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.

Last month, the government of Mali (GOM) officially rejected the latest financial offer for the country’s state-owned telco, Sotelma. Early this year, Maroc Telecom (MT) was selected as the winning bidder for a 51% stake in Sotelma, with a EUR 252m (USD 330m) bid. Negotiations have since plodded along, offering a glimpse into the challenges of reconciling divergent perceptions of African carrier value, all the more so in a context in which valuations have cratered.

What MT offered: MT offered EUR 252m for the 51% stake, more than half what had been proposed by the next bidder, Sudan’s Sudatel. Sotelma is an intriguing operation; by African state-owned telco standards, it is relatively well managed. Its revenue is as high as that of Telkom Kenya despite its operating in a market that is three times smaller. The company’s mobile business has some solid upside, with a mobile penetration at 30% and only one major competitor; by contrast, the upside of the fixed business is fairly marginal.

What the GOM wants: the GOM is said to seek closer to EUR 350m; MT has proposed to sweeten its offer by an additional EUR 30m, in exchange for tax breaks and the GOM taking over Sotelma’s debt, but the government has balked at the idea. The GOM would also require the winning bidder to stick to its proposed business plan for the company, a requirement that would compel some investment in a fixed business that carries virtually non-existent intrinsic value.

There is no telling where this standoff will go. For the GOM to meet its objectives, the winning bidder would need to ignore current (depressed) market valuations and price the operation more in line with the standards of the 2006-2008 period.  The MT bid already does that, by valuing Sotelma at 4.6x revenue, and more than 10x EBITDA, a substantial premium over current market valuations.

For indicative purposes, Sonatel (a gold standard of sorts for West African telcos) currently carries an enterprise value of 2.4x 2008 revenue and about 4x EBITDA; Burkina Faso’s Onatel (an operation not that dissimilar to Sotelma) is valued at similar revenue multiples and at about 5x-6x EBITDA, more in line with the privatizations of Telkom Kenya, Ghana telecom (on which Vodafone has just taken an impairment charge of $375m, 40% of what it paid), and Onatel’s own privatization two years ago. By contrast, the GOM is valuing the operation at twice those levels. That is a risky bet to make. For the bet to work, the GOM needs somebody to overbid wildly; in the current context, however, we are skeptical there is a better offer elsewhere. In our view, the GOM should take the money (with no tax breaks) and run.