As foreign speculators move to cash in on the growth in African telecoms, the number of deals being struck will provide plenty of opportunity for lawyers. Rod Kirwan reports

The African telecoms industry is booming. Mergers and acquisitions are producing record-breaking valuations as foreign investors try to exploit the massive growth potential. The influx of capital is creating new infrastructure, as well as innovation in services.

Investment in African telecoms is a political issue and the development of high-speed communications is an explicit priority for most of the 54 countries on the continent. The Global Mobile Tax Review 2006-2007, produced by the GSM Association & Deloitte, suggested that a 10% increase in mobile penetration in the East Africa region can lead to a 1.2% increase in annual gross domestic product.

The GSM Association has also reported that its members expect to invest in excess of $50bn (£27bn) in sub-Saharan Africa between 2008-13, while the World Bank Group has committed to doubling its funds for African information and communications technology projects to $2bn (£1bn) by 2012.

Such policies date back several years and the regulatory reforms they have produced so far have resulted in the African telecoms markets opening up to foreign investments over the last decade. More than 20 nations have privatised their incumbent fixed-line operator, while twice as many have created an independent regulator for the sector. Almost every country in Africa has licensed private mobile operators.

These reforms have led to astonishing growth. Nigeria, for example, has seen mobile phone subscriptions increase by more than 100%. For Africa as a whole, growth of fixed and mobile subscribers was nearly 33% in 2006. Most of this increase is in the mobile market, but not all. Internet use jumped 30% between 2005 and 2006 to a total of 43 million users. Those 43 million users represent less than 5% of Africa's population, so the potential for further growth is clear.

Most of the overseas investment that has taken place has been in the form of corporate acquisition, especially in sub-Saharan countries. Perhaps surprisingly, the majority of this has not come from the established European companies, such as Nokia, Vodafone, Deutsch Telecom and France Telecom, but from a new breed of Middle East operators. Zain, Etisalat and Qtel have been leading the charge, with impressive results.

Etisalat, for instance, which has a presence in 10 African countries, launched Egypt's first third-generation (3G) operation in spring 2007 and
now has more than 3.5 million subscribers. It expects to launch the fifth mobile network in Nigeria imminently.

Kuwait-based Zain has a presence in 15 African nations, with more than 50 million subscribers. In the last two and a half years it has invested $9bn (£4.9bn) in expansion. This began in April 2005 with the $3.4bn (£1.8bn) acquisition of Celtel International. In November 2007 it announced it was extending its One Network product to Burkina Faso, Chad, Malawi, Niger, Nigeria and Sudan – bringing the One Network product coverage to 12 countries and more than 400 million people.
The One Network concept offers a borderless network in which subscribers can move freely across geographic borders while continuing to pay local rates. Try doing that in Europe, where decades of harmonising European Union (EU) legislation have failed to achieve such flexibility.

After a slow start, it is fair to say that the big European names are waking up to African telecoms. Vodafone recently acquired a 70% stake in Ghana Telecommunications Company from the Ghanaian Government for $900m (£494m). Reports suggest it is keen to increase its 50% stake in Vodacom, the largest mobile operator in South Africa. France Telecom and Nokia have both declared higher African revenues as a key strategic objective.

While mergers and acquisitions have captured headlines, significant investment and innovation has also taken place in the less widely reported areas of new network construction and service development.

Building and expanding mobile networks has been, and continues to be, the first priority for most operators on the continent. At present, there is one international submarine cable along the west coast of Africa, with little spare capacity, and nothing along the east coast. This means that, for many countries, the only international connectivity is offered through the limited bandwidth of satellite networks.

That should change during the next few years as three major projects bring high-speed capacity to the eastern sea board. After five years of planning, the East African Submarine Cable System is now under construction and should be ready for service in early 2010. Another submarine cable running on a similar route, Seacom, should be ready at around the same time. In 2009 a third cable, TEAMS, will connect Kenya with the United Arab Emirates, where onward connection to a number of international cables is possible.

The prospect of international capacity has sparked projects designed to improve onshore options. A number of fibre schemes are now underway to connect landlocked countries to these submarine cables. In early September 2008, Liberty Global, HSBC and Google announced the O3B Network – a plan to launch 16 low-orbit satellites to provide back-haul connections to replace the need to lay cable to join up mobile base stations. The consortium intends to sell capacity direct to mobile networks that are building mobile towers in emerging markets.

In order to cope with these projects, the African regulatory infrastructure needs further expansion – or even overhaul. In an interview with Reuters last year, Hamadoun Toure, the secretary general of the International Telecommunications Union, said: "In order for the three key [submarine] projects to succeed, the landing countries have to harmonise their regulatory framework as a matter of urgency. If their regulatory framework is contradicting, then there is a big problem."

The contradictions Mr Toure refers to concern licensing and foreign ownership. For example, some regulators require cable companies to hold a licence to sell capacity in their country. Others impose limitations on foreign ownership. In short, there is little consistency between countries. In all cases, regulators have scant experience of dealing with international connectivity and rules are unclear and untested. For international cable projects – often affecting as many as 15 or 20 countries – these problems can become major headaches.

Teaching old dogs new tricks

While underdeveloped regulatory frameworks sometimes get in the way of foreign investment, they can also provide opportunities. Mobile phone-based electronic money is a good example. Essentially it involves using your mobile like a bank card, with the possibility to make deposits, withdrawals and transfers, as well as to pay utility bills or purchase goods from selected retailers. It has not taken off in Europe, partly because of stifling regulatory developments.

Another reason for poor uptake in Europe is that internet banking, debit cards and e-transfers already provide good alternatives. In Africa, though, access to banking services is much less widespread. Less than 10% of the population have a bank account. In contrast, mobile ownership is relatively high – with almost 25% of Africans in possession of a mobile phone.

The result is that African operators are at the forefront of mobile cash deployment. Safaricom (the Vodafone operator in Kenya) has two million users of M-Pesa, its money transfer service, and is seeing 200,000 new ones sign up each month. Orange has launched its own version of the service, Orange Money, with full payment and withdrawal functions.

Interestingly, both of these companies have hardly pushed mobile phone payment facilities in Western Europe, despite being at its vanguard in Africa. Perhaps they plan to transfer know-how from these African projects back to Europe when the regulatory environment becomes clear. This would be an unexpected dividend of the African
telecoms boom.

Rod Kirwan is a partner specialising in telecommunications at Denton Wilde Sapte.

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