The Buying and Selling Game in Africa – A backstage look at the way Mergers and Acquisitions Happen
With the developed world economies flat-lining, the prospect of investing in Africa has never been more attractive. With the halo effect from the mobile growth years still in place, buyers are coming to a set of markets that are much changed. Russell Southwood looks at who might be up for sale and who might not be sold and at who the possible buyers might be.
The slogan “Africa is not a country” encapsulates the first thing that needs saying about the buying and selling game in Africa. There are 55 “recognized states” on the continent and they were not all born equal. Buyers are generally looking for two things: scale and some degree of risk certainty.
These two things point in slightly different directions. The number of countries where there is scale and some degree of risk certainty are actually very small in number: in Sub-Saharan Africa, these are South Africa, Angola, Ghana, Nigeria, Kenya, Tanzania and Uganda and in North Africa Morocco, Tunisia and until recently Egypt. These ten countries all have issues but they have a relatively clear regulatory framework and are amongst the most developed on the continent. You might add Ethiopia but in telecoms terms there’s nothing really for sale.
In the other direction, a certain kind of buyer is attracted to those smaller countries where there is much less competition and if there is no change in the regulatory regime, then you can look at something approaching guaranteed revenues even if they are much smaller in scale. These smaller countries are often run by rulers who will take financial advantage of incoming investors so companies there are often in the hands of those who understand the old business practices of an Africa that is slowly passing away.
In terms of buyers, there are two broad categories: international buyers looking to get into Africa and existing regional African buyers wanting to expand their portfolio of operating companies. International buyers have come from almost every different continent on the planet (examples in brackets): India (Bharti, Essar Group); VTel (Vietnam); Vodafone (UK); France (Orange, Vivendi); Luxembourg (Millicom); Portugal (Portugal Telecom); the Middle East (Etisalat, QTel, Oger Telecom and Zain); Lebanon (Comium, Lintel); and Israel (Cellcom).
Some are coming and some are going but they have all had wet feet. Some of them like Vivendi and Telecel have been in and out more than once. Indeed as Airtel shows, potential buyers should beware assets that have changed hands on a regular basis over the last ten years.
Potential bidders have included Russian and South Korean companies but except at the equipment vendor level there has been no interest from China and the USA has been remarkably absent. Japan’s NTT bought into South Africa’s Dimension Data but has not really been present in the telecoms space.
International buyers either want to acquire a portfolio of companies across the continent or get into one or more of the major markets. Larger international players often seem mesmerized by a kind of geographic empire building. This often leads them to make choices that do not completely make good business sense. Vivendi’s Maroc Telecom is up for sale and the two bidders are from the Middle East. If the deal goes through at reported levels, the assets seem overpriced.
For example, there is one existing mobile operator that looks at buying into South Africa’s Cell-C on a regular basis because it feels it cannot be on the continent without having a presence there. Others buy into collections of relative small countries where the revenues and growth are alright but not spectacular. One of the international operators recently achieved 3% growth which may look great run against Europe now but would be less impressive in different economic times.
Buyers can also be sellers when their performance is less than stellar and their patience runs out. For example, Bharti’s Airtel may recently have bought Warid Uganda as a consolidation play. But the confidence with which it announced it was going to shake up the market does not yet seem to have borne fruit.
The strategy of lowering prices – particularly in Kenya – has not significantly shifted the needle on market share. The outsourcing play with external suppliers taking on the running and risk of large parts of the operation is still waiting to pay off. So might there come a point when Bharti decides that the scale of on-going investment required to keep up with the shift to data outruns its returns and company decides to sell?
On a much smaller scale, the same might be said for Orange’s investment in East Africa, particularly Kenya. When does what might at the most optimistic assessment be described as a “work in progress” finally cause management in Paris to say “enough is enough”? And who then would be brave enough to take on such a damaged asset?
The other major category of buyers are the regional African players which include: MTN, Vodacom, Glo, Econet, Orascom, Expresso and Lap Green. What you can say most easily about nearly all of these regional players is that they understand African markets. Their chances of success in making acquisitions and running should therefore be significantly higher.
With the buyer or seller conundrum, almost all of these companies (with the exception of Vodacom) could be a buyer or seller. The unsuccessful attempt by Reliance to buy the business and the South African Government insistence on a dual listing may well scare off other buyers.
Glo’s owner Mike Adenuga (who runs his business from Adenuga Towers) may have his own vision of continent-wide expansion but the rather individual way in which the company is run makes it hard to believe that this will flourish. Nevertheless, ego and undying self-belief have powered things through some of the most difficult moments. But as an acquisition target, any potential buyer would need understand more about the business and be prepared to keep investing. Single owner businesses are often difficult to buy out unless the owner is thinking of retiring to spend more time on the golf course. Lap Green seems to be showing signs of growth pains: see the item below on its subsidiary utl being sued by the Chinese vendor ZTE.
Sudatel investment vehicle Expresso has had a less than stellar performance as it persuaded itself to take the CDMA handset route. Its subsidiary Chinguetel in Mauritania is up for sale and its subscriber numbers in Ghana and Nigeri almost don’t appear on the measuring scale.
Outside of these major deals, the main things that will come up for sale will be individual country purchases. These are likely to come in two different shapes and sizes: consolidation plays where existing players are paying for some element of subscriber acquisition and to take the company out of the market. But loyalty is not a defining feature of African subscribers as they are much more driven by price.
The acquisition targets at this level do not really set the heart racing. Cell C even under its present CEO is not making spectacular progress against the established incumbents. The long shadow of the South African Government sits across Telkom. A recent attempt by KTT to buy highlights this point. As always with the South African Government, you might say its indecision is final.
After that, it’s pretty much all low cards: Comium and Lintel in West Africa; and Cellcom in Liberia. The only exceptions are as follows: Madagascar ex-incumbent Telma which might be an interesting purchase if the country was somewhat more stable politically. And the Angola mobile operator Movicel which is held privately.
The other much less attractive acquisition asset category are the state owned former incumbent telcos. In 2010, we identified 28 of these that were still Government owned but just under half do not have a mobile operation. The number is pretty much the same and where there have been sale offers in a couple of cases, the Government has withdrawn from the sale on the basis that the prices offered were too low. The Nitel saga continues and has had almost as many twists and turns as a Latin American telenovelas.
Theoretically with the coming transition to data, these assets should appreciate in value. But the reality is that the majority remain over-staffed, leak revenues and would require huge amounts of investment and management time as Orange has discovered in Kenya.
The last set of opportunities are companies that might operate in the data space as that transition is made. The deal Kevin Maxwell has put together in Nigeria (CAPCOM) is timely and if he and his investors can overcome the operational challenges, they may yet become credible insurgent challengers. With a stronger stomach, a company like Internet Solutions in South Africa might look at a similar consumer play in South Africa by buying up one or two of the larger ISPs.
The transition to data will mean that those who have wholesale network assets will become significantly more important over the next five years. The continent contains few “carriers’ carrier” operators and Liquid Telecom bought one of them (KDN) recently. Others are available in Nigeria but have assets on a smaller scale. Instinctively and without any evidence to put on the table, we feel that LTE might just produce some interesting changes in how data is delivered and niche players like Smile Telecoms might become attractive acquisition targets.
The only lasting truth in this whole discussion is that something is only worth as much as the buyer and seller can agree it’s worth.
Changes to your telecoms e-letter: We’re making some changes to the categories in this e-letter and our website to reflect the changes taking place in the market and to give greater clarity to what is covered by each section. What used to be called the Money section will now be split into two parts: Money Transfer which will deal with all of the different online and mobile money transfer services and Mergers, Acquisitions and Financial Results which will deal with everything mentioned in the title plus things like major bank loans and share issues. Also the Web and Mobile Data Content section will be renamed Digital Content and Services.
Video briefings on:
A new online content platform on Intel’s Yolo phone:
Tim Rimbui, Innovative Music on the launch of online music and audio-books platform Waabeh.com in Kenya
Ad agency shifts to digital online spend because of Internet growth:
Shahzad Khan, OgilvyOne on the rapid growth of the Internet in Africa and the rise in digital ad spend
Mobile operator uses social media to hook customers:
Shazad Khan, OgilvyOne on its Nigerian social media campaign for Airtel, Half Dollar
Software package to control telecoms costs in the enterprise:
Morocco: Anas Alhilal, Medina Telecom on UniBox, a device for controlling telecoms costs
A strategy to prepare for Bring Your Own Devices (BYOD):
Carsten Brinkschulte, CEO, Movirtu on its two new products aimed at the BYOD market
A broadband and video rural deployment model from India:
Osama Manzar, Digital Empowerment Foundation on delivering broadband in rural India
Online food delivery model from Turkey:
Turkey's Gokhan Akan, Yemeksepeti.com on delivering all things food online
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