The list of shortlisted bidders for a 75% stake in Zambia’s state-owned telco Zamtel makes for a most unusual group. The Zambia Development Agency (ZDA) announced that the bidders were BSNL of India, Lap Green of Libya, Unitel of Angola and Altimo/Vimpelcom of Russia.

With the exception of Lap Green, all the shortlisted operators are looking for their first African asset. The traditional pan-African players have sat out of this opportunity after manifesting initial interest, an implicit indication of perceived value. BSNL’s involvement is in line with the recent forays of Indian operators into Africa, though past behavior suggests they are unlikely to overpay. Lap Green Libya has already won licenses and privatizations in a number of markets; on history alone, this is the favorite in this process, thanks to its propensity to pay well above value for its targets. 

The presence of Angola’s Unitel is most intriguing. It is an underpublicized fact that Angola has the third largest mobile market in sub-Saharan Africa in revenue terms (behind South Africa and Nigeria), with about $2bn in annual services revenues. Unitel is the country’s dominant player, and one of the most profitable mobile operators in the African continent. The company has cash to spend, thanks to the $600m+ it generates annually in free cash flow.    

The core question is what exactly the buyer would be getting. Zamtel largely fits the typical profile of an African state-owned fixed carrier: inefficient, loss-making, strong unions and debt levels so high privatization appears to be an alternative to bankruptcy. Should the buyer be able to get the government to take on much of the debt and offer some tax breaks, there is some underlying value in the operation. Cell Z, the company’s cellular unit is Zamtel’s most attractive assets.

It holds 5% of a Zambian mobile market we expect to grow by about 10% annually over the next five years, and in which competition is relatively moderate. We believe a better-managed (and better capitalized) Cell Z can raise its market share to at least 15% and grow its revenue six to tenfold over the next ten years. The fixed segment is similarly attractive, thanks to the opportunity to offer bandwidth to Zambia’s carrier and corporate markets. In essence, we’ve seen worse opportunities, as long as the $150m+ debt can be wiped out.

As more governments move to mandate the registration of all active mobile subscriptions, concerns are rising over the impact of this new obligation on operator performance. Late last year, Vodacom indicated that South Africa’s implementation of the regulation mandating subscriber registration (known as RICA) had had a negative impact on its gross subscriber acquisition numbers. In early January, UBS removed MTN South Africa from its Top Telecoms List, amidst concerns that subscriber registration would lead to lower revenues and earnings in 2010. We believe this is an overreaction; we do not expect subscriber registration to have a materially negative impact on the earnings of African mobile operators, and see a more threatening cost impact in other factors. [Click title to read full analysis]

Subscriber registration is a painfully painstaking exercise. Logistical challenges abound, rural areas are difficult to cover, there is deep mistrust of government usage of the data, subscribers and operators just don’t like the process. But few would argue that it’s an unnecessary exercise, as a check against wanton, faceless crime. More African countries have moved ahead with plans, including Tanzania, Kenya, Botswana, Cameroon, and Ghana, and more are bound to follow.

Subscriber registration will have a negative impact, at least in the short term. This stands to reason, for registration introduces enough incremental friction into the subscription process to slash the volumes of spontaneous purchases. Subscriber registration will also likely lead to a drop in overall subscriber numbers as operators are forced to deactivate SIM cards that have not been identified. In one of the most prominent examples, Algeria compelled operators to deactivate close to 3m subscriptions in 2008; gross acquisition numbers subsequently dropped by about 50% year-on-year and the overall user base rose by a mere 3% (vs. 30% the previous year).

Overall however, we find the impact of SIM registration on operator earnings to be negligible at best in the long term (under the critical assumption that the process is not overly complicated), and at worst, a function of established gross additions and churn volume levels. The limited evidence available suggests that gross additions return to near pre-registration levels within 6 months to a year as subscribers learn to adjust to the new rules.  In Bangladesh, where the regulator deactivated 1m unaccounted lines in 2008, the impact on gross adds was marginal.

The argument for a materially negative impact on operator earnings is similarly unconvincing, in our view; in the case of Algeria and Bangladesh, operators experienced short term revenue blips (of one quarter or two) before revenue growth started anew, if from a slightly lower base.  To be sure, this is also a function of the level of penetration. The higher the penetration level, the less marginal revenue is a function of marginal subscriber additions. In Nigeria, for example, net additions are already in decline, and will likely be less than half 2008 levels, independent of any impact from SIM card registrations. Operators may still blame SIM registration, but we are not certain its impact will be any more prejudicial than a natural attrition in the number of acquisitions.

Further, we simply see bigger concerns to earnings elsewhere. The widespread decline in interconnect rates will have a more perceptible impact on earnings than SIM registration, as will across-the-board competition. Nonetheless, we believe first tier players that have moved fast enough to insulate themselves from the volatility of the voice business (as MTN has) are in a better position to withstand the one-time shock of SIM card registration.