Mergers ahead for Middle East telcos

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GLYNN: Africa is high risk market, but potential rewards are huge.

He also predicts that the USA's leading players, AT&T and Verizon are also likely to start looking at potential acquisition in the region, partly because their home market is already saturated.

"They are in stagnant markets, mobile retail prices are going down, markets are saturated. They are going to have to grow."

Furthermore, Glynn also raises the possibility of a regional "merger of equals" where two of the Middle East or Africa's biggest players could come together to create a regional telecoms behemoth.

Tanguy van Overstraeten, partner and co-head of telecoms sector at TMT, Belgium, Linklaters LLP, adds that despite a global decline in deal value and volumes in 2007, from some EUR 332 billion and 1260 deals in 2006, to EUR185 billion and 1,190 deals in 2007, Africa and the Middle East are now poised for increased M&A activity and consolidation.

"The two main reasons cited for the continued increase in M&A activity in the region are the general drop and slowdown in the market activity in Western Europe and the US and the increasing interest in the wireless industry sector, which saw the largest proportional increase in 2007 with total proportion of all deal values growing to 50% in 2007."

He adds that this offered expansion opportunities in the region, and sites the example of France Telecom's activities in Kenya and targeting, along with other operators, further activities in Ghana.

"The rise of interest in wireless does not just relate to wireless voice but also the expansion of use of solutions such as WiMAX to provide internet access," he says.

Deal challenges

But while making acquisitions may well be vital for many telcos' survival, acquiring another company is a complicated business that can bring significant risks. As a number of recent headlines demonstrate, much can go wrong, and many deals fail to make it past initial discussions.

For example, both Bharti Airtel and Reliance Communications of India cancelled negotiations with South Africa's MTN, through no particular fault of either of the parties.

DLA Piper's Glynn says there are numerous challenges with doing deals in the region, particularly in Africa. "Some of them are typical to any M&A scenario such as integration of processes, culture and that sort of thing," he says.

Then there are also challenges related to Africa including corruption, a lack of skilled technical staff, and legal and linguistic challenges, according to whether the country is Francophone or Anglophone.

In this climate, it is important for the acquirer to find a strong local partner, Glynn says. "In terms of Middle Eastern companies going into Africa, the big issue there is that if you want an acquisition to go smoothly, you have to have a very strong local partner. Africa is a "managed" environment and you very much need a strong local partner who has good local connections and knows how the markets work. Some of the early investors into Africa have had problems with their local partners that haven't worked well," he says.

In terms of integrating operations and building, Glynn points to a "war for talent" as one of the main challenges. "There simply isn't enough top telecoms talent whether it is CTOs, CEOs or CMOs to go around all of the opcos being established around Africa," he says.

"There are also issues in terms of where outside talent will work. Nigeria is one of the jewels in the crown of Africa, but not everyone wants to go to work there."

But Glynn singles out corruption, a lack of transparency and a lack of regulation as the major hurdles to doing deals in Africa. The main means of defence for the acquirer is to research and plan the deal thoroughly.

"The single biggest card that you can have to investing in Africa is due diligence," he says. "Go in with eyes wide open. Understand where the skeletons are, understand where the difficulties lie with the company."

Who dares wins

However, these same challenges also have the potential to shake-up the region's telecom sector, perhaps allowing smaller players who are prepared to take calculated risks to move in and make strategic acquisitions where larger, more established players might exert more caution but move too slowly to get deals done.

"There are companies from all over looking at this market, there is so much interest that deals are literally being done in two or three weeks time," Glynn says.

"The demand is so high that certain companies don't have the luxury of doing as much due diligence as they should. This is essentially another part of the high risk profile of investing in Africa. This is why it will be difficult for some US companies to make inroads into the African market."

"The bottom line is that investing in Africa is a high risk profile but it also carries with it substantial rewards. Those clients used to operating in a higher risk profile environment such as operators in the Middle East and Africa, are the ones who are going to be able to move faster."

"They are the ones who will be comfortable with the higher risk profile which is interesting because I don't think that it will be all Etisalat or all Zain or MTN. I think we'll see a few new folks move into the top-five in terms of pan-African operations and some of them you won't even have heard of," Glynn says.

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