On February 13, Zain’s board accepted a $10.7bn offer for its African assets from India’s leading carrier Bharti, including $1.7bn in debt. The deal is expected to close within a month, the time for Bharti to close out the financing of the transaction; at first blush, this appears to be that rare transaction that works for all parties, though perhaps not as well for Bharti’s shareholders. (Please click title – Full Analysis in PDF available at www.africanext.com)

The price: the price point is at the higher end of the $7-$9bn equity valuation we had estimated for Zain’s African assets (see “How Much is Zain Africa Worth?” an AfricaNext Research Investor Note – September 2009). It values the equity of Zain’s African operations at about 7.5x projected 2009 EBITDA, a relatively rich valuation in the current African context (public pan-African carriers currently trade at 3.5x-4.5x forward EBITDA), but hardly excessive within the historical context of similar transactions.

For Zain, it’s a good sale price for a set of operations in which the Kuwaiti company had sunk around $6-$7bn over the past five years, with a nearly non-existent dividend stream. It’s a price that allows Zain to realize a profit through capital gains that would have been hard to come through dividend upstreaming alone, on a business that was dragging down its earnings. Zain will be able to pay down debt and focus capital expenditure on more profitable Middle Eastern markets. Removing Sudan from the equation was the icing on the cake, making the deal the ultimate no-brainer.   

By our estimates, Zain realized a non-weighted return of at least 30%-40% on its African investments, potentially more depending on the structure of individual capital transactions and depending on assumptions for management fees and equity contributions to CapEx.

What is Bharti getting for its money? Our analysis in a June 2009 Investor Note is still relevant:

 “The fact that Zain would even consider selling its Africa business points to heightened concerns about the deterioration of fundamentals in African mobile markets. Competition has intensified, taxation levels have risen as tax holidays have expired, the markets are as capital-intensive as ever (at a time Zain is seeking to cut CapEx levels by half) and African currencies have plunged against the dollar. […] Excluding Sudan, Zain’s African operations accounted for about 65% of the group’s subscriber base, 56% of its revenue and 50% of its EBITDA in 2008. Perhaps more significantly, they take up more than 75% of capital expenditures, yet only account for 15% of the group’s net income. Zain’s net income rose 6% in 2008; excluding Africa, net income rose 34%. For all the lofty subscriber numbers, African operations are arguably a drag on the entire group, at least for now. “

 Please download full analysis in PDF format at www.africanext.com.

On Tuesday 16, Nigeria’s National Council on Privatization announced that a Consortium known as New Generations Telecommunications had bid $2.5bn for a 75% stake in Nigeria’s state owned carrier NITEL. The winning consortium reportedly includes Minerva Group of Dubai, Nigeria’s Gicell (a small local wireless operator) and China Unicom (Hong-Kong). With all the due caveats for the finer details of the proposed transaction, the purported bid is puzzling and outlandish enough to strain credulity for an operation we had described as a “ghost ship”.  (Please click title to read full posting).

We make a number of points:

- The bid is $1.5bn higher than was offer by the next highest bidder (UK consortium Omen International), a rather unprecedented gap in absolute terms.

- The bid is $2bn higher than it was only three years ago (though for a higher stake), when Nigerian group Transcorp agreed to pay $500m for NITEL. Since that ill-fated bid, the company’s financial and strategic position has deteriorated, an evolution at odds with the valuation suggested by the winning bid.

- It is tough to identify the cash flows to would justify the bid. Under the most favorable of projections, NITEL’s mobile unit would be hard-pressed to generate such free cash flows.  Other segments have some upside, but are similarly a long shot to generate the underlying free cash flows that would be required to meet the valuation.

- No NITEL privatization is quite without controversy; two days after the initial announcement, a China Unicom spokesperson said the company was not involved in the bidding. A cascade of purported bidders has since denied they were involved.  

- The first test of bid credibility will come 10 days after it is officially accepted: the consortium will have to put up 30% of its bid, a substantial $750m.

Vodacom’s latest trading statement shows a resilient performance, in the face of what the company called a “challenging environment”. Group revenue rose 6% for the quarter ending in December 2009, but the overall picture is mixed, with stable growth and a relatively positive outlook contrasted with some weakness in its international operations. Over the past four quarters, Vodacom’s revenue has grown by less than 2%, with slower, if solid growth in the mature South African market not compensated by international operations, where revenues have declined by about 10% over the same period. A few highlights:

In South Africa, year-on-year revenue growth was solid at 7.5%, with subscriber growth stable and revenue now largely driven by strong performance on the broadband front, where the company has emerged as the largest broadband retail provider. Overall ARPU is at the same level year-on-year at ZAR140, but 12% higher than over the previous two quarters.

International operations are a pressing concern.   Revenue declined 7% for the quarter and has been on a 10% downward trend over the past four quarters. The key factors of decline are a combine drop in subscriber growth and overall subscriber revenue.

• In DRC, Vodacom’s subscriber base fell from 4.4 to 3.5m, the result of tough economic conditions, competition and a clean-up of its subscriber base. The company’s subscriber share has declined from 52% in 2006 to an estimated 38% at the end of 2009.
• In Tanzania and Mozambique, Vodacom’s leading position is also under threat. Despite a good product portfolio, the operator has seen a decline in subscriber gross adds and the gap with rivals Zain and Tigo is narrowing. The differential between Vodacom and Zain’s subscriber base stood at 59% at Q22008. It dropped to 35% at Q42009. Nonetheless, Vodacom should keep its first place over the coming years with a market share around 37%.
• ARPU across international operations has declined by an average of 15% over the past four quarters, a trend the company attributes to competitive promotions and economic pressures, and one that complicates matters when subscriber growth seems to be contracting.
• Revenue from international wholesale business Gateway has been largely flat, an evolution not entirely surprising, as the company expands and has to face sharp declines in bandwidth prices in many of its markets. The business retains substantial upside.  

Nigerian state telco NITEL is back on the sales block, in another government attempt to privatize the company. This time, the bidding process attracted 14 companies who have until February 15 to submit their technical and financial offers. (Please click title to read full posting).

The bidders include established Nigerian market players (Globacom, MTN Nigeria, Etisalat Nigeria) and outsiders (Brymedia West Africa, Finetek.com/Ericsson Consortium, Omen International (BVI), MTI Consortium, Telefonica Consortium, Conau, Dansacom Technologies, Adison Consulting, Foneama.com and Afzitelecoms). India’s MTNL entered the fray last week, in another sign of Indian companies’ rising interest in African assets.  

The main question is whether the Nigerian government can succeed in fetching a valuation above the US$980m it got from its most recent tender; that, we believe, is highly unlikely. 

NITEL’s is eerily suggestive of a ghost ship; old, creaky, sinister in its own way and aimlessly wandering about in the mist.  On the fixed side, NITEL has seen subscriptions plummet, from over 500k fixed subscribers in 2001 to around 60k active subscribers at YE2009 according to estimates from the Nigerian Communications Commission (NCC). The company has been irrelevant in a mobile market that has become the largest in Africa, with about 250k customers by the regulator’s count. NITEL has also been hit by multiple strikes over the past few years and its liabilities are abysmal. In October 2008, the National Council on Privatization estimated the company’s debt at a NGN200 billion (US$1.31bn).

 Where is the value then, one may be forgiven to ask? In some select assets.

• NITEL’s mobile assets, notably a GSM license acquired for US$285m in 2000; mobile subsidiary MTel runs a GSM 900/1800 MHz network, but its current state is anybody’s guess. Overall, MTel has invested a cumulative US$200m in its mobile network over the past decade. Overall however, the company’s mobile assets have lost substantial value, and its lost market share may be irrecoverable. The government has indicated that this asset could be sold on a stand-alone basis.
• NITEL’s transmission backbone, most notably its control on the SAT-3 submarine cable: NITEL invested around US$49m in SAT-3, which still provides most of the country’s international bandwidth. While the value of this asset is eroding, with at least two competing cables expected to become operational within the next two years, it remains attractive and may ironically carry higher intrinsic value than the mobile asset over the long term.

Taken together, these two assets could be worth between $400m and $600m (excluding the liabilities), certainly less than the Government of Nigeria (GON) will undoubtedly want for NITEL; this however, may be the GON’s last chance to sell for a somewhat respectable price before NITEL loses the last vestiges of its relevance.