DEALTALK-Djezzy could be dealbreaker in MTN bid

MTN's potential $9-billion bid for Egypt's Orascom Telecom will have little meaning if the South African firm can't secure a hefty stake in Orascom's money-spinning Algerian unit.

• Desperate to boost growth beyond its core markets of Nigeria, South Africa and Iran, MTN Group has long been on the prowl for further acquisitions. Analysts say that Djezzy, Orascom’s Algerian unit and its top source of revenue, would give MTN a lucrative foothold in North Africa.
• But for now, the Algerian government says ‘no deal’, citing a law passed last year that, according to the finance minister, would give the state or state-owned companies initial right of refusal on a 51-percent stake in the event of a sale.
• Without Djezzy, MTN would once again come up short in a bid for much-needed expansion.
• ‘Algeria is what makes this attractive, not Burundi or Pakistan. If they don’t get Algeria, I will be surprised if they carry on with the deal,’ said Steve Minnaar, a fund manager at Cape Town-based Abax Investments.
• One solution may be for MTN to take a 49-percent stake of Djezzy and management control. That would give the Algerian government a 51-percent stake and fulfill Algiers’ long-held desire to wrest Djezzy from Egyptian ownership.
• ‘MTN has no problem with management control with a 49-percent stake,’ said one banker with knowledge of the deal but not directly involved in the talks.
• ‘At issue is how much the Algerian government will pay for its 51-percent share.’
• MTN, Africa’s largest mobile phone operator by subscribers, already has a minority stake in its Iranian unit, so it wouldn’t be in completely unfamiliar territory.
• MTN said last week it was in talks to buy some or all of Orascom, which has the potential to make MTN the world’s third-largest mobile phone operator, based on its latest subscriber numbers.
• Cairo-based brokerage Naeem estimates Orascom’s enterprise value — a measure that takes into account a company’s debt — at $12.6 billion, while AfricaNext Investment Research reckons the group is worth around $11 billion.
• The bulk of those valuations rest on Djezzy, putting relatively little weight on Orascom’s other assets, which include operations in sub-Saharan Africa and Pakistan.
• Naeem also notes that Orascom’s problems in Algeria, where it is involved in a tax dispute, depress the value of the company. The brokerage said its figure is based on a multiple of 5.5 times EBITDA, or earnings before interest, taxes, depreciation and amoritisation. Recent African telecom deals have valued companies at seven to eight times EBITDA.
• SUB-SAHARAN ASSETS
• People familiar with the matter said that Citigroup had been appointed to sell Orascom’s businesses in Burundi, Namibia, Zimbabwe and the Central African Republic.
• They said the process was more formal than the efforts to dispose of Djezzy and that, although the preparatory work had been done, acceleration of the sale would depend on the outcome in Algeria.
• The sub-Saharan operations are unlikely to be a big draw for MTN, which needs to boost its presence in the northern part of the continent.
• ‘Orascom’s presence in Zimbabwe, Namibia, Burundi and the Central African Republic is a marginal factor in this deal,’ AfricaNext said in a recent note to clients, estimating the value of those assets at no more than $200 million.
• ‘This, ostensibly, is all about North Africa, the one region in the continent from which MTN is absent.’
• Although the North Africa phone market is fairly developed, analysts point to relatively high income levels, big demand for broadband and absence of 3G service.
• Orascom also has an operation in Tunisia, but it is unclear if MTN is also aiming for that business.
• Analysts are skeptical that MTN would take the Orascom assets that are too far afield from its core African markets, such as in Bangaladesh and North Korea.

• ‘I think if they are going to buy pieces of Orascom, the Algerian operation is going to be the key in that negotiation,’ said Mark Ansley, a fund manager and telecoms analyst at Cadiz African Harvest in Cape Town.