Much as Ulysses endured the enchanting music of sirens trying to lure him to shipwreck, South African carrier MTN has been threatening to succumb to the sirens of consolidation. As the chants mount –the latest from Reliance- and MTN itself stays on the prowl for opportunities, we remain somewhat skeptical of the promise of the proposed deals. We review some of the proposed combinations.

THE ORASCOM SIREN: an African born company like MTN, Orascom Telecom is the most attractive opportunity of the bunch. It operates in two of the largest North African Markets (Algeria and Egypt), has a presence in a few small but high growth sub-Saharan African markets and features EBITDA levels well above the African average. But an Orascom deal may also be the toughest to pull off, with uncertainty looming over key assets. First, the company is embroiled in a geo-political tussle in Algeria where the government has rejected a possible buyout of Orascom unit Djezzy by MTN. Further, Orascom’s second most profitable operation, Egypt’s Mobinil, is partly owned by one MTN’s main competitors, France Telecom, who has negotiated an option to purchase Orascom’s remaining share by 2013. As for the remaining Orascom Telecom assets, they accounted for 44% of group revenues in 2009 but only 30% of the EBITDA. In other words, an Orascom without Algeria and/or Egypt is only remotely attractive.

THE RELIANCE SIREN: The Reliance siren resumed its singing last week when the Ambani brothers announced a truce in their longstanding feud by agreeing to do away with their “non-competing” agreements. This allows Anil Ambani to sell Reliance Communications without prior consent from his brother Mukesh; it also means that MTN, who had looked to purchase Reliance Communication through a share swap mechanism, can now go back to the negotiations table. Nonetheless, the asset looks a little less attractive than it did a couple of years ago. Reliance is facing substantial pressure on profitability as a result of stiff competition at home. Its revenues and earnings have dropped significantly over the past year. In addition, MTN may have a rival in Etisalat, which is also said to be interested in the Indian carrier.

THE LITTLE MERMAIDS: We believe MTN should go for smaller and sweeter assets providing both consolidation at home and a beachhead outside its current geographic footprint. Millicom would be a compelling option. The Luxemburg based operator provides some consolidation opportunities in key African markets such as Ghana and Rwanda and fills key African gaps for MTN. In addition, it would open the doors to new markets in Central and South America where the operator holds a strong position.

In the West African nation of Togo, the government and second mobile operator Atlantique Telecom Togo (ATT, a unit of Etisalat) are locked in a high-stake, “pay or else” poker game reminiscent of Benin’s negotiation with its mobile operators two years ago. As in Benin (and more recently, in Senegal), the Government of Togo (GoT) has suspended the operations of the operator, subject to full payment of the license fee under the government’s terms.  

- The GoT is asking for $45m (XOF 20bn); at a top level, the amount is not outlandish. As the GoT has noted, it is consistent with recent license valuations in Benin and Cote-d’Ivoire. The problem with the Togolese license is that it is stripped down to near-nothingness. The proposed license does not include an international gateway (a must for profitability) or direct interconnect (it would require ATT to connect to other mobile operators through state-owned Togo Telecom); it is not technology neutral (ATT would need to buy more licenses to offer broadband services), and includes no tax holidays. Without those elements (which were included in other markets), Togo’s license is worth only half as much as is requested in a best case scenario, for an operation that by our estimates, will see 1.5m-2m subscriptions at best and low ARPUs over the long term.

- Another sticky point is the fact that the GoT requires the entire license fee to be settled by the end of 2009; the general practice in the region is for the operator to pay for a portion (typically 50%) of the license at renewal, with the balance settled over a 2-3 year period, so as to avoid the impact on the balance sheet of the one-time capital outlay. The government has already allocated the money in its budget, and Ministers are now under pressure to deliver it.

- According to Togolese Press Agency Savoir News, Etisalat has made a counterproposal  including alternate offers ranging from $20m to $45m, with variations based on the features of the license and the possible licensing of  a third mobile operator. The payment schedule is bound to remain a bone of contention, but Etisalat is handling the issue just right in our view. We expect the parties to ultimately reach an agreement, but the entire episode has been rather damaging and wholly unnecessary.