M&A activity in Africa enters new phase
Over the past several years, BuddeComm has frequently reported about the merger and acquisition (M&A) frenzy in Africa’s telecom markets, where prices of over US$1,000 per subscriber have been paid for stakes in companies that sometimes make US$10 or less in average revenue per user (ARPU) per month. Considering that the typical net profit margin of an African mobile operator is around 15%, it would take a very long time to repay such an investment – if it wasn’t for a significant potential for further subscriber growth. Market penetration in some countries is still in the single digits, across the continent it currently stands at about 40%, and African markets can get close to or even exceed 100% penetration, as countries such as South Africa, Libya, Botswana and Gabon have already demonstrated.
However, the subscriber growth curve in many African markets has started to flatten, and many look set to level out between 40 to 70% penetration over the next few years, taking into account some degree of multiple SIM card ownership among mobile phone users. 2009 may still see record net additions in some markets, especially those with intense competition between five or six networks, but in percentage terms the subscriber growth peak is already behind us in most markets.
The new subscribers being signed up now are the expensive ones: Many of them are outside the major cities where operating conditions for a mobile network operator are extremely difficult and expensive: To build their base station sites in the country, operators often have to build roads first, and to operate the sites they have to bring their own power in the form of diesel generators. Pan-African operator MTN for example spends US$5.5 million every month on diesel fuel to power the 6,000 generators at its base stations across Nigeria alone.
And these new subscribers are spending less: As the competition intensifies, taking the form of outright price wars in some countries, lower and lower income groups gain access to services, resulting in lower and lower monthly ARPU levels which have now broken the US$5 barrier in several cases, and even the US$3 barrier in some.
Add uncertainty about the effects of the global economic crisis on developing countries to this cocktail and you get a pretty gloomy picture.
Or not? Why is there still a keen interest, or even a renewed one, in mergers and acquisitions in Africa’s telecom sector at this stage? Orange/Orascom, Vivendi/Zain and MTN/Bharti are recent examples.
Orascom is an interesting case: The Egyptian company divested almost all of its sub-Saharan mobile operations between 2002 and 2005 – which it had bought from Telecel International in 2000, mostly in markets with low penetration and high growth potential – and henceforth concentrated on the more developed North African and Middle Eastern markets. Reportedly, the towering cost of infrastructure deployment south of the Sahara had led the company to take this decision. However, in 2008 it established a new subsidiary Telecel Globe to re-enter sub-Saharan Africa, including some of the same markets it had abandoned five years earlier such as Burundi and the Central African Republic, which still today have a market penetration of only around 6% and 12%, respectively.
But it’s not only a return to low-penetration, high-growth markets for Orascom: In early-2009, Telecel Globe also made an acquisition in Namibia (Cell One), a market that has already reached 60% penetration, and at the same time Orascom is vigorously fighting an attempt by Orange to take control of the two companies’ joint Mobinil operation in Egypt which has a similar penetration level.
Another French giant, Vivendi was until recently in talks with Zain to take over 15 of the Kuwait-based group’s 16 African operations (with the exception of Sudan), but the deal collapsed in July 2009. Vivendi had reportedly offered US$10.5 billion for a 65% stake, representing about US$460 for each of the approximately 35 million proportionate subscribers – less than half of what Zain (formerly MTC) had paid per subscriber when it bought Celtel’s African mobile networks in 2005.
Where did all the value go?
Zain’s shares rose by 5% on the day the negotiations were announced, and Vivendi’s rose 4% the day they broke down, which tells a story. While it has performed well in certain markets, Zain has fought for market share with very aggressive pricing in several key markets, which has led to very low ARPU figures and a loss of profitability. In Nigeria for example, Africa’s biggest mobile market, Zain’s ARPU fell from US$9 to US$7 in the first quarter of 2009 alone – little more than half of market leader MTN’s which fell from US$16 to US$13. And yet, Zain’s subscriber base in Nigeria grew by only 19% over the past 12 months while MTN’s rose by 46% during the same period. In Kenya and Uganda, Zain’s monthly ARPU in the quarter plummeted to US$4 from US$6 and US$7 respectively – and in Ghana, Zain’s latest playing field, the operator even finished its first quarter with an ARPU of US$3 per month, a fraction of MTN’s US$8.
Seven – almost half of Zain’s 15 African operations that were subject to the Vivendi bid – turned net losses in the first quarter of 2009, and where profits remained they were significantly down on the same quarter the year before in most cases. Five of the operations posted net losses for the entire 2008 financial year. Overall, Zain’s Africa operations account for 65% of its subscribers and 56% of revenues, but they absorb more than 75% of capital expenditure and create only 15% of net income. The operator has reacted by sacking staff across its operations and outsourcing major parts of its network services to Ericsson in June 2009, in a bid to improve its bottom line.
Zain’s most profitable operation across the entire Africa and Middle East region is… you guessed it: Sudan, the one excluded from the Vivendi bid, with an EBITDA margin of 55%.
The collapse of the Zain/Vivendi deal shows that buyers in Africa’s telecom M&A game are now paying more attention to profitability as well as strategic and brand positioning, compared to a few years ago when low market penetration seemed like a guarantee for success. Further consolidation seems inevitable, and perhaps only real giants will be able to survive in Africa’s expensive, low-ARPU telecoms operating environment in the future, as the US$23 billion merger talks between MTN and Bharti Airtel of India may indicate which have been on and off and on again for over a year.
In parallel, the operators are looking for ways to generate new revenue streams in a bid to slow the downward ARPU trend, and perhaps even turn it around. There are two key areas that look promising: Third-generation (3G) mobile broadband services, and m-payment/m-banking services.
Internet penetration is still very low in Africa, due to the typically poor or sometimes virtually non-existent fixed-line network infrastructure in most countries. Access to international bandwidth has traditionally been monopolised, which has led to extremely high prices and poor availability. Most Africans cannot afford the cost of a PC or an Internet subscription. However, the large number of cybercafés and other public access facilities found across the continent has contributed to a certain level of Internet awareness and usage.
With the emergence of mobile data and 3G broadband technologies it is now possible for the first time to take the Internet to a much wider part of Africa’s population. Many mobile networks in Africa already provide coverage to between 70% and close to 100% of the population in their markets, while the fixed-line networks reach only a few percent. Used PCs, imported from developed countries, are sold in shops for as little as US$50, and smartphones with large screens are also becoming more affordable. In Uganda for example, there are already ten times more mobile than fixed Internet connections, and even in South Africa’s relatively highly developed telecoms market the number of 3G broadband users has passed the number of ADSL users.
This revolution on the access network level is matched by one on the international bandwidth side: Access to it has been de-monopolised in key markets, and several new international submarine fibre optic cables along both the African west and east coasts are set to go live in 2009 and 2010. In East Africa, the landing of the Seacom cable in Kenya in July 2009 even marks the first time that fibre-based international bandwidth has been available in the entire region. On the west coast, several cables will be competing with the SAT-3/WASC cable, currently the only one serving that region. To take this bandwidth to the end customer, national fibre backbone networks are being rolled out across the continent, which will even enable landlocked countries to benefit. Prices for international bandwidth are set to plummet from several thousand US$ per Mb/s per month to a few hundred US$, at least in countries where not only the technology is in place but also an enabling regulatory framework.
The potential demand for broadband in Africa is huge. BuddeComm’s forecasting model shows that the ARPU decline in the continent’s currently mainly voice-driven mobile market can indeed be stopped and even turned around if the operators succeed in truly transforming themselves into converged service providers.
The other key area for African telecom operators to create new revenue streams is financial services. On a continent where only 10 to 20% of the population have bank accounts, the economy is largely cash-based. Banks are few and far between outside of the main cities, and most people cannot afford the fees or wouldn’t even qualify for account ownership. The mobile networks have jumped into this gap with the introduction of m-payment services, enabling users who do not have bank accounts to use their mobile phone credit to pay bills via SMS, as well as complete m-banking services.
The absolute pioneer success story here is M-Pesa in Kenya, introduced by Vodafone’s Safaricom network in 2007. The service uses Safaricom’s airtime distribution outlets and other authorised agents. It does not require the user to have a bank account, nor is there a minimum amount. Users can deposit cash into the M-Pesa account and withdraw it through a network of authorised dealers such as shops and petrol stations, or at one of 110 PesaPoint ATMs in 46 towns throughout Kenya (with hundreds more planned), without the use of an ATM card. SMS-based money transfers can be made irrespective of whether the recipient is another M-Pesa customer or not, and even to non-Safaricom customers.
M-Pesa attracted 1.6 million users within 12 months and broke the 3 million barrier in 2008, roughly the number of all account holders at all Kenyan banks combined, or 10% of the population. By this time it was carrying US$280 million per month, the equivalent of more than 10% of Kenya’s GDP. By May 2009, the numbers of users had doubled again to six million.
Safaricom earns between US$0.35 and US$0.50 per transaction. But this direct revenue is not the only benefit for the operator: Safaricom has found that the voice ARPU of M-Pesa users is 25% higher compared to non-M-Pesa users, simply because they can keep their phone accounts topped up more conveniently and therefore more regularly.
M-Pesa’s stunning success in Kenya has prompted Vodafone to expand the service internationally. Other pan-African operators are racing to catch the train, although less successful than M-Pesa for the time being – Zain with its ZAP service, Orange with Orange Money, among others. The extensive national coverage of the mobile networks has the potential to revolutionise the financial services sector in Africa, to the extent that the established banks are complaining that the mobile operators are enjoying privileges similar to those extended to them but are not subjected to the same regulatory regime.
So current buyers of African telecom assets are not only looking at buying a phone company anymore. They are looking at buying a broadband and converged services provider, and possibly even one of the continent’s largest future banks. Market penetration rates in both service segments are currently as low as mobile voice penetration was five or six years ago when the sky was the limit. With the right strategic positioning in place, an African operator can ‘do it all again’.
Peter Lange, Senior Analyst Africa – BuddeComm
For more information on telecoms, broadband and electronic media in Africa, see BuddeComm’s range of Africa reports at http://www.budde.com.au/Regions/Africa.
