France Telecom-Orange's ambition to double its turnover in emerging countries over the next five years is unlikely to be fulfilled through organic growth or piecemeal acquisitions alone. In 2009, the operator turned over EUR 3.8 billion in Africa and the Middle East, showing a 19 percent CAGR from EUR 1.5 billion in 2004. The group’s customer base in Africa and the Middle East grew by a 46 percent CAGR to 42.5 million customers, versus 6.4 million in 2004. But in 2009, Orange only added EUR 150 million of new revenues in these regions, or a 5.2 percent increase on EUR 3.21 billion in 2008. So how will it be able to find another EUR 3.8 billion by 2015?
Introducing targets for 2015 at a meeting of the group’s 500 top managers in Paris on 26 March, new CEO Stephane Richard said the group “aimed to double its activity in emerging countries in the next five years, or even sooner”, according to La Tribune. A day earlier, Richard told the Financial Times that he was interested in buying smaller assets in Africa and the Middle East, and possibly combining some of Orange’s European telecommunication businesses with rivals.
France Telecom has built its presence in emerging economies on a case-by-case basis, buying mobile licences in Tunisia and Uganda, for example, or taking controlling stakes in incumbent operators, such as its 51 percent in Telkom Kenya. The operator has just signed a three-year management deal with Ethiopian incumbent ETC that will generate limited revenues in the form of an annual management fee and a possible share of revenues from enhanced services. While penetration is still low in many of these African countries, offering strong potential for subscriber growth, the possibilities for revenue growth are more limited due to the low-income population. ARPUs are very low and dropping in Africa, as operators penetrate low-income segments with voice services but struggle to sell more high-margin, value-added servies.
In a bold but unsuccessful move under its previous CEO, Didier Lombard, France Telecom attempted to take over TeliaSonera in 2008, which would have given it a strong presence in Russia, Eastern Europe, Central Asia and Turkey. In the wake of the failed bid, Lombard said that France Telecom would focus on making acquisitions in Anglophone African countries. This strategy is already clear - after cementing its hold on most of Francophone Africa, Orange's recent expansions on the continent have included Kenya, Uganda and an attempt to buyout the rest of Egyptian mobile operator Mobinil. Adding Zain’s African assets is not an option, now that the Middle Eastern group has agreed to sell its 15 operators to Bharti Airtel for USD 10.7 billion. Other potential targets include Millicom, valued at around the same level as the businesses sold by Zain, and comprising 34 million subscribers in Africa and Latin America. But Millicom’s 35 percent owner, Swedish investment fund Kinnevik, is unlikely to sell.
The French group's most likely target is South Africa-based MTN, which has 116 million subscribers across Africa and several quickly growing Middle East markets including Iran and Syria. But MTN's stock market capitalisation of USD 28 billion and complicated shareholder structure may be too high a price to pay - as Bharti Airtel found last year when it tried to merge with MTN. African telecommunications operators up for sale that may be of interest to France Telecom include Orascom’s Telecel Zimbabwe and Nigerian incumbent Nitel.
Idate forecasts that the Africa, Middle East, Latin America and Asia-Pacific telecommunications markets will grow by 6 percent this year, compared to 4 percent in 2009. While Asia-Pacific is the biggest market, with estimated revenues of USD 406 billion this year, France Telecom will likely find it difficult to break into an area already full of big regional players set on expansion, such as Singtel, Axiata and Hutchison Whampoa. Similarly in Latin America, France Telecom’s presence in the Caribbean is negligible compared to Telefonica or America Movil’s assets. Emerging markets in Eastern Europe, where Orange is already active in a number of countries, are a possibility, but again competition for the few remaining assets up for sale will be tough versus the likes of Deutsche Telekom, Telefonica O2 and Telekom Austria. The French company's best bet appears to be Africa and the Middle East, but it will need deep pockets to either buy MTN or invest heavily in infrastructure and growing the potential market with innovative services.
