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Old issues, new dynamics
Risks are high, competition is heating up, but the telecoms sector still has plenty to
offer astute investors, says Iain Fenn, of law firm Linklaters
African telecoms companies
can’t stay out of the news.
MTN’s suitors, Safaricom’s
IPO and various acquisitions
by African and international telecommunications
firms have kept the newswires
buzzing. But while opportunities
abound, investment in African telecoms
companies remains dangerous territory
for the unwary.
Political and regulatory uncertainty
remains in many jurisdictions. Investors
acquiring interests in African telecommunications
companies need to focus on
the coverage offered by their licences and
the risk of their removal, or limitation, in
the future. There have been examples of
spectrum being clawed back from operators,
and of universal licensing creating
opportunities for new entrants at the expense
of current licensees.
I fought the law
In many African, and other emerging
markets, the legal systems are immature
and not completely effective. This can
lead to undeveloped and insufficiently
robust listing regimes. In the mergers
and acquisitions arena, for example,
concerns about local law in joint ventures
can be addressed by providing for UK or
US governing law and disputes can be
resolved by arbitration outside the state
in question. However, enforcement of
judgments against purely local partners
remains difficult. These features mean
that aligning the economic interests of
non-African investors and African partners
remains very important.
Local laws continue to constrain the
distribution of profits and exchange
controls remain in many jurisdictions.
Many states also retain foreign ownership
restrictions on telecoms companies,
often for national security reasons.
These can limit control and also
render standard joint venture tools,
such as puts and calls and buyout provisions,
ineffective as they cannot, in
practice, be exercised.
Don’t hang up
Despite all these issues, interest in
African telecommunications remains
strong. Why As well as the rewards of
a successful venture, new dynamics are
driving the demand and pricing of African
telecommunications assets. Global
players, such as Vodafone, have changed
their strategies to focus on emerging
markets in a search for growth. Middle
Eastern operators with significant assets
have become more active in their
“backyard”. These include Zain, which
purchased Celtel, as well as sovereign
wealth funds.
Another dynamic is that major players
from countries that were until recently, or
in some cases still are, seen as emerging
have turned away from domestic markets
and are looking for international growth.
Africa is seen by some such operators –
Reliance, Bharti, VimpelCom and China
Mobile – as the perfect place to operate
their high-volume, low revenue-per-user
models and capitalise on western companies’
residual nervousness about African
investment.
The next step, and we are not there
yet, will be consolidation. This may be
led by international or African operators.
MTN, Zain, Etisalat and Vodacom
all appear to be potential African consolidators
whether acting alone, or as
part of a consortium with international
telecommunications firms or sovereign
wealth funds.
Your call
Potential investors in African telecommunications
beware: you are probably
not the only show in town. African governments
privatising assets and African
business partners are increasingly able
to call the tune. As well as coming up
with a good price, what should significant
investors provide
African players will be looking for partners
who have access to capital and can
provide it cheaply whether directly or indirectly.
Sovereign wealth funds are particularly
well placed to fulfil this need.
They may also be looking for management
expertise. Experienced individuals
from western companies can transform
the rollout programme for new infrastructure.
They should also have experience
in running a business with a view
to a value-enhancing liquidity event: a
disposal or an IPO. This can be particularly
important for governments (such
as in Kenya) or private equity financiers
(such as the investors in Celtel).
Technical expertise is vital. Strategic
investors can provide this in the form
of seconded employees, or service or
partnership agreements on preferential
terms. Such partnership arrangements
with international firms can include access
to preferential terms of business.
There are clearly new dynamics at
play in Africa, and investors need to
consider the risks they face and their
appetite for them in the context of
tough pricing, tougher competitors and
deal complexity in consortium situations.
Sentiment appears to be that the
risks are worth it.
With particular expertise in the telecommunications
sector, Iain Fenn is a specialist
in corporate law, including mergers and
acquisitions, takeovers, privatisations, public
offerings, joint ventures and corporate
reorganisations. Linklaters is the leading
international law firm operating in Africa,
advising some of the continent’s largest
investors across a range of sectors.
Contact: iain.fenn@linklaters.com,
www.linklaters.com
september – october 2008 africainvestor | 95