Telecoms M&A in Emerging Markets Expected to Remain Hot
Published on: 24th January 2008
LONDON (Dow Jones) -- Telecom deals in emerging markets such as sub-Saharan Africa, Russia and the Middle East are likely to continue apace in 2008, despite the global credit crisis.
"A large number of executives think emerging markets is the place to be," said Gavin Owston, head of European telecom, media and technology (TMT) investment banking for ABN Amro, at a presentation during the TelecomFinance conference in London this week.
Robert Samuelson, in charge of business development for Richard Branson's mobile operator Virgin Mobile, confirmed the trend.
"Emerging markers is really where all the action is and where all our attention is," he said.
Virgin plans to enter the Indian market in the first quarter of 2008. It's already present in South Africa.
As demand for voice services has flattened in mature markets, regional carriers operating in areas of the world where subscriber growth is exploding have become very attractive targets for Western players keen to capture new sources of income.
From a mere afterthought, these new markets, which now account for about two-thirds of the world's total number of subscribers, have evolved into an essential part of any global operator's strategy.
In fact, gaining a foothold in these fast-growing regions has been the motivation behind many of the deals announced in the past year, including Vodafone Group's $13-billion acquisition of Hutchison Essar in India. In 2007, 47% of telecom M&A deals took place in emerging markets, according to Thomson Financial.
Deal activity unlikely to slow
But will tighter credit conditions, slower economic growth in many developed markets and a generally gloomier business climate put a curb on the appetite of telecom players for new assets?
That is very unlikely, according to several industry observers in London to talk about the outlook for telecom deals in 2008 as well as their financing.
Regional players, in particular, are in a stronger position than they were even a year ago, so that from prey, they could easily become predator.
"The financial flexibility of regional operators, in fixed-line as well as in mobile, has not been impacted as much as that of Western operators by the credit market crisis," said Erik Arveschoug, who heads the TMT corporate finance team of Citigroup for emerging markets.
"There's still a lot of liquidity in Russia and the Middle East for mid-sized transactions," he added.
ABN Amro's Owston also believes that consolidation will continue, even though he predicts the dynamics will shift a bit.
"It will be more difficult for Western players to buy emerging-market operators than for emerging market operators to buy each other," he said.
Yet Owston doesn't expect Western carriers to just stand by and watch. He believes their often underleveraged balance sheets mean they can probably raise money if they want to play the consolidation game.
The financing structure of the deals, however, is likely to change, reflecting the new credit conditions and the resulting subtle shift in the balance of power between the various players.
In particular, Arveschoug expects greater utilization of equity in upcoming transactions. Yves-Henri Saliou, head of financing for emerging markets at BNP Paribas, meanwhile, expects more regional market operators to target Western players as well as each other as they try to develop a more global footprint.
Among regional players with enough cash and ambition to look at significant deals, Zain and Orascom Telecom Holdings were repeatedly mentioned. Kuwait-based Zain, formerly known as MTC Group, has operations in 21 countries in the Middle East and Africa and recently snapped up the third mobile license in Saudi Arabia for more than $6 billion. Orascom is in Tunisia, Algeria, Bangladesh, Pakistan and Egypt. It recently exited the Iraq market.
Sub-Saharan Africa, Middle East to see wave of consolidation
The two emerging markets likely to see a particularly high level of deals in 2008 are sub-Saharan Africa and the Middle East, observers said.
"We expect a shakeout of consolidation in these two regions in the next 18 months," said Owston, mostly because, at 70, the number of operators covering about 20 countries is unsustainable.
In the Middle East, a wave of deregulation, leading to new licenses becoming available, is likely to spur former state incumbents to venture into foreign markets to keep growing.
"A number of operators in the Middle East have enjoyed near-monopoly conditions in the past. Deregulation will force change," said Citi's Arveschoug.
In Russia, where the proportion of the population owning a mobile phone is higher than in most emerging markets, Arveschoug expects the privatization of Svyazinvest to change the game, even though it is still difficult to predict whether the state-owned company's assets will be broken up or whether it will be sold as a whole.
In that case "the buyer would automatically become an important player," Arveschoug said.
Sub-Saharan Africa, meanwhile, has in the past year demonstrated its extraordinary potential, despite the high fragmentation of the market and the continuing infrastructure challenges it presents. Nigeria is now the biggest mobile market in Africa, with 44 million subscribers, followed by South Africa.
(END) Dow Jones Newswires