he mean by largest? "In terms of revenue, EBITDA, number of countries. In terms of number of subscribers we were second, but we might be first now."

Subscriber numbers

Egypt-based Orascom is the closest rival in terms of subscriber numbers, he says. "In revenue or EBITDA, all of them are far behind," he claims.

The numbers, as published by the combined group at the end of August, certainly seem healthy, with EBITDA margins for both constituent parts of 42%. Combined revenues for the six months ending June 2006 were around $3.2 billion, with EBITDA of $1.3 billion. Revenue per customer averages out at less than $100 for the six-month period but revenue appears to be growing faster than subscriber numbers — though a change in the year-end makes it hard to be precise.

What is the logic of the merger? "Our history is different but our culture is very much the same," says Mikati. "We're both very entrepreneurial in our approach. We are both growth and bottom-line oriented. We both really look to create shareholder value."

He hopes that there will be efficiencies in terms of network, terminals and operations. "There is quite a lot we can learn from each other in terms of best practice in this new combined group. It goes from things that are pretty simple, like procurement — there are quire a lot of economies of scale that can be created — all the way down to products and services, and the way it approaches customers."

Are there already similar strategies in terms of networks and handsets? "Very close," says Mikati. "We both use some of the same vendors. For example Ericsson is a big supplier for both companies."

In terms of handsets MTN was bigger than Investcom, so the former Investcom operations "could benefit from that", he adds.

Both companies look for low-cost handsets as more appropriate to the markets they are in. They have usually sourced them from either Nokia or Motorola "as the most competitively priced handsets": the favoured vendor varies from time to time as new deals are done.

Construction business

Both companies started up in 1994, though the history of Investcom dates back a further decade. Mikati's family was in the construction business but in the period of civil war in the 1980s the telecommunications infrastructure was virtually destroyed and it was impossible to do business.

"As entrepreneurs they installed a ship-to-shore satellite phone on the rooftop of their office building," says Mikati. Friends asked for similar installations. But satellite phones were expensive then and the founders set up the first privately owned cellular network in the Middle East, starting out with an analogue AMPS system.

"And then we moved into Africa after that. We took that model and replicated it in emerging markets." Growth "was very opportunistic" where there was a need for telecoms. "Africa was the place."

When MTN took over Investcom there was no consolidation to do, as there was no overlap. "We were more into west Africa," says Mikati of Investcom, "and MTN was more into southern Africa." It was, though, largely a coincidence that there were no rivals to rationalise.

One of the closest near-misses was in Nigeria, where MTN has a 45% market share of the mobile business, and Ghana, where Investcom was the operator.

With widely dispersed operations, no executives have been lost, says Mikati. "All of the executives are absolutely needed."

Following the merger is the expanded MTN looking for further takeover or merger opportunities? No, says Mikati. "The countries we're in still have substantial organic growth that hasn't been exploited fully. Therefore for the time being — unless there is a really big opportunity — we'll be concentrating on putting the two companies together."

Cost structure

Economies of scale in a business where costs have to be low, as revenues are low, must be a particular challenge. ""We have a cost structure that is even more competitive than the one we had in the past," he says. "Therefore we could reduce those costs and increase the level of penetration."

But there are particular challenges in working in Africa. "You're operating in an environment that very often does not have electricity, and often you don't have roads." They increase the costs. "This is why you need to know how to deal with these markets so you can remain a low cost operator."

On the whole "most of these markets have very similar models", he says. "You need to operate as a low-cost operator. You have to localise your offering to fit certain cultures but overall the business model is the same. Both groups have proven that they excel and the model is replicable."

Customers are almost all on prepay accounts, he notes, peaking at around 90-95% in some countries, but much lower in others. It is only 55% in Syria, he says.

Syria is unusual in other ways: in June Areeba, its mobile network in Syria, announced that it will be launching 3G services, complete with video calls between suitably equipped mobile phones and high-speed internet access. Data speeds will be up to 340 kilobits a second.

Is there a market? Yes, says Mikati, and not just in Syria. "Ultimately it's going to be an evolution and most of the networks we operate are going to start offering 3G as the need arises."

Élite market

Who will be using 3G in the Middle East and Africa? There is an elite market, he says. They will pay for such services.

But 3G is also "part of marketing", he adds. "Usually subscribers like to know that the operators they use are always on the edge of technology and offer them the latest and most advanced services. It's part of customer psychology."

He likens this to the advantages that 2G operators had in the early days of the industry when they could promise full national coverage. Even though most prospective customers did not need coverage beyond the boundaries of their own city, they liked to know it was there if needed.

In Syria, Areeba will use its 3G network to indicate even to 2G customers that they are connected to a technologically advanced operator.

Meanwhile, Mikati and his colleagues throughout the group are starting to look at potential synergies that are resulting from the merger: "We can start offering customers services so that no matter where they're travelling within Africa they are part of their home country," he says.

And the company's in-house wholesale network will get a chance to expand, too. It was set up in the early 1990s to link Investcom's operations in the Middle East and Africa with European networks, using the principality of Monaco as a gateway. Most of Europe had not deregulated then, but Monaco was keen to offer a licence to Investcom to provide services.

Now Med Net is part of the combined group and is expanding its links through Intelsat satellites to the other member companies. GTB

MTN has networks across Africa and in several countries in the Middle East as well as Cyprus, but it has no current plans to add more territories, says Mikati

Pre-merger results for six months ending June 30 2006

MTN

  • Subscribers 25.4 million (9.4% rise in six months)
  • Revenue R20.2 billion (approx $2.6 billion)
  • EBITDA R8.7 billion (approx $1.1 billion)
  • EBITDA margin 42.9%

Investcom

  • Subscribers 6.14 million (26% rise in six months)
  • Revenue $600 million
  • EBIDTA $255 million
  • EBITDA margin 42.4%

 




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