PYRAMID RESEARCH Africa/Middle East Perspective
For the second time in nearly as many years, pan-African operator Telecel International is for sale. In July, parent company Orascom Telecom launched a process that should see the sale of the African carrier before the end of 2001. Orascom acquired 80 percent of Telecel in early 2000 in a deal that valued the African operator at about $520 million.
Orascom's divestiture is primarily motivated by a need to meet the demanding financial requirements of its new and promising Algerian venture, as well as a strategic orientation more weighted toward Middle Eastern and North African markets. More significantly, the Telecel sale may well mark the beginning of an intense period of merger and acquisition activity in African communications markets.
THE PYRAMID PERSPECTIVE
An environment propitious to wheeling and dealing
•The sale of Telecel is symptomatic of an African market ripe for mergers and acquisitions. With a few scarce exceptions, meaningful green-field opportunities in mobile markets have all but evaporated. While markets have reached only a fraction of their estimated potential, operators are increasingly adopting strategic approaches based more on value creation and preservation than investments in gaining subscriber market share, which have a negative impact on profits due to the cost of acquiring low-end, low-revenue prepaid users.
•After the initial scramble for costly licenses, operators are better able to distinguish the truly attractive markets from the not-so-appealing lot. And with the burst of the telecoms bubble, the valuation of telecoms ventures has fallen sharply, making takeover targets more affordable. For operators lucky enough to have deep pockets, now is the time to buy. Within the next few years, Pyramid Research anticipates that the number of major pan-African carriers will be reduced to about six-seven from the current nine-ten, through lateral or vertical integration.
Telecel: A prized asset beset with question marks
•In many respects, Telecel is certainly an attractive asset for any operator with pan-African ambitions. The company's geographic coverage extends to 12 markets across the continent, and data from Orascom's reports suggests that its revenue (as denominated in Egyptian pounds) is on a path to more than double for the second year in a row, from about 680 million Egyptian pounds ($195 million) in 2000. Telecel is generally the leader or the second largest operator in its markets, and continues to build its presence in some promising but unheralded markets, such as Benin and Togo, in addition to strong forays into Uganda. Telecel may yet break into Cameroon, its deal with the local government for the privatization of Camtel remaining somewhat of a question.
• On the flipside, Telecel's presence is stronger in small markets. Only one of Telecel's markets (Cote-d'Ivoire) ranks among sub-Saharan Africa's five largest in 2001 in subscriber and revenue terms, according to upcoming Pyramid Research Africa Mobile forecasts. These forecasts suggest that only about two of the countries in which the company is active may rank among sub-Saharan Africa's top five markets in 2005. For all its geographic breadth, Telecel's estimated revenue is only about half the revenue generated by another Orascom operation, Egypt's mobile carrier Mobinil. While annual revenue and EBITDA (Earnings before interests, taxes, depreciation and amortization) growth have been strong as its subscriber base expanded, the company's estimated EBITDA margin in the first six months of 2001 was lower than 20 percent, slightly below the 25-35 percent generally recorded by peers in the Africa region.
•Another source of concern is the operating environment in Telecel's two largest markets, Cote-d'Ivoire and Zimbabwe. In Cote -d'Ivoire, political instability and a sharp economic downturn have stunted growth, bringing subscriber additions to a virtual standstill earlier this year. The government's new requirement of a $53 million license fee will hardly help the bottom line. In Zimbabwe, political instability has had a similarly devastating effect on the economy, dealing a substantial blow to a once-promising cellular market. Much of Telecel's fortunes ride on these two potentially large markets; yet in both, the short-term outlook is bleak and the long-term prospects indecipherable.
The pool of potential suitors is smaller than it may seem
•With many operators readily professing pan-African ambitions, the field of potential suitors would seem strong, including European telcos and African operators. As shown in Exhibit 2, the possibilities, though finite, are numerous. French operators may come to mind first, given Telecel's strong presence in a handful of French-speaking African markets. France Telecom would seem unlikely, with its presence in Cote-d'Ivoire, and financial markets that may not be ready for its increasing its exposure in markets perceived as overly risky. Vivendi Telecom International (VTI) is arguably a better fit, as Telecel would provide the African presence it lacks and seems to yearn for. VTI, however, would be subject to the same financial market constraints as France Telecom.
• African carriers should be players in the sale of a Telecel stake as well. Econet Wireless and MSI Cellular may show some interest. Whether they can generate the required financing for such a transaction remains a question, however, and in the case of MSI at least, the degree of geographic overlap may be too high to justify a Telecel acquisition.
South Africa's Vodacom may represent the best fit for Telecel
•This leaves the two South African carriers, MTN and Vodacom. Both can generate the required cash and have made expansion in Africa one of the cornerstones of their long-term strategy. Although MTN has moved strongly into Africa, the demands of its Nigerian venture on its financial and human resources may stretch its capabilities. Indeed, it may make more sense for MTN to acquire individual carriers where necessary than integrate 11 new possessions in one fell swoop. MTN's South African rival, Vodacom, may have fewer options. The company's African expansion has heretofore been limited to Tanzania and Lesotho, and a Telecel acquisition would enable it to make up its lag with one deal, even if this means jettisoning Telecel's less attractive ventures. Like VTI, Vodacom would arguably represent one of the best fits for Telecel.
Guy Engon Zibi, Pyramid Research
This Perspective provides Pyramid’s view on a significant development in the communications industry. Perspectives are a component of Pyramid’s Advisory Services.
© 2001 The Economist Intelligence Unit Ltd. All rights reserved. Pyramid Research is a division of the Economist Intelligence Unit
© 2001 Mena Report (www.menareport.com)
