MTN seeks to buy Econet’s stake in yu

By KENNETH KWAMA

After several past failed attempts, MTN Group Ltd could finally gain its much-desired foothold in the Kenyan market, if a $450 million (Sh36 billion) buyout offer for yu sails through. MTN, which is Africa’s largest mobile phone provider, has offered to buy Econet Wireless International’s (EWI) stake in local mobile phone provider Econet Wireless Kenya (EWK), which trades locally as ‘yu’, as part of its growth strategy in emerging markets.

According to a South-African based source, well-versed with the negotiations, the amount is the total budget MTN is proposing for the acquisition of Econet’s entire interest in the mobile phone company, including already laid out basic infrastructure such as base stations, and further rollout of services in other parts of the country.

Base stations are the most capital-intensive part of cellular telephone network rollout, responsible for handling traffic and signalling between mobile phones, and what is referred to as network switching subsystem, thus enabling quality transmission and reception of communication.

Currently, yu, the latest addition to Kenya’s telecoms market, relies on some of its rivals’ basic infrastructure, including signal masts, and operates only in Nairobi and Mombasa. It has reportedly searching for credit to finance bigger rollouts of its services.

About two months ago, Michael Foley, former chief executive of EWK, resigned, amid unconfirmed reports of unpaid suppliers, and struggles to find capital to continue yu’s network rollout. Foley unexpectedly resigned just six months after he was appointed, with allegations flying about of a tightening in the company’s liquidity, caused by delay in securing credit.

Majority stake

Coincidentally, MTN, through its Chief Executive Officer (CEO), Phuthuma Nhleko sent a letter of intent to Johannesburg-based EWI, seeking to acquire its majority stake in Kenya’s fourth mobile provider, and by extension, management rights around the same time that Foley resigned. If successful, the move could see yu change its name to MTN.

However, our source intimated that the talks might drag because the two parties are yet to agree on the proposal, with a deadlock being reported on management and ownership structures.

Econet Wirless Kenya, which is the local holding company for the yu brand, is 70 per cent owned by EWI, while Essar Communications Holdings Ltd., a unit of the Mumbai, India-based Essar Group, owns 49 per cent of EWI and by extension management rights over the Kenyan operations. When contacted, EWK declined to comment on the story, but MTN could neither confirm nor deny a deal was in the offing.

"In line with its vision to be the leader in telecommunications in emerging markets, the MTN Group will continue to pursue value-enhancing opportunities. Our intention is to diversify earnings and consolidate the group’s leadership position in emerging markets. We cannot comment on specific corporate activity at this stage," read a statement from Nozipho January Bardill, MTN’s group executive, corporate affairs and spokesperson.

Confidence in deal

MTN Headquarters in Johannesburg. The new acquisition would inrease the Group’s operations to cover 21 markets spread across Africa and Asia

Despite the tongue in cheek responses, MTN is said to be so confident of clinching the deal, that a few weeks ago, it sent out representatives to court top Kenyan government officials in the communications sector, and also sound out the local shareholders that own minority stakes in the mobile firm.

Other shareholders in the venture include Starnet Limited (26 per cent), Corporate Africa (two per cent) and Crosslink (two per cent). A purchase would allow Johannesburg-based MTN to expand into a market that’s forecast to add 15 million subscribers in the next five years, as current 16 million subscribers are expected to climb past 30 million by 2013.

For Essar, exiting the venture would help the Indian company focus on its main business in the manufacturing and services sectors of steel, energy, power, shipping ports and logistics.

However, the success of MTN’s ambitious plan will depend on Essar, which is reportedly ‘not so excited about the deal’.

According to our source, this is because executives at the Indian company believe that this is not the right time to sell out the venture.

This is because of projections that the local mobile phone market is set for phenomenal growth in the next five years, and subscribers are likely to double from the current 16 million to slightly over 30 million, a projection they think will see the company start getting returns out of its investment.

The Chief Executive of yu, Mr Srinivasa Iyengar, is on record as having predicted that the operator, whose subscriber base is currently estimated at 500,000, will easily acquire four to five million subscribers within the next two to three years.

Econet also has operations in Botswana, Burundi, Lesotho, New Zealand, Nigeria, South Africa, the UK and Zimbabwe, with more than 11 million subscribers.

Although nobody has expressly come out to confirm the existence of the proposed deal, industry insiders say that a buyout that neither party is still unwilling to officially comment on, would be a reasonable move, given MTN’s past desire to enter the Kenyan market, and the fact that yu still needs massive resources to roll out its services in many parts of the country.

Acquisition

"It is true MTN has been seeking to enter the Kenyan market, but the only way it can do that is through an acquisition.

It can’t buy Safaricom, Zain or Orange, given the nature of their ownership and business model, which leaves yu as the best alternative," says Thomas Sonesson, MD and Country Manager Ericksson Kenya Ltd, which supplies all the four local mobile phone operators with the basic telecommunications infrastructure.

Former Permanent Secretary in the Ministry of Information and Communications and Chairman of the Parliamentary committee for Communications, Engineer James Rege questioned the feasibility and long-term sustainability of Econet’s operations in Kenya.

The company’s customers can now call each other for as low as 50 cents per minute and it is aiming to acquire more customers through aggressive price competitive tactics.

"It is a capital intensive business, and obviously the company needs a partner with deep pockets, and the patience to wait for the returns, because the market is already ‘pocketed’.

The new investor should be ready to commit more money to setting up new base stations, amongst other things, if the current owners are not willing to invest further in the venture," reckons Rege.

If successful, the deal will see MTN achieve its long-nursed dream of venturing into the Kenyan market become a reality. In the parlance of love, the firm’s past trysts with local mobile providers would make it pass for a Casanova, because it has virtually courted all but Safaricom, in a bid to gain the much-desired foothold in the country’s lucrative mobile phone market.

MTN lost

MTN first showed interest in buying a 60 per cent stake in Kenyan mobile telephone company, KenCell Communications, which was then being sold by French Company, Vivendi Telecom, but lost out to Celtel International.

In August last year, Celtel re-branded its venture to Zain (Zain is Celtel’s parent company and is based in Kuwait).

About two years ago, it lost the bid to own 51 per cent of the then state-owned Telkom Kenya to a consortium led by France Telecom, which later rolled out mobile services under the brand name, ‘Orange’. The Government fell for the French-led consortium’s $390m bid over other applications.

Early this month, MTN’s Nhleko was quoted widely in the South-African media as saying that the company was seeking "a meaningful" acquisition this year, to add to its operations in the 21 markets spread across Africa and Asia, where it’s already doing business. MTN’s profits last year climbed 44 per cent to 15.3 billion rand ($1.6 billion) after operations in Iran and Nigeria helped its number of subscribers increase by 48 per cent to 90.7 million.

Earnings before interest, taxes, depreciation and amortisation — a measure of a company’s inflow of cash — is forecasted to jump to $7.67 billion by 2013, up from $5.22 billion last year, according to investment and financial services firm, Goldman Sach’s estimates.

Yet, this is not the first time MTN is negotiating with an Indian firm for a takeover.

Last year, the company failed to close two such deals. Talks with Reliance Communications Ltd, India’s second-largest mobile-phone operator, ended without an agreement, because of ‘legal and regulatory issues,’ and talks with Bharti Airtel Ltd ended because agreement on management and ownership structures couldn’t be reached.

The MTN-Econet deal, if successful, could also disrupt a roaming services agreement, courtesy of a tri-network tie-up arrangement by MTN Uganda, Safaricom and Tanzania’s Vodacom, which allows mobile subscribers in Kenya, Uganda and Tanzania to make cross-network calls at local rates ,and also receive free incoming calls.