MTN, which was awarded the stake in IranCell ahead of Turkish telecoms giant Turkcell, announced in November that it would have nine months to prepare for rollout before the commercial launch of the network. Since mobile penetration in Iran stands at a paltry 10%, the investment represents an opportunity for the company to spread its base of international operations outside Africa. “Indeed, the fact that Iran has a low mobile penetration and a high popu-lation of about 70-million people, half of whom are estimated to be under the age of 25, make it a very attractive greenfield opportunity for any operator,” says BMI-Tech-Knowledge telecoms analyst Rich-ard Hurst.
“However, other incentives for MTN to enter the country could be that the operator is seeking to maximise opportunities in the Middle East region and could see Iran as being a springboard into other territories, such as Turkmenistan, Uzbekistan and Kazakhstan,” says Hurst.
Another telecommunications analyst, who does not wish to be named, agrees that this is the thinking behind the move.
“MTN has spoken of a hub strategy, and it would seem logical that Iran be used as a hub for forays into other Middle Eastern countries,” says the analyst.
“Diversification is one of the reasons, besides the opportunity being attractive in its own right.” Merrill Lynch telecoms analyst Meloy Horn adds that the relatively weak wireless competition in the country is another incentive to dip into the Iranian market.
However, she cautions that “the Iranian regulator is inexperi-enced, when it comes to dealing with competition in the telecoms sector”.
The foray into Iran is also a case of “preferring to develop greenfields opportunities” – one of MTN’s core competences, says Horn.
A degree of market liberalisation in certain Middle Eastern countries, such as Iran and Saudi Arabia, has offered an ideal opportunity for the company to gain a foothold in the market; MTN also tried to get exposure to the Saudi Arabian market, but lost its bid for a network licence in the country. The decision to launch into Iran, argues Hurst, would be in line with MTN’s goal of becoming a leading player in the telecoms markets of emerging countries. “This is a very significant rollout opportunity, which is possibly bigger than Nigeria,” said MTN CEO Phuthuma Nhleko last year at MTN’s results presentation for the second half of the 2005 financial year. Although peak funding for the network is estimated to be $1,5-billion within two to three years of the network rollout, Nhleko explained that the capital expenditure for the project is likely to be more.
He said that the $1,5-billion is the “maximum negative exposure at a particular time”.
In addition to the upfront licence fee paid to the Iranian government in November, the government will also receive a 28,1% revenue share every year.
The plan is that, once the network is established and begins to do business, revenue from the oper-ation will also be used to fund the network.
Given current circumstances, should MTN see Iran as a rain cloud to water its profits or a brooding storm set to strike at profit margins? “We are not in the business of analysing political risks associated with our target markets, but I must say that Iran, like any other market, would have some risk perceptions,” said Nhleko. However, at its results presentation last year, MTN stated that one of its priorities is to “proactively manage financial, economic and political risk inherent in international expansion.” With the February 4 decision by the International Atomic Energy Agency to report Iran to the United Nations Security Council, MTN is certain to be monitoring the situation closely. While Russia and China, both of which enjoy strong economic ties with Tehran, joined with European members and the US to report Iran to the highest UN body, only three countries – Syria, Cuba and Venezuela – voted against the measure.
Meanwhile, South Africa joined Algeria, Belarus, Indonesia and Libya in abstaining from voting. In mid-February, Iran continued to signal its defiance by starting tests on its nuclear-fuel equipment, threatening to abandon the 1970 Nuclear Non-Proliferation Treaty and calling off talks with Russia to discuss a potential compromise in terms of its nuclear dispute. Shockwaves rippled through the international community last year, when President Mahmoud Amadinejad questioned the authen-ticity of the Holocaust and said that Israel should be “wiped off the map”. In terms of its legislative landscape, although Ahmadinejad is widely regarded as ultraconserv-ative, many argue that his views are not always an accurate barometer of Iran’s general current of opinion or mood. “Since 1980, the Iranian government has been extremely isolationist in its foreign policy; however, the growth of the power base of the liberals should allow a balance to enter the Iranian political landscape,” says Hurst.
Many young Iranians, arguesSouth African Institute of Inter-national Affairs researcher Hany Besada, are also becoming increasingly frustrated with conservative policies.
With a decision by the five permanent members of the Security Council and Germany to delay action against Iran for at least a month, many are wondering what form the action is likely to take. “Economic and political sanctions would be detrimental to the country’s economy as a whole, with a resultant effect on those conducting business in such an environment,” notes Hurst.
“Capital-expenditure rollout might also be affected,” says another analyst, who does not wish to be named.
Sanctions could possibly have an impact on foreign vendors contracted by MTN to help deliver services, argues Horn.
Sanctions, however, seem likely to be less damaging to business than military conflict. “The most major impact on business in Iran would be the prospect of conflict with Western powers,” says Hurst. “However, it is more likely that both sides will seek to avoid a conflict, as the West currently has almost all of its military resources tied up in Iraq, while, in Iran, memories of the ten-year war with Iraq have not faded.” And, should tensions between the West and Iran escalate any further, would there be a danger of MTN’s infrastructure or repres-entatives being targeted for being ‘foreign’? “I believe that this will be an unlikely event, since the company is perceived as being a South African company and will not have the perception of being a foreign company arriving on Iranian shores to maximise exploitation but rather as a partner in the development of the country’s telecommunications ser-vices,” says Hurst.
Besada agrees that MTN will be perceived as more of a partner than an outsider.
“South African investors predominantly want to engage with local businesses and conditions.
“It is very important that the company is not seen to side publicly with any one force or party,” reasons Besada.
In general, he believes that Iran will regard South African com-panies as extensions of a country with which it enjoys a good relation-ship.
“Both countries enjoy cordial bilateral relations, both economic-ally and politically, and have work-ed together in a number of fields, including oil and gas exploration and drilling projects,” says Bes-ada. MTN will certainly not be the only company to do business in Iran – other South African companies which have done business in the country include PetroSA, Sasol, Mintek, Bateman Engineering, Standard Bank and Global Railway Engineering. Another important consideration is the status of the country’s legal system and its ability to resolve disputes in a transparent and just way. “The Iranian courts are based on Islamic law and, as such, should at least be perceived to be fair and equitable.
“However, there could be some uncertainty surrounding the impartiality of the country’s judges,” adds Hurst.
He explains that the supreme leader of Iran, Ayatollah Ali Khamenei, selects the head of the judiciary and the six members of the Guardian Council, which is responsible for all legislation.
“Judges are politically appoint-ed and not impartial,” says Bes-ada.
“The Iranian legal system is quite challenging, which adds to the risk premium that investors should take into account when valuing this opportunity,” explains Horn. In terms of technical support, Hurst believes that the telecoms operator will have no trouble tapping into the local store of knowledge and skills.
“I think that the level of technical expertise in the country will be on a par with, if not better than, some of the other Middle Eastern countries.
Besides global concerns over Iran’s nuclear agenda, there is still the lingering risk associated with instability in Iraq and its neighbour’s attempt to find a new political footing after the removal of Saddam Hussein’s government. The expansion into Iran aligns with one of the group’s stated strategies, which is to “continue to identify and pursue value-enhancing expansion opportunities, with a view to consolidating our position and diversifying earnings”. In this light, the strategy seems to be a sign of the “emerging African global corporate entity” rather than a company wishing to avoid putting all its eggs in one basket, says Hurst.
The group’s stake in IranCell brings to 11 its total number of operations, which include South Africa, Nigeria, Cameroon, Rwanda, Uganda, Swaziland, C�te d’Ivoire, Zambia, Congo Brazzaville and Botswana. Its base in developing African countries has been fertile ground for growing profit with countries like Nigeria, which contributed over R2-billion to the company’s profit after tax for the six months ended 30 September 2005. Roughly 56% of the company’s subscribers now come from outside its South African base (as at September 2005).
In addition to its existing footprints in Africa, MTN is also busy reviewing bidding opportunities in Tunisia and Namibia.
The question then, as is the case with any business, is whether the risk outweighs the reward.
“The rewards far outweigh the risks,” says Hurst.
He adds, however, that MTN needs to manage these risks as closely as possible.
“We are comfortable with the company’s current strategies,” says Horn. Despite Nhleko’s assertion that the company is not in the business of analysing political risks in its target markets, MTN cannot simply hang up on the red light of risk. It is more than likely that the ‘y’ello’ operator is going to have to obey the yellow light of ‘be careful’ – a stance that will require it to keep a sharp ear for the ringtone of risk in the region.