Lebanon's Mikati family, which owns 70.6% of Investcom, has accepted a cash-and-share bid which will give it about 10% of MTN and make it one of the South African company's top shareholders.
The deal will boost MTN's subscriber base to 28.1 million in 21 countries, making it the second biggest emerging market mobile phone operator behind Egypt's Orascom Telecom, which had 30.4 million subscribers at the end of December.
"This is a positive step for MTN," said Sean Gardiner, emerging markets telecom analyst at Morgan Stanley. "I don't think the price is that outrageous given the amount people are paying for African assets and the potential synergies."
Risky markets
The bid represents a 27% premium over the closing price of Investcom's global depository shares on April 28 and a 68% premium over the company's implied valuation when it floated in October.
But analysts said that with an enterprise value of eight times 2007 core earnings, the deal was in line with similar recent transactions in Europe and gave MTN - which has a history of growth in risky markets - a chance to expand.
The news pushed Investcom's London-listed shares up 25% while MTN fell 3.3% as some investors worried about debt and earnings dilution due to the issue of new shares.
"There is a lot of merit in large operators creating critical mass and extending their footprints in a region like Africa, where penetration is still very low," said a Cape Town-based portfolio manager whose company holds a stake in MTN.
Fat multiples
Telecom companies from South Africa, the Middle East and Europe have been scrambling to compete for a slice of the African market, where penetration is around 9% but growing fast.
Britain's Vodafone paid a more than 20% premium on earlier valuations for a 15% stake in South Africa's Vodacom this year and Kuwait's MTC stunned investors last year with a $3.3bn acquisition of Celtel.
MTN said it would offer either $3.85 in cash per Investcom share, translating into $19.25 per global depository share, or $2.0809 in cash and 0.1807 MTN shares, translating into $10.4047 in cash and 0.9035 MTN shares.
It would fund the equity part of the deal by issuing new stock and had secured a credit facility worth $3.85bn from Deutsche Bank to fund the cash part. It hopes to finalise the deal by August.
MTN made its first foray into the Middle East last year by buying a coveted stake in a licence to run the second mobile network in Iran, and will get access to Investcom's business in Syria, Yemen and Afghanistan.
Analysts said MTN may be able to cut costs by creating regional hubs combining the two companies' businesses in East and West Africa and Chief Executive Phuthuma Nhleko said that while the deal would intially dilute earnings it would soon help ratchet up profits.
'Somebody's lunch'
M1 Ltd - the vehicle used by the Mikati family - has agreed to a lock-up period of 14 months from the date its MTN shares are issued.
The tie-up is the ninth biggest M&A deal done by a South African firm in the past 15 years, according to Ernst & Young.
MTN quelled speculation the deal could make it attractive to bigger fish in Europe hunting for high-growth assets.
MTN group chief executive Phuthuma Nhleko said the company would now focus on consolidating its businesses but would not rule out further purchases if the opportunity arose.
"We certainly don't see ourselves as someone's lunch," he said in a presentation on the deal.
Investcom said it had withdrawn its offer to buy emerging markets operator Millicom which has been on sale since January.
