Major Telecoms firms swoop in to make acquisitions in emerging markets

With valuations of emerging-market phone companies falling, some of the telecom industry’s big players are swooping in to make acquisitions.

U.K.-based Vodafone recently gained control of South Africa’s biggest wireless firm, Vodacom, and plans to expand into Nigeria. And Japan’s NTT DoCoMo, Norway’s Telenor , and United Arab Emirates-based Etisalat, a big Middle East company, all recently acquired assets in India.

Many other telecom companies — including China Mobile, Germany’s Deutsche Telecom, France Telecom, Singapore Telecommunications, and Hong Kong’s Hutchison Telecommunications — have expressed interest in buying assets in Asia, Africa and elsewhere. All aim to buy growth in emerging markets where wireless phone usage has skyrocketed.

Until recently, the high valuations of takeover targets posed an obstacle to deals. South Africa-based MTN Group, with 70 million customers in 21 countries, couldn’t find a buyer willing to meet its asking price earlier this year.

With worries over a global recession mounting, wireless assets are now commanding less of a premium, analysts say.

“It’s probably a good time to be buying assets if companies have cash lying around and take a long-term view,” said Philip Kendall, an analyst at Strategy Analytics.

Telenor Shareholders Nervous

Telenor says the timing is right, but its shareholders aren’t so sure. Telenor agreed to pay $1.1 billion for a 60% stake in India’s Unitech Wireless on Oct. 29, sparking a sell-off of its New York- and Oslo-listed shares.

Unitech is building a wireless network across India. Telenor estimates it’ll spend another $2 billion on Unitech’s network.

Although India’s economy is slowing, Telenor figures its investment will pay off down the road, Kendall says. “Telenor is talking about a five- to eight-year break-even (point),” he said. “The current economic turmoil isn’t irrelevant, but they’re taking a long-term view.”

Only about one-fourth of India’s 1.2 million people own mobile phones. The country is adding more than 8 million wireless users monthly.

Still, India already has 10 wireless firms, making competition fierce. And the government plans to dish out even more wireless licenses.

Telenor will struggle to build market share, says Angel Dobardziev, an analyst with research firm Ovum. “While India is a great opportunity, it will take Telenor quite a while to reach a positive return on this strategic venture,” he wrote in a research note.

Thin Profit Margins

Consumers in India and other emerging markets spend much less on average for wireless services than do consumers in developed countries, says Thomas Wehmeier, an analyst at research firm Informa. Profit margins are usually paper-thin in emerging markets, he says.

Wehmeier says latecomers to emerging markets will have a tough time competing with established companies. Even with valuations falling, he says big telecom companies should be cautious making acquisitions.

“There are many companies with large war chests, significant cash piles, and they’re hunting for bargains in emerging markets,” Wehmeier said. “But we’re seeing intense price competition and a proliferation of players even without an economic downturn. I’m skeptical about new entrants because it’s not a situation of unfettered growth in many cases. The rate of return on investments in emerging markets isn’t as clear anymore.”

Stocks in overseas wireless phone companies have taken a beating. U.S.-listed shares in Russia’s VimpelCom have plunged nearly 80% in 2008, and Millicom International Cellular is down nearly 70%. Shares in China Mobile, American Movil and Turkcell have each fallen more than 50%, while Vodafone’s stock has shed about 45%.

Investor’s Business Daily