The Kenyan mobile market has been in the throes of an acute price war over the past month, following Bharti/Zain Kenya’s move to slash its prepaid rates by half, to KES 3 (US$0.035). Rivals Essar and Orange followed through with cuts of their own, with market leader Safaricom responding with an elaborate model offering deep discounts based on the value of the recharge. All these moves have combined to give Kenya arguably the lowest mobile rates in the African continent. Over the past three years, airtime prices have declined by more than 80%.
The catalyst of the latest cuts was regulatory body CCK’s decision to cut mobile termination rates further, to around $0.02. The CCK will continue to cut MTRs annually, with a long term target of KES0.99 ($0.01) by 2013, the lowest in Africa.
The CCK’s cuts, combined with increased competition and the emergence of Zain from its long slumber, will offer the stiffest challenge to Safaricom’s market’s dominance. This will be good for consumers, not so much for margins. Impact on revenue growth will be negative, and all operators will have to move quickly to broadband to make up for the voce shortfall. This may be a harbinger of what will happen elsewhere, though that is unlikely. No other regulator has cut MTRs this quickly, and this deeply.
Over the past three months, an open conflict has opposed Senegalese fixed carrier Sonatel to international wholesale carrier Global Voice Group (GVG). The GVG-Sonatel dispute follows similar (if not as contentious) disputes in Ghana (where Vodafone loudly protested) and Cote-d’Ivoire.
In Senegal, GVG signed a deal to managed inbound international calls into Senegal. The government subsequently raised Senegal’s termination rate to EUR 0.215 per minute, from EUR 0.14 per minute, and effective tax of EUR 7 cents per minute. Under the terms of the deal, GVG receives 49% of the “tax” on incoming calls, with the government retaining 51%. The company has signed similar deals in Ghana (where termination rates rose from $0.12 to $0.19), Congo-Brazzaville and a handful of other African markets.
The impact of GVG is not inconsequential. In Senegal, local operators terminate about 100m minutes in international calls each month; the GVG tax would generate about $10m a month, around half of which would go to GVG. By our estimates, GVG generates around $7-$10m a month combined, in Congo, Togo and Guinea-Conakry. In Ghana, GVG would stand to make another $4-$5m a month.
The GVG approach is fairly cunning. The company deals directly with African governments, who are starved for cash, and can use their power to impose new rules. It rarely intervenes directly, only providing monitoring equipment and training. There is increasing resistance. Besides Sonatel and Vodafone Ghana, other operators are becoming increasingly vocal. In Cote-d’Ivoire, the government has backtracked on its initial decision to allow GVG. The regional ECOWAS organization has formally protested and requested an exemption for regional traffic. Some foreign operators are already applying reciprocity. Senegal may ultimately backtrack, but the lure of fresh revenue remains too strong for many governments to resist.
On July 5, France Telecom put additional substance in its plans to expand its emerging markets. Unveiling a so-called “Conquests 2015” plan, the company aims to double its revenues in the Middle East and Africa (MEA) region by 2015. That is ambitious, and will require the “acquisition” of around EUR 2.5bn in revenue.
France Telecom has 19 operations in the MEA region; the region generated EUR 3.4bn in revenue in 2009, up 5% from the previous year, with EBITDA margin solidly at 42%. The company expects organic growth around 5%-6% over the medium term, which means that the realization of its target will have to be primarily acquisition-based. France Telecom estimates that it’d have to spend around EUR 5-7bn, a not inconsequential amount.
In Africa, the company’s options are multiple, though many have narrow value. There are few mid-scale to large value options; large pan-African players such as MTN or Zain are either too large or not for sale. Other pan-African players are only moderately attractive. A market-by-market approach may be best, if painstaking. FT still has no operational presence in sub-Saharan Africa’s largest markets, South Africa and Nigeria. Cell C would fill the South African gap, while Etisalat or Bharti may be talked out of their Nigerian operations, though that’s unlikely. Cross-segment deals are more likely, with more acquisitions in the Internet space, though most operations there may be too small.
Last June, Nigerian carrier Globacom revealed it had received a license from the government of Senegal; the announcement created much ado, for the license was awarded outside of traditional channels, with the country’s regulator ostensibly not aware of it. The process was certainly a step back for Senegal’s telecoms regulatory framework. As for Globacom, it’s another step in the company’s relentless effort to build a strong challenger to France Telecom in French-speaking West African markets.
Over the past few years, Globacom has advanced meticulously, like a spider spinning its web. From its base in Nigeria, the company acquired licenses in Benin, Ghana, Cote-d’Ivoire and now Senegal. While the mobile portion of the licenses typically garners the most attention, it is mere pretense. In all these markets, Globacom would be the fourth mobile operator at best, with challenging profitability prospects. The value is elsewhere, rooted in the upcoming launch of Globacom’s Glo-1 submarine cable.
The licenses provide Globacom with more than landing points; they are a beachhead into West Africa’s burgeoning and underexploited wholesale market, a starting point to offering services in typically neglected landlocked West African countries. With its current coverage, Globacom will be in a position to challenge France Telecom and its primary West African vehicle, Sonatel, by selling bandwidth and corporate services into such markets as Mali, Burkina-Faso and Cote-d’Ivoire, and leveraging the volumes afforded by its Nigerian presence.
Globacom is too often under-estimated, primarily because the company is information-shy and somewhat nebulous. It’s a mistake to do so; on evidence alone, we find Globacom’s strategic acumen to be as good as any; they know precisely what they are doing.
Much as Ulysses endured the enchanting music of sirens trying to lure him to shipwreck, South African carrier MTN has been threatening to succumb to the sirens of consolidation. As the chants mount –the latest from Reliance- and MTN itself stays on the prowl for opportunities, we remain somewhat skeptical of the promise of the proposed deals. We review some of the proposed combinations.
THE ORASCOM SIREN: an African born company like MTN, Orascom Telecom is the most attractive opportunity of the bunch. It operates in two of the largest North African Markets (Algeria and Egypt), has a presence in a few small but high growth sub-Saharan African markets and features EBITDA levels well above the African average. But an Orascom deal may also be the toughest to pull off, with uncertainty looming over key assets. First, the company is embroiled in a geo-political tussle in Algeria where the government has rejected a possible buyout of Orascom unit Djezzy by MTN. Further, Orascom’s second most profitable operation, Egypt’s Mobinil, is partly owned by one MTN’s main competitors, France Telecom, who has negotiated an option to purchase Orascom’s remaining share by 2013. As for the remaining Orascom Telecom assets, they accounted for 44% of group revenues in 2009 but only 30% of the EBITDA. In other words, an Orascom without Algeria and/or Egypt is only remotely attractive.
THE RELIANCE SIREN: The Reliance siren resumed its singing last week when the Ambani brothers announced a truce in their longstanding feud by agreeing to do away with their “non-competing” agreements. This allows Anil Ambani to sell Reliance Communications without prior consent from his brother Mukesh; it also means that MTN, who had looked to purchase Reliance Communication through a share swap mechanism, can now go back to the negotiations table. Nonetheless, the asset looks a little less attractive than it did a couple of years ago. Reliance is facing substantial pressure on profitability as a result of stiff competition at home. Its revenues and earnings have dropped significantly over the past year. In addition, MTN may have a rival in Etisalat, which is also said to be interested in the Indian carrier.
THE LITTLE MERMAIDS: We believe MTN should go for smaller and sweeter assets providing both consolidation at home and a beachhead outside its current geographic footprint. Millicom would be a compelling option. The Luxemburg based operator provides some consolidation opportunities in key African markets such as Ghana and Rwanda and fills key African gaps for MTN. In addition, it would open the doors to new markets in Central and South America where the operator holds a strong position.