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.