As written before in this blog, STC’s foreign investments seem a distraction, even if they may bear fruit in the long run. Mobily is preferred as the leader in mobile data and is delivering strong growth while Zain (although is performing well for a no.3 player) is hobbled by excessive debt.

Relevant highlights

1) Saudi telecoms market: attractive overall. From a top-down perspective, the Saudi telecoms market is attractive. The country benefits from a young and fast growing population and from high GDP/capita. The mobile market, which accounts for 74% of the total, is growing fast and is also relatively concentrated.

2) Mobile market: data can drive growth further. Mobile broadband is expected to help drive mobile penetration in Saudi Arabia towards 220% within five years. Mobile broadband will fuel incremental growth, rather than replace existing voice revenues; however, it may threaten fixed-line DSL. In a core scenario mobile ARPU only declines modestly, but with RPM high by the standards of emerging markets there is a risk of sharper price falls.

3) New opportunities: don’t be distracted. Comparisons with historical overseas investment plans in the telecoms sector cast doubt on several aspects of STC‘s expansion strategy. STC‘s investments may boost growth in the future, but right now it has lost its way at home. Mobily is proving the near-term winner in Saudi telecoms; Zain is growing fast but remains in clear third place.

4) Stock conclusions. STC is inexpensive and its financial stability and dividend yield of 6.5% offer support; however, it lacks catalysts for performance. Al Rajhi Capital rates STC Neutral and set a price target of SAR46.4. Mobily offers strong near-term growth in their opinion and is not expensive for a fast-growing operator on a PE of 9.3x. They rate Mobily Overweight and set a target price of SAR64.9, implying 39% upside potential. With net debt 2.4x 2010 sales, these guys think fair value for Zain is more than 20% below the current price and rate it Underweight.

Interesting. Enjoy the reading, CVA.

A special report on telecoms in emerging markets.

The mother of invention. Network operators in the poor world are cutting costs and increasing access in innovative ways

PROVIDING mobile services in a developing country is very different from doing the same thing in the developed world. For a start, there may not be a reliable electrical grid, or indeed any grid at all, to power the network’s base stations, which may therefore need to run on diesel for some or all of the time. That in turn means they must be regularly resupplied with fuel, which can be tricky in remote areas. Then there is the challenge of running the network profitably. In Europe mobile subscribers typically spend about $36 a month, a figure known in the industry as the average revenue per user (ARPU). In America that figure is $51 and in Japan $57. But in China it is only around $10, in India less than $7 (see table 5) and in some African countries even lower. As mobile phones get cheaper and more poor people can afford them, ARPUs across the developing world are falling.

Operators in poor countries have responded by finding new ways to reduce the cost of operating mobile networks and serving customers. The country that has gone furthest down this road is India, so the result is sometimes known as the “Indian model”, even though some of its features originated elsewhere, and some low-cost innovations developed elsewhere have not caught on in India. Despite an ARPU of only $6.50 and call charges of $0.02 per minute, Indian operators have operating margins of around 40%, comparable with leading Western operators, according to a study by Capgemini, a consultancy. “On low-cost, innovative models, this is where the centre of gravity is,” says Prashant Gokarn, head of strategy at Reliance Communications, India’s second-biggest operator. Given India’s size, its combination of poverty and rapid growth and its reputation as a centre of technology and outsourcing, it is hardly surprising that it has emerged as the crucible of business-model innovation.

Indian model

Outsourcing is at the heart of the Indian model, which was pioneered and is now embodied by Bharti Airtel, India’s biggest mobile operator. All of Bharti’s information-technology (IT) operations are outsourced to IBM; the running of its mobile network is handled by Ericsson and Nokia Siemens Networks (NSN); and customer care is outsourced to IBM and a group of Indian firms. This passes much of the risk of coping with a rapidly growing subscriber base to other parties and leaves Bharti to concentrate on marketing and strategy. Unusually, it is not just the operation of Bharti’s network that is outsourced but the construction as well, under a scheme known as “managed capacity” that is now used by several Indian operators.

When moving into a new area, Bharti requests a certain amount of calling capacity and pays for it three months later at an agreed price per unit of capacity, says Kunal Bajaj of BDA, a telecoms consultancy. That leaves it up to the vendor to handle the business of designing networks, putting up base stations and so on, giving it an incentive to build the network as frugally as possible. Margaret Rice-Jones of Aircom, a network-planning consultancy, says this cut costs by ensuring that operators do not pay for more capacity than they really need. “The old model was a bit like letting your supermarket plan your shopping list,” she says. The vendors, for their part, gain economies of scale because they build, run and support networks for several Indian operators. Ericsson’s Mr Svanberg says his firm can run a network with 25% fewer staff than an operator would need. Bharti’s operating expenses are around 15% lower than they would be if it were to build and run its network itself, and its IT costs are around 30% lower, according to Capgemini.

Arguably, the Indian model should be called the Ericsson model, says Mr Svanberg, because his firm developed it and first deployed it on a small scale in New Zealand. But, says Mr Bajaj, “Bharti decided to do its entire network like this, and to experiment at that scale is totally different.” There were growing pains to start with as Bharti and its outsourced suppliers searched for the right balance of cost- and risk-sharing. Expanding into rural areas is especially tricky because the capacity needed is initially very low, so Bharti typically agrees to buy a minimum amount.

Equipment vendors make most of their profits when capacity is increased. “You make the land grab in the early phases, and what you’re securing is margins and revenues for the future,” says Ms Rice-Jones. The outsourced-network model is now gaining popularity with other operators in India. Even if they do not go as far as Bharti, they are more likely than operators elsewhere to outsource network design, tuning and management, says Mr Svanberg.

A second plank of the Indian model is infrastructure-sharing, in which several operators share the metal towers on which network antennae are mounted and which house their associated equipment, generators and so forth. In 2007 three Indian operators, Bharti, Vodafone Essar and Idea Cellular, pooled 100,000 of their towers in a single company, Indus Towers. Not all the operators use all the towers (the average is about 1.5 operators per tower), but the arrangement saves the three companies having to find new sites and build their own towers. Indus Towers will also lease tower capacity to other operators.

Similarly, Reliance Communications has spun off its towers into a separate unit that will offer tower capacity to other operators. This turns an operator’s assets into a source of new revenue, says Mr Gokarn, and allows the mobile operator to concentrate on serving customers. Tower-sharing happens in other countries too, including Britain and America, says Greg Jacobsen of Capgemini; and some countries, including China and Bangladesh, have made sharing compulsory. What is unusual about India is the extent of voluntary, market-led sharing as a way to reduce costs.

Other components of the Indian model include “lifetime” prepaid schemes, in which customers pay a one-off fee and can then receive incoming calls indefinitely, even if they do not make outgoing calls; widespread use of paperless top-ups, to reduce the costs of distributing top-up vouchers; and automatically turning off some equipment at night, when traffic volumes fall, to reduce energy usage.

The search for new cost savings continues. Reliance is experimenting with a “micro-call-centre” model, in which large call centres in urban areas are replaced by a smaller number of centres in more rural areas. This means agents can be paid less and are more likely to be able to answer queries. Turnover is high, so the trick, says Mr Gokarn, is to reduce the cost of training new agents. Indian operators are also keen adopters of “green” base-station technologies, such as air cooling, solar and wind power, and hybrid diesel-electric generators, which reduce energy consumption and hence operating costs. “Green technology has become a hot topic in India because it’s cheaper,” says Mr Bajaj.

Dynamic Africa

African operators, which face many of the same difficulties as those in India, have devised some cost-lowering innovations of their own, such as dynamic tariffing, pioneered by MTN. This involves adjusting the cost of calls every hour, in each network cell, depending on the level of usage. Customers can check the discount they are getting on their handsets. At 4am it can be as high as 99%. This generates calls when the network would otherwise be little used, says Themba Khumalo of MTN Uganda. In addition to the peak hour from 8am, he says, there is now a new peak hour from 1am as people take advantage of cheaper calls. Customers in developing countries are far more price-sensitive than people in the rich world, notes Stephan Beckert of TeleGeography, so they are prepared to stay up late to save money. Vodacom has introduced a similar scheme. In Tanzania, says Ms Rice-Jones, it found that call volumes increase by 20-30% in areas where dynamic tariffing is switched on.

Another African innovation is “borderless roaming”, introduced by Celtel (now Zain) in late 2006. This allows customers in Kenya, Tanzania and Uganda to move between these countries without paying roaming charges to make or receive calls. They can also top up their calling credit in any of these countries. The scheme has been extended to other African countries where Celtel operates, and rival operators such as MTN have introduced similar offers. Borderless roaming is possible because many operators have direct fibre-optic connections between their networks in different countries, allowing them to act, in effect, like a single network.

Alessio Ascari, of McKinsey, a consultancy, argues that Africa, rather than India, “is the new battlefield and the new laboratory for development” in telecoms. The difficulties operators face are even greater than in India, given the huge diversity and political instability in many countries, as well as widespread poverty and fierce competition. Africa is also interesting because local operators and regional champions are competing with Middle Eastern operators, such as Zain and Etisalat, and those from Europe, such as Vodafone and Orange. All of them, Mr Ascari points out, “bring different strengths to the market”.

The wealth of innovation in India and Africa demonstrates that the Western operators are not always best at running networks. “Each of us is learning different pieces of the puzzle from the others,” says Mr Álvarez-Pallete of Spain’s Telefónica. His company is transferring expertise, and indeed managers, between its operations in Europe and Latin America. Much the same is done at Vodafone, which has separate divisions for the developed and the developing world. Vittorio Colao, its chief executive, says his company is applying its European expertise in customer-profiling and segmentation in India, for example, as customer loyalty becomes more important. But there is also a flow of expertise in the opposite direction, in particular in network operations. “There are a lot of operational ideas from a cash-constrained, poor and very entrepreneurial environment that you can immediately bring back to the developed world,” he notes.

Perhaps the most striking example is the agreement struck between Vodafone and Telefónica in March 2009 to share towers and other network infrastructure in four European countries. Network-sharing is not new, says Mr Colao, “but the confidence to do it at scale, and with a fierce competitor, came from India. Once you see how it works in that kind of environment, you become much more confident that you can do it in Barcelona or Venice.” The savings are much bigger in Europe because the cost of leasing tower sites is higher, which adds to the attraction of the deal. An agreement reached in July by Sprint, an American operator, to outsource the day-to-day running of its network to Ericsson can also be seen as an example of the spread of the Indian model, argues Capgemini’s Mr Jacobsen. Ericsson is betting that it will be able to sign similar deals with other American operators in order to gain economies of scale.

Vodafone has outsourced more of its IT, again inspired by the Indian example, and it is using the Indian “managed capacity” model at one of its rapidly growing subsidiaries in Turkey. But according to Mr Colao this model, which he likens to leasing rather than buying a car, does not work everywhere. “In markets where you are not sure about speed and shape of growth, the model makes sense,” he says. But in mature markets where demand is easier to predict it can be better for operators to build new capacity themselves. Vodafone is also taking a leaf out of the Indian marketing book, moving its marketing chief from India, Harit Nagpal, into a global marketing role. (Google “Zoo zoo” to see Vodafone’s popular series of Indian television advertisements.)

The challenge now is to apply all these cost-saving lessons to connecting the world’s remaining 3 billion people and achieving universal mobile coverage. Within India, even the most remote areas are now judged to be on the verge of commercial viability, judging by the results of two auctions held in 2007. In each case bidders had to say how much government subsidy they would require to expand into rural areas, with the contract going to the lowest bidder.

In the first auction, for the right to build shared towers in 8,000 rural locations, the average subsidy requested was 35%, much less than expected. In the second auction, for the right to offer mobile services, many operators submitted zero bids or even negative ones—in effect offering to pay for the right to set up in rural areas. “The subsidies required are not as big as everyone thought, because the companies believe there’s a business case in being present in rural areas first,” says Mr Bajaj. In part this reflects the cut-throat competition in the Indian market. But it also shows that mandated tower-sharing can make the economics far more attractive for operators in rural areas, which could be a valuable lesson for other countries. A second round of rural expansion, with another 12,000 shared towers, has been announced.

In China tower-sharing is mandatory, which has helped reduce the cost of expanding into rural areas. But since the three mobile operators are state-owned, the extension of coverage is co-ordinated from the centre. China Mobile, the largest operator, has signed an agreement with the agriculture ministry to cover 98% of rural areas by 2012, in part to compensate for its relative weakness in third-generation (3G) networks, where it is being forced to adopt the home-grown and relatively immature Chinese standard. And just as India, renowned for its technology-services industry, has pioneered clever business models and outsourcing to get prices down and extend access, China has used its own particular strength as a low-cost manufacturer (see article).

Rural access elsewhere in the developing world is also likely to improve. One hopeful sign is the merger being negotiated between Bharti and MTN, which should accelerate the transfer of low-cost operating expertise between India and Africa. Greater scale will also increase the combined firm’s clout with suppliers. The deal is driven by Bharti’s and MTN’s desire for long-term growth potential outside their existing markets, rather than by hopes of cost savings, says Mr Bajaj. But it could promote greater use of network outsourcing in Africa, and new techniques such as dynamic tariffing in India.

Spreading the word

This is unlikely to be the end of Indian operators’ international ambitions, which could spread the Indian model to other parts of the world. So far moves into Africa by Middle Eastern operators have not been conspicuously successful. Nick Jotischky of Informa Telecoms & Media, a consultancy, notes that Middle Eastern operators often lack the Indian operators’ experience with low-cost business models. Zain, for example, was said to be looking for a buyer for its operations in sub-Saharan Africa, many of which are making losses, to concentrate on wealthier customers in North Africa and the Middle East. But in recent weeks it has been negotiating to sell a 46% stake to a consortium of Indian and Malaysian buyers. Reliance, India’s number two, held merger talks with MTN last year.

In recent years Indian firms have made a series of bold foreign acquisitions in industries such as steel and cars. If its telecoms giants follow suit, their low-cost model could give them a clear competitive advantage—and help bring mobile phones within reach of even more people.

Sep 24th 2009
From The Economist print edition

Millicom Should Benefit from International Bidding War.

Millicom International Cellular (MICC) could shortly be on the end of a nice windfall as three major emerging market telcos line up in a bidding war for MICCs Tigo network in Sri Lanka. Millicom has been making concerted efforts to divest its Asian operations as it realigns its strategy to concentrate on key markets in Latin America and Africa.

In August Millicom offloaded its Cambodian operations to local partner The Royal Group in a cash deal that saw Millicom receiving $346m in return for its 58.4% holdings in CamGSM, a premium that valued the operator at 7 x times 2009 EBITDA. The deal is expected to close before the end of 2009. This followed the company’s statement in July that it wanted to exit the Asian market.

With CamGSM gone, Millicom continues to hold interest in Sri Lanka & Laos. Tigo Sri Lanka, a 100% owned entity, is now on the auction block, with India’s Bharti Airtel and state controlled BSNL having expressed interest, as both operators are looking to expand into new markets and Sri Lankan operations could create some nice synergies with Indian activities. Now that UAE based Etisalat has thrown its hat into the ring, we could see a bidding ward erupt, as three majors go after the prize.

Cash rich Etisalat has had a terrible 2009, as it desperately seeks to expand out of its domestic market, recently failing to secure the purchase of Morroco’s number two operator MediTel, as Telefonica and Portugal Telecom offloaded the unit to local private investors. Etisalat has been on the hunt for the last 18 months or so and has made bids to operate networks in Iran, Morroco, India and Libya. Currently the country is also on the prowl in Nigeria, where it is looking to add to its existing operations. The company bought a 40% stake in Emerging Markets Telecommunication Services (EMTS) for $400 million last year, and it is now looking at acquiring incumbent operator Nitel.

Analysts said the move fit in with Etisalat’s strategic push to operate mobile networks in complementary markets that share commercial or social ties. It already offers some integrated services between networks in the UAE, Saudi Arabia and Egypt, and has said that building on such synergies across its 18-country global network is a priority.

Etisalat announced the Millicom bid in a stock market statement, but did not disclose the price it is offering to pay for Tigo Sri Lanka, which has more than 2.2 million customers. A report in The Wall Street Journal recently said Bharti Airtel [BOM:532454] would be willing to pay up to US$120 million (Dh440.7m) for the company as it seeks to combine Tigo’s 2.2 million subscribers with its existing local operator.

The telecom rumor mill also has Russia’s Vimpelcom (VIP) involved in the bid, however nothing is yet firm on this. It would seem more likely for Vimpelcom to look at Millicom’s Laos operator, as the Russian carrier has launched services in Vietnam and Cambodia this year.

For me the most likely candidate is EtiSalat, as Bharti is tied down in lengthy negotiations with MTN over its $25Bn merger and this would seem to be a side show. BSNL is also rumored to be looking at acquiring a stake in Kuwaiti telco giant Zain at present, whilst Etsisalat has the appetite, the money and the credit rating to make the deal. MICC’s management are shrewd operators and will squeeze every last dollar out of this, so if Etisalat want into the Sri Lanka market, it is my opinion that they will pay a premium.

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%.

There are five players in Uganda’s mobile market that are: MTN (~4.0 million subscribers), Zain (~2.0 million subscribers), Uganda Telecom Mobile (~1.6 million subscribers), Warid (~1.2 million subscribers) and Orange (55,000 subscribers; launched in March 2009). Uganda Telecom Mobile is the only operator with an implemented 3G network (launched in March 2008). Mobile penetration is 27.2% (December 2008), and it is growing at a 78% CAGR 2006-08. The high number of players, together with shareholder expectations on heavy CapEx investments, makes the Uganda mobile market extremely competitive.

Currently, all players are fighting an intense price war. This is felt in two ways: (i) the speed to which new offers are launched in the market and; (ii) the pricing level of these offers. It has become a standard practice to give away voice minutes, either highlighting on-net fees, giving away calls upon recharges or establishing free calling schedules.

As a consequence, ARPUs have been heavily reduced and are still expected to decrease further. Prices have decreased without a similar increase in usage to compensate falling ARPUs – unitary prices have been reduced heavily in the last years, a per-cost reduction from SHS 500, three years ago, to only SHS 50 today. The struggle to capture the most of the market’s organic growth has led mobile network operators to adopt fierce promotions, which are nonetheless damaging customer value.

Furthermore, there are two effects which will bend the average customers’ spending: (i) the addition of lower-value customers as a result of a maturing mobile market and; (ii) the increase of multi-SIMs in the market (offers show distinct price gaps, thus creating a clear benefit for customers to hold more than just one SIM card).

Moreover, in an effort to be first-movers and tap into geographically unexplored growth pools in the market, operators are deploying heavily network into rural areas, leading competition further away from big cities. Playing a coverage game is CapEx intensive and will not always generate positive business cases. Furthermore, commercial networks are bound to expand asymmetrically, creating inefficiencies that persist over time.

As growth perspectives fuel further investments and new players deploy aggressive acquisition campaigns, consumers will tend to get more “free” voice. However, this trend will erode the overall market value. In order to survive, mobile operators must define a new strategy that will ensure future profitability and sustainability in an adverse competitive environment.

Find next some slides that summarize the key KPIs of the market. Best regards.
CVA

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

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.

Having said this, Kenya shows impressive growth rates with significant opportunity, as by the end of 2008, Kenya had more than 15.0 million mobile subscribers, with a mobile penetration rate of 39 percent and with a subscriber base forecast of 29.28 million, or 66.7 percent penetration, by year-end 2013.

The forecasts unveil that total revenue of Kenya’s telecom market will grow by 42 percent from $1.39 billion in 2008 to $1.98 billion by 2013. Among these, 78 percent of the total revenue to be generated by the mobile sector. Net, net, there’s real room for growth.As usually, we have prepared a brief telecom market review of the market. We will be hopefully working there shortly so don’t hesitate to update this post with any update comment. Please find next mmC Group’s assessment on the Kenyan market.

Best, CVA.

Best regards, CVA

The West African nation of Ghana is poised for further growth, but increased competition is bound to make things challenging.

Africa, particularly sub-Saharan Africa, is under close scrutiny at the moment. Despite raging growth in recent years, mobile penetration remains relatively low and countries across the region are seen as an attractive option in the overseas expansion plans of ambitious carriers.

Mobile penetration in Ghana-which stands at just over 40 per cent of a population estimated to top 23 million-may be higher than the continental average of 34 per cent, but it is still low in comparison with teledensities across Europe, North America and South East Asia. That said, Ghana is far from an untapped market.

There are currently four mobile network operators in Ghana. Tigo (owned by Millicom Ghana), One Touch (owned by Ghana Telecom which is now majority owned by Vodafone) and Scancom (owned by MTN) all operate GSM 2G and 3G networks, while Kasapa (currently owned by Hutchison Telecommunications International) operates the country’s only CDMA network. There are two other GSM licensees in Ghana, Zain-owned Western TeleSystems (2G) and Nigeria’s Glo Mobile (2G and 3G). While neither operates at the moment, both have networks planned according to Informa Telecoms & Media’s World Cellular Information Service. The Ghanaian regulator- the National Communications Authority (NCA)-has also granted one WiMAX licence to the ISP Internet Ghana-this too has yet to go live.

The current licence framework only became effective in 2004 when mobile operators were, for the first time, issued long-term licences. Before that date, operators were granted yearly authorisations to use a specific spectrum.

Millicom introduced mobile services in Ghana in 1992, operating a TACS network. The operator then launched GSM in 2002. Celltel, which later became Kasapa, entered the market in 1995 with an AMPS network, while Scancom and One Touch followed in 1996 and 2000 respectively. MTN, which entered Ghana in 2006 through its $5.5bn takeover of Investcom, which owned Scancom, is Ghana’s market leader. Millicom’s Tigo is in second place, Vodafone’s One Touch is third and Hutchison’s Kasapa fourth. At the end of 2006, Ghana had 4.9 million subscriptions, by June 2008 that figured had nearly doubled to 9.4 million. Mobile subscriptions in Ghana increased by 59 per cent year-on-year in Q108. With total African subscriptions growing by 40 per cent over the same period.

Ghana is Africa’s ninth largest mobile market and West Africa’s second largest by subscription count after Nigeria. Informa Telecoms & Media forecasts that the 10 million subscriptions mark will be passed before the year is out. The country will by then have six mobile networks as both Glo Mobile and Zain are expected to launch during Q408. Tigo recorded the highest year-on-year growth, 84 per cent, in Q108, taking market share from Scancom, which had 52 per cent of the country’s subscriptions in Q108. Though Scancom had the highest ARPU, $14 in Q208, with 97 per cent of spending on voice services. Vodafone’s One Touch had an ARPU of $9 for the same period which compares favourably with Kasapa’s $8 and Tigo’s $7.5.

Vodafone plans to launch a 3G network in Ghana through One Touch, which might enable it to establish new sources of revenue from data services. Recent oil discoveries in Ghana could boost the disposable incomes of the country’s users over the medium or long term. The population of Ghana is not poor in comparison with some of their West African neighbours, however, nearly 30 per cent of citizens live below the poverty line making mobile communications a luxury that some can ill afford. Competition is set to increase, potentially driving ARPUs down further as operators compete on price and tap into lower-income groups for growth.

Glo Mobile entered the Ghanaian market after a so-called express bid for a sixth mobile licence was launched on 6th March 2008. The authorities shortlisted 11 unsolicited applications from companies including Globacom Nigeria, Teylium Group and Warid Telecom. On 20th June 2008 the NCA announced that Glo Mobile-one of Nigeria’s biggest three mobile operators-had been awarded the licence for a consideration of $50.1m. The new operation in Ghana was allocated spectrum in the 900/1800MHz and the 2.1GHz bands, as well as an international gateway licence.

The second express transaction was the sale of 70 per cent of Ghana Telecom to Vodafone. The sale of the majority stake to a strategic investor was not a surprise as the process had begun in 2006.

However, Vodafone was not among the initial bidders mentioned. France Telecom was even reported to be the winner in November 2006, mainly in the local Ghanaian press. But in February 2008, it was reported that the government had suspended the sale of shares in Ghana Telecom. France Telecom’s $520m offer had been rejected because the government put a higher price on the company’s assets. Vodafone was announced as the winner on 3rd July 2008. The UK group closed the deal in August acquiring a 70 per cent stake from the Ghanaian government for $900m. The deal was struck on a debt-free, cash-free basis, implying a total enterprise value for Ghana Telecom of about $1.3bn. The government will retain 30 per cent of the company.

Vodafone’s entry into Ghana fits into its strategy of expanding aggressively into emerging markets to offset slowing growth in mature markets. It gives the UK firm access to one of the remaining attractive markets in the region. The challenges will mainly lie in Ghana Telecom’s fixed-line assets and Vodafone will have to deal with heavy debts and reducing the number of staff. The move was a final feather in the cap for former Vodafone chief executive officer Arun Sarin who stepped down at the end of July. “Ghana is one of the most attractive markets in Africa with mobile subscribers growing at more than 55 per cent per annum. Our extensive operating experience together with our portfolio of products and services position us well to deliver a superior mobile experience to Ghanaian customers and significantly improve financial performance,” he said.

Vodafone is aiming for Ghana Telecom to ultimately raise its mobile market share to about 25 per cent, reversing recent underperformance. Sarin said that over the next five years Ghana Telecom is to invest over $500m in its operations and network, restoring and expanding network coverage and completing and integrating the fibre backbone, as well as introducing initiatives such as M-PESA and ultra-low cost handsets.

Back in Q108 Hutchison announced that it had sold Kasapa, Ghana’s fourth mobile (CDMA) operator, to EGH International Limited for HK$584m ($74m). The deal is hanging in the balance, however, dependent on regulatory approval. And there is also an ongoing court case between Kasapa and former local shareholders.

The court case was not mentioned by Hutchison as an obstacle to the transaction and there was no information on EGH’s activities or its country of origin. Rumours link EGH to Sudanese operator, Sudatel, but the Sudanese company has so far not mentioned investments in Ghana. Informa Telecoms & Media forecasts that mobile subscriptions in Ghana will grow by 47 per cent between 2007 and 2011. The country’s penetration rate will then reach 41 per cent. In comparison, Africa as a whole will grow by 48 per cent by 2011 to reach 385 million subscriptions and a penetration rate of 38 per cent.

With increasing competition and rapidly falling ARPU in Ghana, Vodafone’s valuation is starting to look high. West Africa might look like a promising investment opportunity to Western Carriers, and maybe Vodafone can leverage its scale to help it compete, but emerging markets pose a host of challenges and pitfalls that make some carriers, such as Hutch, decide they’re better off getting out of Africa.

Historical subscriber figures for all Ghanaian operators

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).

In April’08 the regulator has required to disconnect the prepaid lines without a contract, which has partially (and temporally) eliminated the double sim effect but has also declined the average penetration rate in April.

The market is fairly saturated in the region of Khartoum while this is not the case for the rest of the country. We agree with the analysts forecasting a potential bag of new millions of net adds but this incremental market share will only be possible if going to the regions where there’s extense room for growth (e.g. South region)

Please find additional details in the next video-slide: