Understanding MTN`s expansion strategy MTN may be second in the running for South Africa`s cellular telephony base, but its strategy for growth into Africa and the Middle East could soon escalate it into first position in the region. And while some analysts have raised concerns about the inherent risks in the strategy, the market appears to be sold on the potential of its future.

In a 2005 business report MTN group CEO, Phuthuma Nhleko, stated: "The Group`s expansion strategy is constrained by the limited size and growth potential of the remaining mobile markets in sub-Saharan Africa. The group will, however, continue to pursue value-enhancing opportunities for geographic expansion. Active steps will also be taken to position the group to take advantage of opportunities arising from the rapid evolution of the industry through the phenomena of convergence and deregulation."

BLAZING TRAILS

News of MTN`s expansion initiatives followed fast and furiously. In July last year it announced the acquisition of a 51% interest in Ivory Coast`s Loteny Telecom; the full acquisition of Telecel Zambia in August; an application for a stake in Tunisia Telecom in October; an effective indirect interest of 44% in Mascom Wireless Botswana less than a month later; a confirmation of its participation in the Iran market in the last week of November; and in December the full acquisition of the Republic of Congo`s Libertis Telecom.

In contrast, the first four months of 2006 were quiet. But the first week of May opened with the announcement that the company was close to acquiring Dubai- and London-listed Investcom. Once concluded, this deal will grow MTN`s geographical spread by 10 countries and "[boost] its combined population to approximately 147 million."

On the downside, the Investcom deal includes high-risk regions like Afghanistan, Sudan and Syria, it will cost MTN about US$5.5 billion, and will only deliver 4.9 million subscribers.

BUT WHY THE HURRY?

The South African market is understood to be more conservative in its investment practices than some developed countries, a factor that probably led to the drop in share price in the hours following the Investcom announcement. Nevertheless, the market quickly recovered and MTN regained all losses by the end of the day.

Of more interest though, was the continued positive run on MTN stocks in the week following the announcement; with investors choosing to ignore media reports of analyst concern on high risk levels.

And maybe this is a sign of a maturing South African investor e who can see past the figures and bottom line and recognise the potential inherent in the strategy.

There is no doubt that the deal holds significant potential for MTN. While the established subscriber base is low in relation to the cost of the acquisition, the regions in which Investcom operates have an average mobile penetration rate of just 9%.

Additionally, MTN is undoubtedly aware of growing interest from international players - including competitor Vodacom - in these high-growth regions, which could result in the organisation being overtaken, should it drag its heels.

And then there are the changing market conditions in its two primary revenue-producing countries - South Africa and Nigeria.

Last week, MTN SA`s MD, Maanda Manyatshe, revealed that the prepaid market was nearing saturation and that its average revenue per user (ARPU) was on the decline in both the subscriber and prepaid arenas. Furthermore, its local revenues are expected to come under pressure as Icasa looks to investigate the call costs across networks, whilst number portability is expected to increase the ease of customer churn.

While the Nigerian market continues to grow, the 2005 business report showed an ongoing decline in ARPU with projections of further decreases in the year to come. Additionally, it pointed to intensified competition in the Nigerian market, stating: "Much of the competitive focus is around pricing, with connection fees reducing sharply."

FULL STEAM AHEAD

The question now is whether MTN will slow down on its expansion trail and take some time to consolidate. Although Nhleko bows to the concept of consolidation, he has clearly stated that MTN is keeping its options open for any "rational" opportunities that could come along. Such as its eyeing of the Egyptian telecoms licence?