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Vodafone’s Africa Inertia Hampers Chase to Narrow MTN Gap

Vodacom’s Africa Inertia Hampering Chase to Narrow MTN’s Lead
Vodacom trades at 11.7 times future earnings compared with MTN’s 10.9 times earnings estimate, according to data compiled by Bloomberg. Photographer: Henner Frankenfeld / Bloomberg

Vodafone Group Plc’s South African unit Vodacom should lead its African expansion if it is to narrow the gap with MTN Group Ltd., which has capitalized on its rival’s inertia to build a business three times its size, Investec Asset Management said.

MTN has built a customer base of 173 million users across 21 countries in Africa and the Middle East since the Johannesburg-based mobile-phone company began in 1994. Vodacom, started that same year, has 47.8 million subscribers, 60 percent of whom are in South Africa with the rest in Tanzania, Lesotho, Democratic Republic of Congo and Mozambique.

Vodafone, which has lost the position as the world’s largest mobile-phone company to China Mobile Ltd., should consider selling its African units to Vodacom, giving it a single entry into the continent, said Rob Forsyth, who helps manage the equivalent of $90 billion at Investec Asset Management in Cape Town. The Newbury, England-based operator sells services through businesses in Ghana, Kenya and Egypt, which together have more than 63 million customers, according to its website.

“It’s not clear who does what in Africa; is it Vodacom or is it Vodafone?” said Forsyth. “The strategy is mixed up.”

Bharti Airtel Ltd. and France Telecom SA are among companies competing for a greater share of the market in Africa where, according to Johannesburg-based BMI-Techknowledge Group, less than 45 percent of its 1 billion people had handsets in 2011. People in Europe, on average, have more than one handset each. Mobile-phone penetration in China reached 74 percent in April, data from the Beijing-based Ministry of Information Industry show.

‘Compelling Growth’

Vodacom trades at 11.9 times future earnings compared with MTN’s 10.8 times earnings estimate, according to data compiled by Bloomberg. Vodacom has committed to paying out 90 percent of earning as dividends while MTN pays out 70 percent of earnings, which is helping to support Vodacom’s share price, said Khulekani Dlamini, head of research at Cape Town-based Afena Capital, which manages 20 billion rand ($2.4 billion) including Vodacom shares.

MTN “offers compelling growth and valuation,” Barclays Plc analysts, led by London-based JP Davids, said in a May 29 note. The company, which on May 28 said revenue in the first four months of 2012 rose more than 10 percent, will continue to post “sector-leading growth in earnings and shareholder returns,” said the analysts, who have an overweight MTN rating.

Price War

Vodacom, 65 percent-held by Vodafone, has gained 63 percent since it listed its stock on May 18, 2009. The stock has four buy recommendations, three sell ratings and 11 holds from analysts that cover the company, according to data compiled by Bloomberg. MTN, which has increased 18 percent over the period, has 13 buy recommendations and five holds.

Vodacom climbed 1.1 percent to 98 rand at the close in Johannesburg, giving the company a market value of 145.8 billion rand. MTN slid 0.9 percent to 133.15 rand, valuing the company at 251 billion rand, the largest South African-based company on the Johannesburg Stock Exchange.

In South Africa, smaller operators have started campaigns to lure customers away from Vodacom and MTN with lower prices.

After hiring Vodacom’s founding Chief Executive Officer Alan Knott-Craig in April, Cell C (Pty) Ltd., the third-largest operator, reduced the price of its pre-paid packages by more than 34 percent last month as it received a $180 million capital injection from its controlling shareholder, Dubai-based Oger Telecom Ltd. The following day Vodacom lowered its prices on similar packages to match Cell C’s.

African Expansion

Telkom South Africa Ltd., which started its 8ta mobile-phone service in 2010, said on June 8 that the unit had gained almost 1.5 million mobile-phone subscribers. It plans to win 15 percent of the market by 2016.

Vodacom hasn’t entered a new market since it started operating in Mozambique in 2003, according to its website, while MTN in 2006 paid $5.5 billion for Lebanese group Investcom to gain customers in Sudan, Syria, Liberia and Yemen. Under Vodafone’s control, Vodacom’s previous major acquisition soured with the company on June 8 disposing of part of its $700 million Gateway Communications asset within four years.

Bharti Airtel in 2010 bought the African assets of Zain, Kuwait’s largest mobile phone operator, giving the New Delhi-based company operations in 17 African countries with 53.1 million subscribers at the end of March, Bharti said on its website. France Telecom, has operations in 18 African countries through its Orange brand, wants to double emerging market revenue by 2015. In Africa its number of customers increased 16 percent to 76 million users by the end of March.

‘One Pocket to Another’

Vodafone will support Vodacom to pursue opportunities anywhere in Africa excluding the Sahel, Vodacom Chief Executive Officer Pieter Uys said in a May 21 interview, referring to a region that abuts the southern border of the Sahara desert from Senegal across Africa to Eritrea. While the issue of handing over the Kenya and Ghana operations has not been discussed, it “may come out in the future,” he said in an interview at the company’s Johannesburg head-quarters.

Vodafone doesn’t see a need to transfer its units in Ghana or Kenya to another subsidiary, said Vodafone Chief Executive Officer Vittorio Colao on May 22. That would be equivalent to “moving my wallet from one pocket to another.”

Vodafone owns 40 percent of Safaricom Ltd., Kenya’s biggest mobile-phone company, a 54.9 percent stake in Vodafone Egypt Telecommunications Co. and 70 percent of Vodafone Ghana.

“There’s no limitation” to further acquisitions, Nick Read, Vodafone’s regional CEO for Africa, said. “The real point is to find good assets or assets you can turn around at a good price.”

Angola, Mali, Ethiopia and Eritrea are the last of the big opportunities left for mobile licenses in Africa, Afena’s Dlamini said.

Vodacom will struggle to catch rivals, said Investec’s Forsyth. “That doesn’t mean they shouldn’t try.”

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