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A scuffle in front of goal
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Larry Claasen
Financial Mail
Friday, May 14, 2010
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Mobile phone operator MTN has a habit of going into new markets in one swoop. Its 2005 US$5,5bn takeover of Dubai-based Investcom gave it entry into 10 new markets and its current bid to take over some of Orascom Telecom’s operations looks similar.
MTN and Orascom Telecom have not specified which of the Egyptian company’s operations are on the table but reports suggest that its networks in Egypt, Algeria, Zimbabwe and Tunisia are up for grabs.
Taking over Orascom Telecom operations in Africa makes sense for MTN. The Roodepoort-based group could get an extra 29m subscribers in one push, take control of a few well-established operators and build up a substantial presence in North Africa.
“In principle it looks like a very good deal. It takes them into markets they are not already in,” says Kaplan Equity Analysts MD Irnest Kaplan.
But taking over these operations is not going to be easy. Political friction between Algeria and Egypt — stemming from an acrimonious international football match — threatens the deal.
Algeria’s 1-0 win over Egypt in a soccer World Cup qualifying game in November cascaded into violence, product boycotts and even the recalling of ambassadors.
It got so bad Orascom Telecom says its Algerian operator, Djezzy, lost about $55m in earnings before interest in the fourth quarter of 2009 as a result of the riots and “loss of revenue opportunity” following the match.
It also has to deal with the small matter of the Algerian government now claiming Djezzy owes it $576m in back taxes.
The tension can be seen in the Algerian authorities warning that any transaction between Orascom Telecom and MTN for Djezzy “is void and could lead to the withdrawal of the licence”, according to a Bloomberg report.
What the Algerians are essentially saying is that local companies have a right of first refusal if Orascom Telecom’s 50% holding in Djezzy is up for sale, says Africa Analysis MD André Wills.
The Algerian government’s hard-line stance should also be seen against the backdrop of Orascom Telecom’s owner, Egyptian billionaire Naguib Sawiris, selling his holding in the cement company Orascom Cement to Lafarge of France, in defiance of laws governing foreign investment in Algeria, according to the news website Ennahar Online.
MTN can do a deal without Djezzy, but given the size of the Djezzy business, this seems unlikely.
“The Algerian company is key,” says Wills. “It accounts for 37% of Orascom Telecom’s $5,06bn in revenue and brought in about 50% of its $2,1bn in earnings before interest and tax.”
Kaplan says even if MTN does not get control of Djezzy, it is not the end of the world because completion of the transaction would still take it into growth markets.
For Kaplan, the central issue is not what’s bought but how much MTN pays for what it gets. “At the right price anything is a good deal,” he says.
Until MTN and Orascom Telecom come out and say which operations are being sold and at what price, it’s impossible to gauge whether it is overpaying.
Wills says similar takeovers have been structured in such a way that debt is paid off as part of the transaction. With $8,6bn in liabilities and only $10,9bn in assets for the year to end-December, Orascom Telecom’s balance sheet is not in a great state. If the Egyptian company wanted to eliminate its debt then the speculation is that a deal might be made around $9bn.
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