MTN Group Limited

Introduction In May 2008 MTN Group, a very successful South African wireless telephone company, began exclusive discussions with Reliance Communications Ltd., the second largest wireless company in India, regarding possible business combinations including a merger. The previous month discussions between MTN and Bharti Airtel Ltd., India’s largest wireless company, had collapsed, reportedly because MTN balked at becoming a subsidiary of Bharti. MTN served 68 million customers in Africa and the Middle East and had a market capitalization of $32 billion.80 Reliance Communications served 48 million customers and had a market capitalization of $26 billion. Reliance Chairman Anil Ambani said a combination “would provide investors, customers, and the people of both companies a unique and global platform for exponential growth.”81 The day of the announcement of the discussions the share prices of both companies fell by over 5 percent. The two companies operated in different markets, with Reliance Communications operating in India and MTN operating in 21 countries in Africa and the Middle East. The two companies had somewhat different strengths according to observers. MTN was experienced in entering new national markets and in efficiently building infrastructure. Reliance Communications was experienced in serving very poor customers in rural areas, and its average monthly revenue per subscriber was $8.80 a month. MTN’s average customer spent less than $20 a month on wireless service, compared to $40–50 a month in Europe and the United States. Regardless of whether MTN entered a combination with Reliance Communications, it had to deal with challenges in its ongoing operations and evaluate opportunities in emerging markets in which it was not yet present. MTN Group Limited MTN began in 1994 with the founding of the cellular telephone company M-Cell, which was 25 percent owned by MTN Holdings. Through internal growth and acquisitions the company grew rapidly from 800 employees in 1997 to 20,000 in 2008. In 2001 MTN acquired licenses in Nigeria and built a nationwide microwave transmission system. It continued its expansion in Africa with operations in Rwanda, Swaziland, Uganda, and Ghana. Cellular telephones were popular in Africa because of the lack of access to land-line telecommunications in many countries. In 2005 MTN paid $5.5 billion for Investcom LLC of Lebanon, which provided 21 million subscribers and entrance to the Middle East and North Africa. In 2008 MTN had operations in the following countries: South Africa, Botswana, Ghana, Nigeria, Zambia, Cameroon, Ghana, Sudan, Uganda, Côte d’Ivoire, Benin, Syria, Afghanistan, Iran, Swaziland, Rwanda, Cyprus, Guinea-Bissau, Guinea Conakry, Republic of Congo, and Yemen. The company was organized in three geographic regions: South and East Africa (SEA), West and Central Africa (WECA), and the Middle East and North Africa (MENA). In 2007 19 million of its subscribers and 43 percent of its revenues were in SEA, 28 million and 43 percent in WECA, and 14 million and 14 percent in MENA. MTN’s EBITDA increased by 43 percent in 2007 resulting in an after tax profit of R11.9 ($1.6) billion on revenue of R73.1 ($9.7) billion. MTN’s strongest growth was in South Africa and Nigeria. In its marketing MTN went to the people, using vans in rural areas and selling its prepaid phones at traffic lights. MTN provided mobile telephone service along with the following enhanced applications: Data Solutions, BlackBerry, International Roaming, Banking, EVD, Mobile TV, Me2U, and CallerTunes. MTN also had begun to invest in broadband in Nigeria and had acquired an Internet service provider in Cameroon. One component of MTN’s strategy was to build and rely on local talent in its operations in each country. Another component was to have local shareholder participation in its national operations, but MTN always maintained a controlling interest. In Uganda it had increased local shareholder participation to 5 percent and in Côte d’Ivoire to 40 percent. MTN also embraced social responsibility. Mrs. Amina Oyagbola of the MTN Foundation explained, “Corporate Social Responsibility is an integral part of MTN’s business strategy. As you know we set up the MTN Foundation to focus on implementing our CSR programmes. To date, MTN is the only organization in the telecom industry that sets aside a percentage of its earnings, annually to CSI (corporate social investment) initiatives in which the MTN executes.”82 In 2007 MTN introduced “21 Days of Y’ello Care” in Nigeria and the other countries in which it operated. Its staff performed a wide variety of community services in addition to their work obligations. MTN Nigeria CEO Ahamad Farroukh had apologized for quality of service problems, “My firm assurance to you is that despite the infrastructural constraints we face, we remain firmly committed to ensuring that the quality of service on the network continues to improve. In the past nine months, we have embarked on one of the most aggressive network expansion programmes anywhere in the world. We are building dozens more of base station controllers, and several mobile switching centres.”83 MTN also contributed R5 million for the relief efforts for refugees who had fled to South Africa from countries such as Zimbabwe. Some South Africans had attacked the refugees in the camps they had set up. MTN was committed to sustainability, which for MTN meant:84

• Promoting ethical responsibility and sound corporate governance practices

• Providing a safe working environment in which the health of employees is protected and their opportunities for self-development are enhanced

• Promoting cultural diversity and equity in the workplace

• Minimising adverse environmental impacts

• Providing opportunities for social and economic development within the communities we operate MTN was proud to have been chosen as the global sponsor of the 2010 FIFA World Cup to be held in South Africa. Opportunities and Risks Although the risks of operating in emerging markets were substantial, those markets provided tremendous opportunities. Market penetration of mobile telephones in Africa was 29 percent, 34 percent in India, 70 percent in the United States, and more than 90 percent in Europe. Because of poor transportation infrastructures and the low penetration rate of Internet service, banking transactions were now beginning to be conducted by cell phones in emerging markets countries. In South Africa many wireless customers use their handsets for even small transactions such as services and retail purchases. In much of Africa many people did not have bank accounts, but the opportunity to make transactions remotely by cell phone could lead them to open a bank account. Moreover, cell phones could be used to make payments on microfinance loans rather than requiring the lender or the borrower to make a physical trip. One limit to growth in emerging markets was the price of a handset. The cheapest handset was made by Motorola and sold for $30, but with half the people in the world living on less than $2 a day even that price could be prohibitive. To reach rural customers some wireless companies had set up “telephone ladies” who rented their handsets, one customer at a time. Entry into new markets required a license, and MTN both bid for licenses and acquired licenses from other parties. MTN faced competition from other wireless companies in Africa as well as companies from outside Africa. The largest wireless company in Africa was Orascom of Egypt with 71 million customers. Vodafone had a subsidiary in Egypt and operated in eight countries in Africa, and Orange had investments in 13 African countries. Vodafone also owned Vodacom, a wireless company in South Africa.85 U.S. firms had shown little recent interest in Africa. Robert Chaphe, who was CEO of MTN from 1995 to 2002, explained, “Many big U.S. telcos eventually lost interest in these markets: they were too small. Now U.S. telcos see more opportunity closer to home. After all, risk ratios are lower in Kansas than in Africa.”86 In some countries a government-owned or regulated company provided fixed-line service and wireless service as well. Countries belonging to the World Trade Organization (WTO) were required to open their telecommunications industries and issuing a second license for wireless service was a straightforward way of meeting this obligation. For example, Saudi Arabia joined the WTO in 2005, and auctioned a second wireless license. In 2007 it auctioned a third license for wireless service, as well as a license for fixed-line service. MTN outbid Altech for Internet service provider Verizon Business in South Africa. MTN’s competitors immediately complained about antitrust violations. Angus MacRobert, CEO of Internet Solutions, said, “We have seen how MTN operates around interconnection and mobile data and it is anticompetitive. This is going to intensify it.”87 Wireless companies in South Africa were subject to reselling of airtime. The Competition Tribunal had scolded Vodacom for trying to eliminate resellers. MTN faced a decision on whether to block an acquisition bid by the Huge Group for reseller iTalk Cellular, which was 41 percent owned by MTN. MTN could do so by buying a majority share. CEO Anton Potgieter of Huge said, “It’s been such a game of poker that it’s hard to know how hard MTN will try to push it, but I believe we have the moral and legal high ground.”88 The regulatory systems in each of the countries in which it operated posed a variety of challenges. For example, MTN had experienced problems in repatriating funds from Ghana and Syria, and Benin had suspended the MTN network for 3 months in 2007. MTN described the regulatory environment:89 Telecommunications is a regulated industry and MTN engages actively with governments and regulators in all the countries in which it operates. MTN respects the fact that the frequency spectrum is a natural and national resource, and that the management thereof is subject to much public scrutiny. MTN strives to participate fully in dialogue with governments and regulators on policy and legislative issues and frameworks. While we will lobby for fair treatment in the business interest, we respect the laws of countries in which we operate and the terms of our licence conditions. We endeavour to fulfill the terms of our license obligations, and to go the extra mile in facilitating universal access to communications services. We will not in any way compromise the national interest of countries where we do business. We also participate actively in industry forums that promote improved health and safety issues relating to mobile telephony. A major problem for wireless companies operating in emerging markets was taxation. The billings systems of wireless companies provided an opportunity for countries to raise funds at little cost to the government by simply taxing wireless phone service and requiring the operator to remit the taxes to the government. Particularly in Africa where most countries were strapped for revenue, taxing wireless service was an opportunity too good to pass up. In addition to a value-added tax countries imposed special levies on wireless service. According to the GSM Association, an industry association, the tax on wireless service represented 47 percent of mobile phone service charges in the Congo, 35 percent in Ghana, 27 percent in South Africa, and 22 percent in Nigeria. Countries faced a tradeoff, however.90 Wireless phones increased productivity and business activity, so a tax increase could reduce economic growth.91 Another challenge was to keep infrastructure costs low to be able to price to attract customers lower on the pyramid. Serving customers in a new country or expanding into new areas in a county required building infrastructure. In Nigeria MTN had not only to build base stations and transmission facilities but also its own power supplies. Some carriers had begun to experiment with new business models, such as franchising parts of the system. For example, Nokia Siemens Networks has been exploring a model in which a local entrepreneur or a village would own a base station and handle service and billings. The Business Combination One complication to a business combination with Reliance Communications was that billions of dollars of cash might have to be raised to complete the deal. U.S. banks were unlikely to be able to participate in the funding because of U.S. restrictions on facilitating business in Iran. MTN and its local partner Irancell had 6 million customers. Moreover, MTN had 2.1 million customers in the Sudan, and the European Union and the United States had imposed restrictions on companies doing business in that country. The United States also had financial restrictions on companies doing business in Syria, where MTN had 3.1 million customers.92 South Africa had regulations governing mergers. Any offer to purchase more than 35 percent of a company required the purchaser to make an open offer for the rest of the shares. India capped foreign direct investment in a telecommunications company at 74 percent, and a purchase of 15 percent of a company required an open offer for the remainder of the shares.93 Ambani thus could obtain 34.9 percent of MTN, while retaining a share of Reliance Communications. The two companies were bargaining over the exchange of shares. During MTN’s negotiations with Bharti, the Indian consumer group Telecom Watchdog had threatened to file a lawsuit to block the merger if a share swap was used in the transaction and violated the FDI restrictions. After discussions were underway between MTN and Reliance Communications, Reliance Industries LTD., whose chairman was Mukesh Ambani, the older brother of Anil, wrote to MTN stating that it had first rights of refusal on acquiring Reliance Communications. A spokesperson for MTN said, “We are aware that something is going on between the two brothers.”94 ■

Preparation Questions

1. Why has MTN been so successful?

2. Identify the risks MTN faces.

3. Why does MTN want local shareholders in the countries in which it operates? Why does it want to staff its operations with locals? Why is corporate social responsibility important to the company?

4. How should MTN deal with the risk of higher taxes on wireless service?

5. Suppose that a license were to be auctioned in Zimbabwe. Assess the opportunities and risks in that country.

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