MTN’s Iran problem

[Duncan McLeod Financial Mail] Trading looks set to become more difficult in Iran for SA-based emerging markets cellular network operator MTN. The telecommunications group is about to face a spirited new competitor in the Islamic republic in the form of Etisalat.

United Arab Emirates-based Etisalat, which claims it has 74m customers, mainly in the Middle East, plans to invest billions of dollars in the next few years building a network to rival Irancell. MTN holds a 49% stake in Irancell (the remaining 51% is held by the Iran Electronic Development Company).

MTN Irancell had signed up 11,6m customers by mid-2008, in a country with an estimated population of 73m. Its June 2008 market share was 32% — up from 23% in December 2007 — with the rest controlled by state-owned Iran Telecom.

Iran is regarded as one of MTN’s three key global markets, the other two being Nigeria, its biggest and most profitable operation, and SA. But the ride may be about to get a lot rougher for MTN in Iran. Regulators said last month they would license a consortium led by Etisalat as the country’s third mobile operator. Etisalat holds 49% of the new company. The rest is owned by Taameen Telecom, a subsidiary of the government pension fund administrator.

The consortium has agreed to pay an upfront fee of E300m for the licence.

MTN in IranEtisalat, which is controlled by the UAE government, already operates mobile networks in Saudi Arabia, Sudan, Pakistan, Tanzania, Benin, Burkina Faso, the Central African Republic, Gabon, Niger, Togo, Côte d’Ivoire, Egypt, Nigeria, Indonesia, Afghanistan and India. It beat opposition from Zain, Telekom Malaysia, Omantel and Bharti Airtel to win the licence in Iran and has promised to invest as much as US$5bn over the next five years in rolling out its network.

Analysts say Iran still offers good growth potential, with mobile subscriber penetration at less than 60% - one of the lowest in the region. “We are confident of the growth potential of this important market, especially with our two-year exclusivity to offer [third-generation cellular] services,” says Jamal Al Jarwan, Etisalat’s chief of international investments.

It is worrying news for MTN investors that the Etisalat consortium is the only one in Iran licensed to provide high-speed Internet access using 3G. This exclusivity lasts until 2011. MTN and Iran Telecom have built mobile networks using the older and more expensive 2G technology. 3G networks not only offer high-speed Internet access, they make better use of radio frequency spectrum and can carry voice calls at a lower cost to the operator, giving it greater pricing flexibility.

Etisalat may be the first of more foreign investors to plough money into Iran, especially if political relations with the West start thawing. Former US president George W Bush branded Iran one of four countries in his “axis of evil” but his successor, Barack Obama, has signalled a willingness to talk.

When MTN got its licence to operate in Iran two years ago, analysts expressed concern about the risks associated with investing in a country that could soon be the target of military action. But with Obama toning down the rhetoric, the risk has been mitigated.

Now the bigger challenge for MTN, whose share price has fallen 17% in the past year, may be figuring out how to take on an aggressive and determined competitor in Etisalat.