UNCLAS SECTION 01 OF 03 LILONGWE 001043

SIPDIS

SENSITIVE

STATE FOR AF/S JEANNE MALONEY
TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA/BEN CUSHMAN
STATE FOR EB/IFD/ODF LINDA SPECHT AND ELAINE JONES
STATE PLEASE PASS TO MCC FOR KEVIN SABA
PARIS FOR D'ELIA
JOHANNESBURG FOR FCS

E.O. 12958: N/A
TAGS: EINV ECON ECPS KCOR MI
SUBJECT: MALAWI TELECOMMUNICATIONS PRIVATIZED AT LAST

REF: LILONGWE 00709

This message is sensitive but unclassified--not for Internet
distribution.

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SUMMARY
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1. (SBU) After a delay that started last August, Malawi's
telecom provider has been sold to a consortium of local
companies for $29 million. President Bingu wa Mutharika had
stopped the deal out of concern that the privatized company
might disconnect the two state-owned television broadcasters.
The World Bank interceded with an offer to build a separate
network for the broadcasters. After taking over, the new
owners say they will double the subscriber base within 12
months. Embassy views the private company as likely to
succeed, and it may give Mutharika some momentum for
privatization of the state agricultural congolomerate and the
electric utility. End summary.



2. (U) After a last-minute delay that lasted four months, the
GOM on Tuesday finally approved the privatization of Malawi
Telecommunications Ltd. (MTL), the state-owned telecom
monopoly. The buyer, Telecom Holdings Limited, is a
consortium led by Malawian conglomerate Press Corporation
Limited, with participation from insurers Old Mutual and Nico
Holdings, plus the Deutsche Telecom affiliate Detecon. The
terms of the deal are close to what was originally negotiated
last summer: a purchase price of MK3.56 billion ($29
million), with government taking MK1.34 billion ($11 million)
and the balance (MK2.23 billion, or $18 million) going toward
investment in the company. MTL comes with a heavy debt
burden of MK3.15 billion ($26 million), and staff
retrenchments are expected to take some MK1 billion ($8
million). MTL currently serves about 40,000 land-line
subscribers and has a minority stake in the country's
second-largest mobile provider, Telekom Networks Malawi, with
roughly 80,000 subscribers.


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DELAYED TO PRESERVE THE TV PROPAGANDA NETWORK
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3. (SBU) As previously reported (reftel), the

deal had been
stopped by Mutharika at the last instant in August. The crux
of the issue was a concern that the two state television
broadcasters, which owed hefty arrears to MTL, might be cut
off from the MTL distribution network for the benefit of the
political opposition. (Everyone in Malawi, government and
opposition, views the state broadcasters as propaganda
instruments for the ruling party.) This reason for stopping
the deal was kept quiet until very recently, and the GOM
offered instead a cover story about needing to revisit the
pricing and due diligence. In the end, the broadcaster
problem was solved by the World Bank (the privatization's
original sponsor), which offered to buy a stand-alone
satellite distribution system for the broadcasters (at about
$1.5 million).


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OPPOSITION FROM THE BOARD
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4. (SBU) The delay also bought time for opponents to try once
more to kill the deal. The most vehement opposition has
come, predictably, from MTL's board, led by former board
chair Ken Msonda, whom government had replaced after he
refused to agree to last summer's deal. Msonda has argued
publicly that the company is worth $200 million (an estimate
with which no credible source agrees) and recently filed a
second lawsuit to try to stop the sale, in addition to
circulating poison-pen letters about several GOM officials
involved. The board itself has dragged its feet, and indeed
failed to show up at the signing ceremony today. Since the
GOM, MTL's sole owner, has voted for the sale and signed the
papers, the board's eventual cooperation is a foregone
conclusion. A board vote is scheduled for 15 December, with
no complications expected.

5. (SBU) The final due diligence conducted by Telecom
Holdings may have uncovered evidence of the MTL board's
efforts to corrupt potential supporters in government. A
source close to the negotiations has told us that one of
MTL's assets, a new car, has been held by a senior GOM
official for the past five months for her personal use. This
official has publicly expressed her opposition to the deal on
many occasions. Three other cars, similarly distributed, are
said to have been discovered on MTL's books during final due
diligence.


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AFTER THE TAKEOVER, QUICK ACTION
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6. (SBU) Owing to the fierce board opposition--in effect
making this a hostile takeover--Telecom Holdings is
accelerating its takeover plans to preclude a possible
stripping of assets by the outgoing management. The original
plan was to take six week to transition to a new management
team. Instead, an interim management team, drawn mostly from
Press Corporation, is scheduled to take over next week.


7. (SBU) Senior executives at Press Corporation have long
held that they can grow MTL quickly. The company has
publicly committed itself to doubling the subscriber base to
80,000 within 12 months--a task made easier by the fact that
MTL was grossly oversupplied with switching and network
equipment, and would-be subscribers are waiting up to a year
for connection. Next on the agenda is replacing the
network's microwave backbone with fiber and satellite
connections. Press's record of aggressive sell-offs suggests
that it is likely to separate the infrastructure from the
service side of the business sooner rather than later. If
that happens, it could mean rapid entry for service
competitors and a corresponding improvement in coverage and
quality of service. Press has also said that it intends to
sell its share of Telekom in the near term.


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COMMENT: A LIKELY SUCCESS, DESPITE OPPOSITION
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8. (SBU) This privatization has a high chance of success, in
our view. This is in part because Press Corporation, which
will wield most of the operational control, is a rare
well-run Malawian company. It is also because MTL has been a
perfect argument for privatization, with scandalously bad
management, a corrupt board, poor service, high prices, and
legion unhappy customers. But it was widely seen as state
enterprises often are: a cash cow, a strategic asset, and a
jewel in the glittering crown of the Malawian economy. As
such, it has been a focus of popular (and populist) mistrust
of privatization, which is decried as a hardship imposed by
flint-hearted outsiders.


9. (SBU) Final closure of the MTL deal has brought a measured
sigh of relief from privatization advocates (nearly all of
whom, true to the popular stereotype, seem to be private
businessmen or foreign diplomats). Mutharika's personal
intervention to stop the deal in August raised questions
about his larger economic agenda and left observers feeling
queasy about his frequent statist ad libs. That he has
finally approved the deal is a good sign, but it almost
certainly would not have happened without pressure from the
World Bank and the USG, among others. The Bank intends to
press for institutional reform at the telecom regulator,
which has been sympathetic to MTL's resistance and may need
some incentive to provide a level playing field for new
entrants. With luck, a successfully privatized phone company
will give this politically weak government some badly needed
momentum for privatizing its agricultural and energy
companies.
GILMOUR