Africa Gold Rush May Wane for Vodafone, Bharti as Margins Slip
A woman talks on the phone infront in a market in Abidjan on June 23, 2009. The African market for mobile telephones has since 2002 shown the "fastest growth rate in the world", according to a survey conducted by business consultancy Ernst Young and published Monday. "Since 2002, the African market has seen a growth rate of 49.3 percent, where the French market has only seen 7.5 percent a year, compared with 28 percent in Brazil and 27.4 percent in Asia, said the report released in Abidjan. Photographer: Issouf Sanogo/AFP/Getty Images
Vodafone Group Plc, France Telecom SA and Bharti Airtel Ltd., which spent at least $18 billion on deals in Africa and the Middle East in the last two years, may face lower margins in the world’s fastest-growing phone markets.
Countries with as many as 11 operators, falling tariffs, a shrinking pool of new customers who can pay the bills and unpredictable government regulation are weighing on profit for companies operating in Africa.
“The next round of growth in Africa is not as profitable as the first stage, and the difference is quite dramatic,” said Mike Dunning, a managing director at Fitch Ratings in London. “You hit a certain point where you’ve got all the juicy subscribers covered, and you have to mine the people who can’t really afford the service.”
Nigeria, Africa’s most populous country, had 11 mobile operators at the end of 2009, compared with about four in European countries. In Tanzania, tariffs fell by 80 percent in the 18 months to May, according to Vodafone’s South African unit, Vodacom Group Ltd.
European companies haven’t been deterred because revenue gains in Africa are still faster than stagnant or slowing growth at home. France Telecom Chief Executive Officer Stephane Richard said in April the Paris-based company may spend as much as 7 billion euros ($8.8 billion) on deals in Africa and the Middle East in the next five years.
Still Growing
Vodafone is targeting sub-Saharan Africa as one of three “priority areas” for expansion, and Vivendi SA has built up its Maroc Telecom unit with deals in Mali and Burkina Faso.
“Five years ago, it took half a year to recover investments in infrastructure for new clients,” said Marc Rennard, the head of France Telecom’s African and Middle Eastern operations. “Now it’s more than two years, but that’s still pretty good.”
Services revenue in Africa, which grew 3.4 percent to $48.7 billion last year, will rise 2.9 percent this year and 7.9 percent next year, according to market researcher Gartner Inc. The region is still one of the largest untapped mobile-phone markets with about 300 million unsigned subscribers as of last year. Still, operators expanding with those growth rates in sight may be less willing to pay rich premiums for assets.
Bharti paid $9 billion, or about 10 times annual earnings before interest, taxes, depreciation and amortization, for Zain’s African assets. The assets had also had been considered by Vivendi before it balked at the price.
‘Gold Rush’
“Except in a truly special case, we wouldn’t be prepared to pay 10 times Ebitda for a target,” France Telecom CEO Richard said on July 5.
Vodacom had also been in talks with Zain “long before Bharti,” said Pieter Uys, Vodacom’s CEO. It walked away from the price “knowing the businesses, knowing the countries, knowing the opportunities,” he said. Vodacom would pay as much as six or seven times earnings for the right assets, Chief Financial Officer Rob Shuter said.
“The glory days and gold rush are over to some extent,” said Dave Hagedorn, a former mergers and acquisitions executive at Zain’s Celtel unit.
Few large deals remain on the continent. MTN Group Ltd., Africa’s largest mobile-phone company, last month halted talks to purchase $10 billion of assets from Orascom Telecom Holding SAE after Algeria’s government blocked a sale of the company’s local unit, the most profitable in the portfolio.
Shortage of Assets
Africa has “a serious shortage of available assets,” with multinational companies already controlling many operators, said David Lerche, an analyst at Avior Research in Cape Town. “There is no country that stands out with a high GDP and a high population to be a big, exciting, worthwhile acquisition.”
Kinnevik Investment AB’s Millicom International Cellular SA, with operations from Chad to Tanzania, may be “the only real possibility to buy something that is more or less worthwhile,” Lerche said.
Millicom Chief Executive Officer Mikael Grahne said in an interview in May that Africa has too many licenses and that the Luxembourg-based company may sell units that can’t be among the top two operators in their countries.
With multiple companies in markets, profit margins have been sliding. In Sierra Leone, the margins of Mobile Telecommunications Co., known as Zain, tumbled to 7 percent in the nine months to September 2009 from 26 percent in the year- earlier period. MTN’s Ebitda margins slipped to 41 percent last year from about 44 percent in 2007.
Growth Needed
“We do not want to deteriorate our Ebitda ratio, but we need growth,” France Telecom’s Rennard said. Margins in Africa are higher than those in Europe, according to CEO Richard.
Bharti will invest about $600 million over three years in Nigeria, the company’s Africa CEO Manoj Kohli told reporters in Lagos yesterday. Half of that amount will be spent in the first year in the West African state, where Bharti bought Zain’s assets.
In addition, mobile companies are grappling with the operational challenges in some of the world’s poorest countries.
Operators also face mercurial governments and partners. In October, a government-commissioned body in Ghana recommended renegotiating the sale in 2008 of a 70 percent stake in Ghana Telecommunications Co. to Vodafone. The U.K. company in April said it will begin arbitration proceedings after shareholders in its Democratic Republic of Congo venture failed to reach agreement on issues including a capital restructuring.
Governments, Regulations
Tanzania last month told Bharti it needs to hold a second round of talks with the government over its purchase of Zain’s unit in the country. Countries from South Africa to Nigeria are also pushing for registration of mobile users and slashing interconnection rates, both weighing on profit margins.
At the same time operators are rarely able to build a loyal customer base.
More than 95 percent of African mobile subscribers pre-paid for their service last year, the highest proportion of any region in the world. With no penalty for switching operators, between four and six percent do so every month, costing the African mobile industry about $11.4 billion annually, according to consulting firm Green Giraffe.
To lower churn, operators could try to sell African consumers long-term data plans, analysts say. Doing so will mean selling higher-end phones and subscriptions to consumers accustomed to cheap, pre-paid voice and text service.
“Mobile data is the next area, and that’s yet to be tested,” Nick Jotischky, an analyst at Informa Telecoms & Media, said by phone. While the most promising value-added service is mobile banking like that offered by Safaricom Ltd in Kenya, “no one’s been able to replicate it entirely,” he said.
Value-added services will be marginal for the foreseeable future as underserved rural areas are connected, said Rosalind Craven, an analyst at Business Monitor International in London.
“All growth is at the bottom of the market,” making cost control critical for operators, she said. “Previously, this was ignored in a mad scramble to expand.”
To contact the reporter on this story: Matthew Campbell in London at mcampbell39@bloomberg.net; Nicky Smith in Johannesburg at nsmith38@bloomberg.net
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