Telecom tycoons exert grip on sector M&As

By Victoria Howley and Denny Thomas

LONDON/HONG KONG (BestGrowthStock) – When France Telecom SA (FTE.PA: ) goes shopping again in Africa as a way to counter flattening sales at home, it can expect competition from emerging market buyers like never before.

France Telecom has already paid top dollar this year for a 40 percent stake in Morocco’s Meditel and is expected to make more acquisitions in Africa, a frontier market with 1 billion people and mobile phone penetration of around 30 percent to 40 percent.

Europe’s third largest telecoms company is a proxy for peers, including Telefonica SA (TEF.MC: ) that have also paid top money in emerging nations recently to get relief from the fierce competition in mature domestic markets.

But now Europe’s telecommunications majors must deal with competitors from emerging markets and sometimes the billionaires behind them.

“For any auction the bidding interest will be high from emerging market companies … looking for diversification and growth as their home markets (also) become more competitive,” said Nikhil Eapen, head of Citigroup Inc’s (C.N: ) Asia Pacific telecoms, media and technology (TMT) banking business.

According to Thomson Reuters data, the proportion of telecom deals with an emerging markets buyer or seller has never been higher — $118 billion, or 67 percent of a global telecom M&A business worth $176 billion.

India’s Bharti Airtel Ltd (BRTI.BO: ) became the standard bearer for emerging market companies seeking high-growth acquisitions when it bought the African unit of Kuwait’s Zain (ZAIN.KW: ) for $10.7 billion, including debt, this summer.

Company founder, billionaire Sunil Mittal, pulled off an African deal on his third attempt, helping Bharti offset competition in India, where call charges have fallen to a fraction of a U.S. cent.

Two previous tie-ups with South Africa’s MTN Group Ltd (MTNJ.J: ) failed due to government intervention, a perennial risk that can derail emerging market deals.

“The deal with Zain succeeded where others had failed previously partly due to an alignment of interests; the use of cash consideration, which avoided dual listing issues; and Zain being a motivated seller,” said Jack Callaway, global co-head of telecoms and media at Barclays Capital and an adviser to Bharti on the deal.

MORE TO COME

Despite the risks, bankers forecast the allure of growth in emerging markets will continue to attract buyers.

“Emerging markets have been a big theme for the last five years. There is likely to be more activity in 2011 as this trend still has some way to go,” said Mark Lewisohn, joint global head of TMT at UBS AG (UBSN.VX: ), which advised Zain on the Bharti sale.

Lewisohn added it would be interesting to see whether companies in the developed markets choose to compete with those from emerging markets in this next phase of expansion.

“Some developed market operators are beginning to see emerging market investments as becoming too risky at their current valuation levels,” he said.

French media giant Vivendi SA (VIV.PA: ) called off talks to take a stake in Zain Africa before Bharti emerged as a buyer, saying such an investment was “not consistent with its financial criteria.”

But those risks have not yet deterred Mittal’s billionaire counterparts in emerging markets.

Russia’s Vimpelcom Ltd (VIP.N: ), 40 percent owned by Mikhail Fridman’s Alfa Group, is seeking to buy Italian and African assets from Naguib Sawiris’s Weather Investments for $20.6 billion, including debt.

Fridman waged a lengthy corporate war with Vimpelcom co-owner Telenor ASA (TEL.OL: ) and Sawiris built his empire by entering some of the world’s riskiest markets, including North Korea.

Vimpelcom’s acquisition — which would give it control of Italy’s Wind and Africa-focused Orascom Telecom Holding (ORTE.CA: ) — is embroiled in a messy fight between Sawiris and the Algerian government.

Algiers is at odds with Sawiris over the alleged nonpayment of hundreds of millions of dollars in back taxes.

The country has threatened to nationalize Orascom’s local unit, which is also its biggest revenue earner, prompting Orascom to say it had not ruled out arbitration to resolve matters.

“The complexity of the regulatory environment in emerging markets is not getting any easier,” Callaway said. “Clients will be even more thoughtful in 2011 and 2012 regarding how to deal with sensitive political and regulatory issues.”

(Editing by Andre Grenon)

Telecom tycoons exert grip on sector M&As