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STUDY ABROAD OPTIONS
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FINANCIAL SHAKE-UP LOOMING FOR TELCOS After a relatively quiet 1999, the year 2000 saw the completion of more telco privatisation procedures in Africa, and turned out as the continent’s most prolific year for privatisations. The process is painful, with many governments having to suspend and re-issue tenders in the face of limited demand from foreign investors. Last week, the government of Kenya, frustrated by the low offers for Telkom Kenya, threatened to cancel the bid altogether. Cameroon’s CAMTEL and the Ugandan Telecommunications Ltd (UTL) ran into similar obstacles last year prior to their privatisation. What is taking place, in the midst of the continent’s telecoms euphoria, is the realisation by foreign investors that not all telecoms business is good business. The restructuring of African telcos involves parties that have conflicting visions for the companies, notably governments that regard operators as national jewels and instruments to achieve economic development objectives, and foreign investors looking for bargains and opportunities for rapid and worthwhile return on investment. For all their strong position in their respective markets, however, African fixed carriers are at the losing end of the African telecoms business, companies with declining market share in the local voice segment and limited prospects for future and rapid revenue growth. More strikingly, most African telcos are still relying on business models that will evaporate within the next three to five years. Current revenue models make the most of international calling and settlements (50-60% of total revenue) as well as regulatory barriers, at a time when international calling costs are shrinking and liberalisation is sweeping global markets. The discrepancy between the existing African telco business model and the reality of the market is reflected in the valuations of many African operators. Compared to a group of peers in other emerging markets, African carriers are selling at a steep discount, with their valuations on a per- population basis less than ten times that of other fixed carriers. While this is understandably a function of Africa’s lower GDP per head, it is mostly a result of the decrepit state of the operators themselves. Bargains though they may be, many carriers are simply not judicious investments. For a foreign operator looking to penetrate the market, it would make more sense to obtain a cellular licence or greenfield fixed licence and start from scratch with a service that has more upside without the legacy of a state-owned enterprise. Selling at a Discount
Source: Pyramid Research estimates. To be sure, some telcos are still making money and churning out EBITDA margins up to 60%. However, such figures are misleading indicators of potential profitability, because they do not reflect the operators’ generally high debt levels. Moreover, the strong margins are mostly generated by international calling revenue. Fixed carriers will have to find some solace elsewhere, but their options are limited. Their stronghold, local voice, is under siege from rapidly growing cellular markets, with cellular increasingly substituting for fixed and shifting the market’s strategic balance. Local revenues streams are too small and plagued with delinquent bills, and the datacoms and broadband markets that have provided some uplift in more developed markets may not be large enough to make up for dwindling international calling revenues. In the short to medium term, most telcos may be loss-making operations, assuming they are not already. Cote-d’Ivoire Telecom, one of Africa’s most reliable carriers, made a loss in 1999, after teetering on the edge for a few years. Some will stand out: Senegal’s Sonatel remains profitable, thanks mostly to a booming cellular operation and its position as a virtual monopoly, as are the efficient fixed carriers of Namibia and Botswana. For companies like Camtel, Nigeria’s Nitel or Zimbabwe’s PTC, however, prospects are grim. Their foreign strategic partner will have to restructure staffing and revamp internal processes in the face of strong labour opposition; invest substantially in capital expenditure to maintain and expand networks and meet often unrealistic deployment targets; restore the deplorable image of the operator; generate revenues more efficiently from current revenues streams and develop alternative revenue sources. As the experience in many markets has shown, it is difficult to focus on all of these challenges simultaneously. For most African telcos, re-engineering
their operations and revamping their business models - sooner
rather than later - is a matter of survival. Even the most
efficient carriers will face a profit crunch. The rest may simply end
up out of business or reduced to offering high-end value-added
services. The key would lie in building up a reliable cellular
business while re-enforcing the position in the local voice
stronghold and leveraging the existing infrastructure to
meet and generate demand for Internet services. M-CELL STAKE REMAINS IN QUESTION IN JOHNNIC UNBUNDLING Although Johnnic, the telecommunications,
media and entertainment group has announced its long-awaited
unbundling programme, the market was uncertain about the
future of M-Cell, the holding company of cellular operator
MTN. CABLETRON TO INVEST IN SA START-UPS Cabletron Group Investments, a company in the Cabletron Group, is to offer financial support for SA start-up companies in the technology sector. (source: ItWeb http://www.itweb.co.za/sections/business/2001/0101110907.asp MICROSOFT AND INFOBANK AFRICA ENTER AGREEMENT Microsoft SA and Infobank Africa
have entered an agreement under which the companies will
work together to assist Africa in participating in the growth of
the digital economy.
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This page last updated on January 28 2004.
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