A dangerous dash

Telco M&A: Telecoms M&A is getting into a frenzy in emerging markets. Deals in the year to date are at their highest level in a decade. Operators are dashing to secure a broader footprint in Africa and Asia, with Abu Dhabi’s Etisalat eyeing a stake in an Indian counterpart, and South Africa’s MTN hoping to acquire some or all of Egypt's Orascom. This all comes just two months after India’s Bharti Airtel spent $9 billion snapping up the African assets of Zain. With decent large targets scarce, this is clearly a sellers’ market.

It’s not hard to guess what Etisalat, which is 60 per cent state-owned, wants most — a deal with Reliance Communications, the last of the three big Indian operators still focused solely on the domestic market. Under Indian foreign ownership rules, Etisalat would have to form a joint venture.

MTN’s deal-hungry chief executive Phuthuma Nhleko needs the approval of the Algerian government before he could do the mooted tie-up with Orascom. The North African market is the third largest by connections on the continent; together the two operators would rank number six in the world by mobile connections, according to research firm Wireless Intelligence.

The snag is that Orascom is itself in a dispute with Algiers. If Nhleko can't get Orascom before next year when he is due to stand down, he may be tempted to revive discussions between MTN and Reliance.

A feud between the Ambani brothers, who control Reliance, was behind the failure of merger talks in 2008. But the two have just made up. The challenge would be to agree a deal before Reliance did anything with Etisalat.

The mooted combinations all come with political and regulatory risk, and render scale without necessarily offering synergies. True, there may be some benefit to geographical diversification. But the likes of Vodafone and Telefonica have so far failed to turn diverse and far-ranging portfolios into decent financial returns.

The risks of poor deal-making are high. That deals are being attempted in the face of financial, regulatory and political challenges shows animal spirits are high.