African 'mobile Gold Rush' May Wane for Vodafone, Bharti


Vodafone Group Plc, France Telecom SA and Bharti Airtel Ltd., which spent at least $18 billion on deals in Africa and the Middle East in the last two years, may face lower margins in the world's fastest-growing phone markets.

Countries with as many as 11 operators, falling tariffs, a shrinking pool of new customers who can pay the bills and unpredictable government regulation, are weighing on profit for companies operating in Africa.

"The next round of growth in Africa is not as profitable as the first stage, and the difference is quite dramatic," said Mike Dunning, a managing director at Fitch Ratings in London. "You hit a certain point where you've got all the juicy subscribers covered, and you have to mine the people who can't really afford the service."

Nigeria, Africa's most populous country, had 11 mobile operators at the end of 2009, compared with about four in European countries. In Tanzania, tariffs fell by 80 per cent in the 18 months to May, according to Vodafone's South African unit, Vodacom Group Ltd.

European companies haven't been deterred because revenue gains in Africa are still faster than stagnant or slowing growth at home. France Telecom Chief Executive Officer, Stephane Richard, said in April that the Paris-based company may spend as much as 7 billion euros ($8.8 billion) on deals in Africa and the Middle East in the next five years.

Vodafone is targeting sub-Sahara Africa as one of three "priority areas" for expansion, and Vivendi SA has built up its Maroc Telecom unit with deals in Mali and Burkina Faso.

"Five years ago, it took half a year to recover investments in infrastructure for new clients," said Marc Rennard, the head of France Telecom's African and Middle Eastern operations. "Now, it's more than two years, but that's still pretty good."

Services revenue in Africa, which grew 3.4 per cent to $48.7 billion last year, will rise 2.9 per cent this year and 7.9 per cent next year, according to market researcher, Gartner Inc. The region is still one of the largest untapped mobile-phone markets with about 300 million unsigned subscribers as of last year. Still, operators expanding with those growth rates in sight may be less willing to pay rich premiums for assets.

Bharti paid $9 billion, or about 10 times annual earnings before interest, taxes, depreciation and amortisation, for Zain's African assets. The assets had also been considered by Vivendi before it balked at the price. "Except in a truly special case, we wouldn't be prepared to pay 10 times Ebitda for a target," France Telecom CEO Richard said on July 5.

Vodacom had also been in talks with Zain "long before Bharti," said Pieter Uys, Vodacom's CEO. It walked away from the price "the businesses, knowing the countries, and the opportunities," he said Vodacom would pay as much as six or seven times earnings for the right assets, Chief Financial Officer, Rob Shuter, said.

"The glory days and gold rush are over to some extent," said Dave Hagedorn, a former mergers and acquisitions executive at Zain's Celtel unit, now at Vodafone.

Kinnevik Investment AB's Millicom International Cellular SA, with operations from Chad to Tanzania, may be "the only real possibility to buy something that is more or less worthwhile," Lerche said. Millicom Chief Executive Officer Mikael Grahne said in an interview in May that Africa has too many licenses and that the Luxembourg-based company may sell units that can't be among the top two operators in their countries.

With multiple companies in markets, profit margins have been sliding. In Sierra Leone, the margins of Zain, tumbled to 7 percent in the nine months to September 2009 from 26 percent in the year- earlier period. MTN's Ebitda margins slipped to 41 percent last year from about 44 percent in 2007.

"We do not want to deteriorate our Ebitda ratio, but we need growth," France Telecom's Rennard said. Margins in Africa are higher than those in Europe, according to CEO Richard.

Bharti will invest about $600 million over three years in Nigeria, the company's Africa CEO Manoj Kohli told reporters in Lagos yesterday. Half of that amount will be spent in the first year in the West African state, where Bharti bought Zain's assets.