Consultant Value Added

Considering the success of our previous post related to Zain’s potential valuation and it’s company profile, we have decided to publish some additional company profiles of top-notch telecom companies across the World. This is the turn of Orascom Telecom Holding (OTH).

OTH is considered among the largest and most diversified network operators in the Middle East, Africa, and South Asia, although has recently acquired licenses to operate mobile services in North Korea and Canada. Orascom Telecom is a leading mobile telecommunications company operating in emerging markets having a population under license of 430 million with an average penetration of mobile telephony across all markets of approximately 44%.

OTH operates GSM networks in countries such as Egypt (MobiNil), Algeria (Djezzy), Pakistan (Mobilink), Tunisia (Tunisiana), Bangladesh (Banglalink), Zimbabwe (Telecel Zimbabwe), Namibia (CellOne) or North Korea (Koryolink). OTH had exceeded 79 million subscribers as of September 2008. A detailed company analysis can be seen bellow:

As you can red in our detailed assessment, OTH has positioned itself as a leader in the region for its diverse GSM operations with various GSM support and Internet operations. One of OTH’s main strategies is to create its own non- GSM subsidiaries to act as a backbone of support for its regional GSM operations.

OTH has achieved this by dedicating financial, technical and management resources for supporting its subsidiaries. This includes network support and installation of GSM operations, equipment procurement, handset procurement and distribution companies, Value Added Services, and Internet operations. OTH is dedicated to providing the best quality services to its customers, value to shareholders and a dynamic working environment for its nearly 20,000 employees.

Relevant links:

1. Orascom telecom site: http://www.orascomtelecom.com/

2. OTH Profile: http://www.google.com/finance?q=LON%3AOTLD

Following up my intention of writing a brief essay related to money-transfer, and considering that we will be participating in the Mobile Money Summit in Barcelona next week, we wanted to share our view of the critical success factors for ensuring success in any money-transfer or mobile payment service.

In the last several years the mobile money products (mobile banking, mobile payments and money transfers) have received a lot of attention from mobile operators, regulators and trade organizations. Specifically in the case of money transfers, there have been a number of success cases, notably M-pesa by Safaricom in Kenya and Smart Padala by Smart Communications in the Philippines. International experiences suggest that money transfer services thrive in markets where (A) there is low penetration of banking services and (B) there is an important inflow of international remittances.

Different African and Asian markets show different completion levels of these pre-conditions. Just to give some examples, you can find: 1) Algeria, a country where the estimated 2008 inward remittances were $5.4 billion annually and the banking penetration rate is at 31%4, 2) Kenya that demonstrates low rate of penetration of banking services at 10% and 3) the Philippines holding the 3rd position in the world by inward remittances at $14.6 billion in 2008.

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Facing increasing competition and commoditization from traditional telecom products, service providers are either in the process of or planning for the move to next generation, converged, network infrastructures in order to offer new, revenue-generating services.

Making this transformation can be complex and difficult. However, if done correctly, working with a managed services provider and outsourcing all or part of the next generation network planning, implementation and management, the transition to the new infrastructure can occur quickly and efficiently and with reduced risk.

I was today speaking with a close friend working in a well-known bank who was asking for some credentials of some managed-services companies in Europe. Why? Because there’s a recent interest in the investment community to bet for companies delivering technology solutions through a managed services model as it seems that these companies have weathered the current economic recession better than any other companies (across different industries) that are focused on more traditional product and support sales.

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Reading at Wireless Federation that Zain, one of the leading mobile operator in Middle-East and African countries, have inked an agreement with SCB to launch its mobile money transfer service Zap in Uganda, I wanted to publish a couple of posts: one related to the mobile telecom situation in Uganda, and other related to money-transfer and some other mobile financial services. Here’s the mobile market overview prepared by our consultants.

Uganda has a population of approximately 32 million inhabitants, which is growing at 2.7% per annum. It has a per-capita GDP (PPP) of USD 1,100 and a GDP annual growth of 6.9% in 2008. Uganda’s mobile market is growing rapidly, having benefited from two factors: (i) a continuous positive growth of the country’s GDP and (ii) a strong market liberalization – Uganda competition commission’s universal licensing scheme launched in 2006. As a result, mobile penetration reached 27% at the end of 2008 and is expected to reach 39% by year-end 2009, already having increased about 16 p.p. in the last two years.

Short-term growth potential in Uganda is confirmed when compared to other similar African markets. In Kenya, for example, while there are a similar competitive level, network coverage and mobile expenditure over available income, mobile penetration is much higher than in Uganda – 41% in 3Q’08 – while in Uganda was only 25.8%.

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This week, Vivendi, the French media conglomerate, has reportedly put in an offer to acquire Zain’s African mobile operations. Zain acquired the businesses in 2005 via the US$3.4 billion acquisition of Celtel. However, the firm is now reportedly looking at selling the networks, which are valued at as much as US$12 billion. For those who need to know whom are we talking about, Vivendi is the joint-owner (with Vodafone) of SFR (France’s second-largest mobile operator); is the company that controls Morocco’s Maroc Telecom; is an international player which has numerous stakes in other African countries such as Mauritania (Mauritel), Burkina Faso (Onatel) and Gabon (Gabon Telecom).

A sale of Zain’s African networks would be a surprising move as the operator has only recently completed rebranding the networks following the Celtel acquisition. There would be some countries that would “suffer” from this sale, such as Zain Nigeria that would have to be rebranded again despite having changed names several times in recent years, from Econet to Vodacom, then V-mobile, then Celtel and finally to Zain.

A separate report by Money Biz notes that Zain’s African businesses account for 16 of the group’s 23 markets and around 65 percent of the group’s customers. However, Africa only contributed 10 percent of group profit last year, and suffered a net loss in the first quarter. So, is it accurate to value it in US$12 billion?

Zain Africa has definitively outperformed in the last 4 years. There was a dramatic jump in net income in 2006 – the year where the full impact from the Celtel acquisition was felt. From then, revenues have been growing rapidly thanks to the new acquisitions and the high take up of mobile services. It is true that the company has not been able to maintain profitability, mainly due to:

1. Adding less profitable businesses to its portfolio (lower ARPU or startup phase).
2. Costs related with integration and improving efficiencies.
3. Forex losses.

Having said this, Zain is one of the few operators in Africa & ME where growth is financed in larger proportion by equity than debt – for every dollar borrowed from the bank, shareholders put 1.13 $. Debt represents as of today a 37% of the funding needed for the expansion of the last five years whilst shareholders equity supports 42%.

The Group has therefore a healthy EBITDA level despite the negative impacts of new deployments and currency issues in certain countries such as Madagascar, DRC and Sierra Leone that, for example, have experienced issues with local currencies. However the main issues that can affect the valuation are:

1. With the exception of Nigeria and Sudan, the subsidiaries in Africa have small individual subscriber bases. Revenues will come once the penetration levels reach the forecasted penetrations, but this will not be in the short / mid term.
2. Growth through the acquisition of existing smaller operations in Africa presented the complication of integrating systems and processes since there are no existing quality standards, therefore increasing costs and reducing profitability.
3. The regional concentrations of the operations portfolio have increased the exposure in current downturn affecting the African region. In our opinion, group’s expectations have been delayed some years.
4. Certain African operations carry some inherent risk due to historical social and political unstableness that might affect Zain’s performance in the future, as it’s more and more complex to homogenize the business culture across regions.

Please find next our Zain’s profile assessment. It gives some additional economic data to understand the rational behind a potential valuation. As written before in this blog, I’m a firm believer of African’s opportunity. But 12 billion dollars is a, let’s say, “non-minor” figure.

If I were Dr. Saad Al Barrak I’d invest less than a minute to accept the offer – it is a no-brainer for me. I believe in Zain’s Africa potential in the long term but we’ll need a long time to get the same consolidated value coming from the operations. He has 12 billion reasons to turn around the repeatedly group’s statement of becoming a top ten global mobile operator by 2011, an ambition that is unlikely to be achieved if it were to sell off its African businesses.

Good luck in any case to both seller and buyer but special congratulations to Chris Gabriel and his executives either at a group and operation levels, real architects of this record valuation.

Enjoy the reading.

Best, CVA

I’ve just come from the middle east, visiting different markets where we’ve seen huge pricing competition battles among operators. One of my clients requested my point of view on pricing and how to fight in such a pricing war. Here it is.

Few levers have as much power to influence profitability as pricing does. For a typical company, a 1 percent increase in price boosts profits two to three times as much as a 1 percent increase in sales volume. Mobile operators have to improve both pricing strategy and their ability to manage pricing over the long term in a scenario of a real war: a pricing one. The key thing here for the operator is to react to the competitive landscape that affect lots of the emerging markets while tapping their full pricing potential in the mid term. A rapid diagnostic analysis allows operators to quickly identify the largest pricing opportunities and tailor an approach to go after them successfully. Our work has helped our clients to gain market share, enhance their product positioning, and grow their bottom line. This should be the main objective in the short term.

mmC GROUP’s Approach

We approach pricing strategy by market, product and transaction. We identify how customizing prices across markets and products can affect buying behavior and differentiate offerings. Working jointly with a client team, we define and implement improvements to the pricing process-everything from integrating it with product design to creating tools and models that measure its financial impact.

Price Optimization Models are business and mathematical programs that calculate price elasticities, or how demand varies at different price levels, then combine that data with information on costs and inventory levels to recommend prices that will improve profits. Price Optimization Models simulate how customers will respond to price changes, supplementing managers’ instincts with data-driven scenarios. The insights help to forecast demand, develop pricing and promotion strategies, control inventory levels, and improve customer satisfaction.

Please take a look at a detailed case of pricing that was conducted in 2008. Now that it has been implemented with success we can share it with the whole of you. It illustrates how to conduct a repricing exercise in a challenging environment with the main objective of boosting acquisition.

Methodology

To implement a Price Optimization project, practitioners should:

• Select the preferred optimization model, determine the desired outputs and understand the required inputs;
• Collect historical data including product volumes, the company’s prices and promotions, competitors prices, economic conditions, product availability, and seasonal conditions as well as fixed and variable cost details;
• Clarify the business’ value proposition and set strategic rules to guide the modelling process;
• Load, run and revise the model;
• Establish decision processes that incorporate modelling results without alienating key decision makers;
• Monitor results and upgrade data input to continuously improve modelling accuracy.

Common Uses

Price Optimization Models are used to determine initial pricing, promotional pricing and markdown (or discount) pricing.

• Initial price optimization is well-suited to businesses that have a fairly stable base of products with long life cycles, such as grocery, chain drug, and office-supply stores, and manufacturers of commodities like packaging and tools.
• Promotional price optimization helps businesses set temporary prices to spur sales of items with long life cycles, such as newly introduced products, products bundled together in special promotions and loss leaders.
• Markdown optimization is well-suited to businesses that sell short life-cycle products that are subject to fashion trends and seasonality, (apart from telecom). Examples include service businesses like airlines and hotels, and certain kinds of speciality retailers, such as apparel retailers, mass merchants and big-box stores.

Case you have any comment, feel free to post. Enjoy the reading.

CVA, Flying from Cairo to Madrid

We recently concluded an interesting and challenging assignment: reducing costs in a mobile telecom operator to improve EBITDA levels in more than 5 percentage points in a 6 months period. As said, extremelly challenging. Why? After more than 6 months of crisis, the most obvious operational inefficiencies in telecom operators have already been wrung out of the system recently. The low-hanging fruit has been picked, and yet more cost savings must be found. There was, in other words, a need for a new, more comprehensive approach to cost containment that looked beyond the obvious and delved deeper into the organization.

mmC Group used a pragmatic -quick-wins driven- unit cost reduction method based on extensive internal and external benchmarks to optimize costs. The methodology ensured ‘dedicated’ client participation and sign-offs on implementable ideas at all senior levels in the client organization. A robust tracking and monitoring mechanism was instituted to ensure systematic implementation and savings accruals to the client.

Savings worth a significant per cent of the addressable cost base were syndicated. Currently, we are assisting the client to implement and institutionalize an ‘internal’ continuous improvement program. Eventually revenue will get a boost as 3G services are adopted by consumers, but for the present and next years, cost optimization will be the way for operators to stay ahead of their game and to sustain long-term innovation capability. Please find next the cost reduction case slides we have prepared for this post. Feel free to ask for additional detail if required.

Enjoy the reading. CVA

Following the success of my previous post related to vivo, and after our first article publication in SeekingAlpha,  I’d like to share some additional insights related to the latest results published by vivo and their comparison with the rest of the market players. As detailed before, despite the growth achieved on a yearly basis, 1Q09 has not been a completely successful quarter for Vivo. The usual market slowdown of the first quarters has had a particularly high impact in the whole market due to two factors: A) The proximity to saturation of the Brazilian mobile market (136% of penetration over addressable market) and B) The impact of the financial downturn.

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