Is Zain Africa worth US$12Bln?

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