Berlin: With a vast, unserved population, Africa used to be a no-lose proposition for mobile phone operators looking for new customers. But after a wave of investment, the wireless industry’s final frontier is showing signs of age.
In Egypt, France Telecom SA has been sparring for two years with its junior partner, Orascom Telecom Holding, for control of MobiNil, the leading Egyptian mobile operator and France Telecom’s largest African holding.
In Johannesburg, Bharti Airtel Ltd, the largest mobile operator in India, is in the second year of on-again, off-again negotiations to merge with MTN Group Ltd, the largest mobile African operator, with 91 million customers in 21 countries. The companies have set a deadline of Friday to reach an agreement or cut off talks.
And last Monday, Vivendi SA, the French media company that owns a majority stake in SFR SA, broke off talks with Zain, the Bahraini group that is looking to sell its 16 sub-Saharan African phone businesses serving 40 million people.
Clinching deals for African mobile phone business, once a relatively low-risk proposition for growth-starved mobile operators, is not as easy as it was. That is especially true in sub-Saharan Africa, where rising competition and the cost of providing service to remote areas has eaten into profits.
Tough competition: A person looks at a cellphone in Johannesburg, South Africa. Many sub-Saharan markets have up to seven operators competing for consumers who spend less than $5 a month on service. Naashon Zalk / Bloomberg
“What we are seeing is an evolution in the valuation of African mobile phone companies,“ said Kristoff Puelinckx, managing partner in Dubai at Delta Partners, an industry consultant that advises Middle Eastern and African operators. “Operators are investing heavily in their networks, but it is not as clear as it was that the financial returns will be there in the end.”
The more sanguine view of those returns has contributed to the intense haggling over acquisition prices that has dragged out the Bharti-MTN merger in Johannesburg and the sale of Zain’s African operations, the second largest on the continent after MTN.
The hard bargaining is a change from five years ago, when most African markets were underserved. Investors have long since filled the vacuum, and many sub-Saharan markets have up to seven operators competing for consumers who spend less than $5 (Rs241) a month on service. In Botswana, cellphone penetration exceeds 80%, and in South Africa, it has topped 100%.
But the growth is slowing in some markets. In Kenya, where competition has led to lower prices, there has been little increase in cellphone use, said Andre Wills, an analyst at Africa Analysis, a business consultancy in Johannesburg.
“We are still bullish on the African telecom sector,” Wills said. “But some markets are showing signs of maturity. The outlook isn’t as rosy as it was.”
The challenge of making a profit in sub-Saharan Africa is one reason Zain, which also has 25 million customers in six other countries, may be looking to sell, said Puelinckx.
Zain’s biggest investors, the Kuwaiti sovereign wealth fund and the Kharafi family of Kuwait, which together own 40% of Zain, are hoping to profit from a sale of Zain’s African businesses, Puelinckx said.
Antoine Abou Khalil, a Zain spokesman, said the company declined to comment on the sales talks. Representatives for Orascom, France Telecom and Vivendi also declined to comment.
In the first quarter of this year, seven of Zain’s sub-Saharan businesses reported a loss as the company struggled to make money in very low-cost markets, said Nicholas Jotischky, an analyst at Informa Telecoms and Media in London. “It’s increasingly an issue as operators expand into rural areas, where most of the remaining unpenetrated areas lie.”
MobiNil, the Egyptian operator that started in 1998, has been consistently profitable and even sells advanced services that are rare in Africa, such as wireless broadband. That is why the two shareholders, Orascom, owned by the Sawiris family, and France Telecom are fighting to push each other out.
The fight began in 2007, when Orascom objected to spending plans by MobiNil, triggering a series of countervailing buyout offers that both sides have rejected. France Telecom, which owns 72.1% of MobiNil, has offered to pay €528 million (Rs3,627 crore) to Orascom for its 27.9% stake in the holding company.
But France Telecom’s attempt to gain control has foundered on compensation to minority shareholders of MobiNil’s listed operating company, ECMS, based in Cairo. The largest is Orascom, with 20%. France Telecom has offered to pay €1.47 billion to the shareholders, representing an additional €600 million for Orascom.
But Orascom and the Egyptian stock market regulator have rejected the offer as too low. In March, the International Arbitration Court in Geneva, which was asked by Orascom to decide the dispute, sided with France Telecom.
Frank Oehler, the head of business development for new markets, including Africa, at Nokia Siemens Networks, a maker of wireless network gear, said negotiations such as those taking place in Egypt are signs of the new wave of foreign investment changing the landscape of the African mobile industry.
At the same time, Oehler said, all operators are under new pressure to justify the purchase of new network equipment, given the slim profit margins that are a reality in sub-Saharan Africa.
“Investors have woken up to the costs of doing business in Africa,” Oehler said. “The pressure to control costs, which was always there, is now much greater than it was.”
©2009/THE NEW YORK TIMES