Consultant Value Added

It is coming the day when the Spanish telecom operators will have to disconnect all pre-paid mobile cell phones unless the owners are registered. Just for those that are unaware of this, let’s explain a little bit the policy: In an attempt to prevent terrorists and criminals using anonymous prepaid mobile phones for communication, the Spanish government issued a decree to disconnect any un-registered phones in the operator’s networks.

The campaign was called “Identifícate” and intended to get the country’s estimated 20 million prepaid mobile phone users to register. The deadline is November 7 2009, after which phone operators will be instructed to switch off service to those who have not provided proof of identity.

It’s not clear what will really happen; According to the Spanish publication “El Mundo”, there are still 9 million subscribers pending registration. Let’s make a simple calculation of what does this mean: according to MarketResearch.com the Spanish monthly average ARPUs will continue to decline across operators. The industry average monthly ARPU will fall from €29.62 in 2008 to €20.05 in 2013 so we can roughly assume that the ARPU in 2009 can be positioned in the €25. Considering a total amount of 8 million clients stopping consumption in November, that means that the Spanish operators will stop generating 200 million Euros / month in November and so on…

Will operators accept loosing this relevant amount of money? How are they going to replace this revenues? How will prepaid users coming from other countries to visit Spain be treated? Does this really make business sense?

I had a similar case when we were working in Sudan for one of the mobile players. The government also required the deactivation of the unregistered prepaid clients for security issues. It was clearly stated that this requirement significantly hurt our client that strictly followed the policy affecting to near a 40% of their base. I have to say that we recommended not doing so, as the financial and market-repositioning impact was so big that we would require no less than a year to recover.

Now the personal part. I know that the law is the law, but I guess that no-one in the government level have dedicated one single minute to think seriously about this. This move will doubtless please the authoritarian “nothing to hide, nothing to fear” brigade, however it’s another major blow against the right to privacy and the presumption of innocence. Yes, cellphones can be used by criminals and terrorists. As can the postal service and – for example in London – public buses. Should letters only be delivered if an authorised sender id is attached? Should we have to provide identification every time we board public transport?

Taking out the more-than-relevant financial issues that all players will suffer as a result of such a decree, a move such as this is not only a direct threat to privacy, it reverses any assumption of innocence. If you don’t register your phone you must be up to something so you’ll be cut off. At the moment this is purely a Spanish issue, but how long will it remain so? The British government in particular have a record of justifying attacks on privacy using the fear of terrorism and the argument that “Everybody else is doing it”. Watch out for something similar coming soon in legislation near you…

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 had recently the opportunity of speaking with the CEO of one of the mobile operators in Kenya and I realized how competitive the situation is turning even in the supposed “emerging markets”. Having worked in neighbour countries such Ethiopia (that is in a higher level of immaturity) or Sudan (which has significant similarities),  it’s not difficult to defend that it’s really a emerging market as there’ll be stiff competition among network operators for a Telecom market that will grow by 95 percent over the next five years.

As in any market, the introduction of new players in the Kenyan mobile market has created strong competition. While Safaricom and Zain alone ruled the market until very recently, new companies such as Essar Telekom Kenya and Orange now are penetrating the Kenyan market successfully. This has forced the operators to cut tariffs and introduce new air time promotions driving the market into a value dilution and ARPU erosion spiral.

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Coming to the end of the year, I wanted to make public the list of the blog’s most popular posts in 2008. The list has been produced by the wordpress’ statistics box and popularity attends to unique visits to the article (those with higher traffic are in upper positions). Case you didn’t have the opportunity to read some of them, here’s the list.

At mmC GROUP, we are continually looking for improvement. If there’s any essay that you liked or any subject that you missed, please let us know commenting this post. Best regards to all our readers and a happy new consulting year for all.
CVA

I recently came from south and mid Africa, where I met a couple of VPs responsibles for the African Operations of a major telecom operator with presence in ten different countries. I was asked for advisory on three specific topics; one of them was double sim Management and it’s effect on the ongoing downturn evolution of their ARPU levels.

We had an interesting and constructive session. The highlights wrapped up alter the meeting are:

1. Double simmers represent a significant community in most of the African markets where the total penetration rate hasn’t reached a maturity level. It will be growing in the next 2 years.
2. Most of these operations’ customers unveil a huge sensitivity to price, moving from one operator to other just for the sake of a premium discount
3. The loyalty of these customers to the SIM is therefore inexistent, preferring these “dustbin simmers” to get another SIM and renew the promotion better than any promo designed to maintain their current number
4. The cost of sales and acquisition of these clients is therefore high, having to control the distribution and channel mechanisms to avoid revenue loss
5. The churn contribution of this type of clients is very high making it necessary for the operators to define expensive retention and loyalty strategies

As I am telling to the rest of my clients in the region, the double sim management exercise should consider two different levers: A) Room in the country to develop our market share and B) share of net billed traffic of our SIM base.

The key question agreed was that while the telecom markets have room for growth, the operators will maintain their priorities on acquisition better than on trying to get as much as billed traffic as possible. Profitability might not be a problem now, considering that there are ARPU stimulation and retention strategies that will help us on increasing our net share of billed traffic when necessary.

This might be different depending on the market. It is not the same being Orange in Uganda (5th operator in an already populated telecom market) than MTN in Sudan (2nd placer in a country with 5 net million clients to come to the market) or MTC in Namibia (2M customer market with low room for growth and just 2 players, one of them with more than a 80% of M.S.).

The trade-off between these two levers will define the best way to handle this hot topic. Most of the countries have not yet crossed the wireless subscriber penetration mark of a mid-mature country but they are all reporting unrealistic market shares primarily due to multiple SIMs reporting. It will come a time when this will change. Until then, my suggestion would be to look closely to how multiple-SIM ownership will impact the industry at both operator and regional level. This phenomenon is pushing penetration rates significantly in some African markets, but these figures inevitably include large numbers of inactive subscribers. Furthermore, increasing rates of multiple SIM use contribute to falling revenues per registered SIM card. This will be the real tough exercise to improve.

Best regards.
CVA, Flying to Madrid

I’ve just read an interesting market review for Ghana coming from Informa. As you may probably know, Vodafone has recently arrived there as the growth opportunities are significant. My assessment on the oportunity for Vodafone was clearly stated in my previous post “Valuation is an art, not a science”. This post  reveals the current status of the country and the opportunities.

Best regards, CVA

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As you may know we are currently working for 4 different operations across Africa. All of them are showing similarities in terms of customer penetration and usage, and it was funny to see how other big telecom groups such as Orascom are facing the same issues (see Arabian Business’ essay: Orascom subscribers pass 77mn mark).

According to the publication, the mobile phone operator Orascom Telecom reported a four percent decline in net income for the first half of 2008 to $276 million while report a total subscribers base exceeding 77 million, up 31 percent over June 2007.  Net, net, same us what we are seeing in some other places is Africa and Middle East: more clients, less revenues.

Remember my previous post regarding ARPU erosion and growth? As written before, ARPU decrease does not mean growth decrease. This trend is attributable to maturation of the market as new users generally enjoy lower levels of disposable income and use of double SIM cards is expected to continue to grow. Double-simmers, that is the question.

In price sensitive countries, price per minute (or second) is key and, instead of what we are seeing in mature markets in Western Europe, people are pretty used to switch his two (or more) SIM cards within the same handset at the right moment to get the best tariff available.

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The Sudanese market is a prepaid market of over 8M subscribers and with a potential of 6-7M net adds within the next six years. 3 operators cover the total market share in 2008: Zain with almost a 50%, MTN & Sudani with near to a 25% each. Recent signs of market stagnation has been seen in the last quarters that have been heavily answered by Zain and Sudani with value-destruction initiatives (e.g. deployment of non-revenues-generating-sims, stimulating fake-market share but are reducing average operator’s ARPUs)

This unfair market share is because of the market is under a declared war for the acquisition of gross adds and SIM-penetrated market share, making Zain and Sudani to prefer spreading the market with SIMs and offer air-time for free better that focusing in market share of billed traffic. Zain and Sudani have already decided their growth strategy towards volume and quantity, positioning Zain as a high value brand, MTN as a top international player and Sudani leveraging on its status of the ‘national operator’

On top of this, a huge competition in the commercial areas (specifically in the pricing area, where the huge discounted plans and tariff are destrying current market’s value, and in the sales areas, where the huge channel commissions given by Zain and Sudani are making of the Sudanesse, a extremely competitive market).

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