Risks of the Middle East venture were high and so are the rewards
Shooting out the lights
By Duncan McLeod
Risks of the Middle East venture were high and so are the rewards
Mobile phone operator MTN drew flak from some analysts last year when it acquired Africa and Middle East cellphone group Investcom in a US$5,5bn deal. The analysts argued that MTN was paying over the odds. Even group CEO Phuthuma Nhleko conceded that the deal wasn't cheap.
But he also told the FM in an interview at the time that the acquisition represented an "attractive opportunity for MTN" and provided "synergies and solid growth opportunities".
Boy, was he right. Nhleko has left his critics with red faces, with the publication of stunning results for the year to December 31 (in which Investcom was consolidated from July).
The group has consolidated its position as one of the world's leading emerging-market operators by growing its subscriber base by 73% to more than 40m at the end of 2006. Even without the Investcom deal, MTN's subscriber numbers would have risen by 36%.
Group revenue in 2006 was up 49% to R52bn and earnings before interest, tax, depreciation and amortisation (Ebitda) climbed 53% to R22bn, delivering an Ebitda margin of 43,4% (up from 42,4% in 2005, with a target of 45% in the "medium term"). Shareholders will receive a dividend of 90c against 65c previously. (See results table).
MTN has moved rapidly to integrate Investcom, and Nhleko says the group is ready to explore any new opportunities "that make sense". That means pursuing new licences in emerging markets and making acquisitions.
MTN recently lost a bid, to Kuwait's Mobile Telecommunications Co, to become Saudi Arabia's third cellphone operator. MTN bid significantly less than the US$6,1bn MTC offered for the licence. "We are comfortably happy to have lost it at that price," Nhleko says.
MTN may now be planning to look further east for opportunities, and speculation is that it could go into India. Nhleko says the group hasn't "made any effort to make a pitch" there, but doesn't rule out it out. "Africa and the Middle East is our natural market but if we had opportunities further east, we'd consider those. But nothing is on the table at the moment."
Even without acquisitions or new licences, MTN expects strong growth in 2007. By the end of the year, it hopes to have added another 16m subscribers, representing a 41% growth on its December 2006 base. That growth is expected to come from Iran (5,5m new subscribers), Nigeria (3,5m), SA (2m), Ghana (900 000) and Sudan (850 000) with 3,8m from its other operations.
The forecast subscriber growth in Iran seems particularly ambitious given that MTN IranCell, MTN's 49%-held joint venture in that market, had only 154 000 customers by the end of December. MTN had been hoping for 1m by then.
Nhleko blames a delayed launch for IranCell missing its initial targets. He says it has taken longer than expected to receive the necessary regulatory approvals. IranCell has also experienced difficulty in securing leased lines needed for carrying voice and data traffic between cities.
The incumbent mobile operator, which is owned by Iran's state-owned fixed-line provider, has taken advantage of the delays to improve customer service and cut prices. Nhleko says IranCell is adding between 15 000 and 20 000 new subscribers a day and had 1m customers at the end of last month.
IranCell's average revenue per user (Arpu) - a key measure that determines profitability for mobile operators - is poor, at just $9/month. Nhleko says Arpu should rise slightly, to between $11 and $12, over time. The incumbent's Arpu is $13.
UN sanctions against Iran "don't help the environment" for MTN but, Nhleko says, "we are quite comfortable that the diversification of vendors and significant vendor funding that has been put in place will allow us to continue with our operation there".
Peak funding of IranCell is expected to reach $1,9bn in 2009, up from a previous estimate of $1,5bn.
In SA, MTN has performed well, despite a market that many in the industry believe is close to saturation. It has held on to its market share despite aggressive advertising and new product promotions by bigger rival Vodacom. MTN SA grew its subscriber base by 22% to 12,5m.
Prepaid Arpu rose R1 to R94, though contract Arpu came down from R541 to R487. Data revenue contributed about 8% of revenue but MTN SA wants to increase this to 12%-15%. It has dramatically cut its data prices and accelerated the deployment of its 3G network - it now has 793 3G base stations, covering 20% of its subscribers.
Regulatory intervention remains a threat in SA. The Independent Communications Authority of SA is reviewing the fees that operators in SA charge each other to terminate calls on each other's networks.
Nigeria was once again the star performer for MTN, where Ebitda margin growth rose to 57% from 53% because of cost-cutting. Nhleko says Arpu of $18 is "pleasing at this stage of the operation".
There are challenges in Nigeria, however: a fifth mobile operator has been licensed and on April 1, MTN's "pioneer status", which afforded it a tax holiday, ended. Then there's the upcoming Nigerian election, which adds political uncertainty.
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