Lost in valuation

I recently travelled to Cairo to chat with the folks at Etisalat, who at the time were fervently preparing for the soft launch of the operation on May 1.

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By  Tawanda Chihota Published  May 1, 2007

I recently travelled to Cairo to chat with the folks at Etisalat, who at the time were fervently preparing for the soft launch of the operation on May 1. The energy was all around the headquarter building in Cairo's Smart Village, and junior and senior staff alike appeared genuinely excited about the new period in the country's telecoms development they were helping bring to pass.

Despite the positive energy around me, my thoughts were never far from the thought that before a single subscriber was billed, before a single base station was installed, Etisalat coughed up nearly US$3 billion in order to have the privilege of entering the market. The company's CEO and CFO continue to defend the amount paid despite lingering market scepticism, and it is becoming harder to tell the wood from the trees.

Etisalat bid around 20% more than MTC did to win in Egypt last year, and the Kuwait operator went on to talk down the attractiveness of the business case at the price Etisalat offered. It was a predictable reaction from a losing bidder, though given MTC's reputation for aggressive bidding in pursuit of other opportunities, the company's comments did have a certain resonance.

Then MTC goes and bids US$6.12 billion for a position as Saudi Arabia's third mobile licence, in a market that ironically enough, Etisalat had paid US$3.4 billion to enter less than three years prior. Quite definitely the Saudi market is a different case to Egyptian mobile market, though the question stands whether the interpretation of value is skewed by an operator's lost opportunity elsewhere.

In 2005, South Africa's MTN lost its bid to consolidate its position at the top of the pile of African operators when it was beaten to the acquisition of Celtel International by MTC. MTN claimed that the price paid for Celtel by MTC was over the odds and that had it entered into a bid war with MTC over the investment, MTN risked destroying shareholder value.

A year after missing the opportunity for Celtel, MTN bounced back with its US$5.5 billion acquisition for regional operator Investcom, which analysts at the time considered a steep price to pay. At over US$1,000 paid per Investcom subscriber at the time, compared to the US$680 per subscriber paid by MTC for Celtel subscribers a year earlier, MTN's move was not cheap.

So it appears that while financial modelling, due diligence exercises and rigorous market analysis and consultation all do play a role in operators estimation of the fair value of a greenfield operation or investment opportunity, the human characteristic of trying even harder to win another opportunity when a first has been missed appears to also have a role to play.

Whatever the long-term implications of today's costly transactions are going to be on the leading operators across the Middle East and Africa going forward, it is clear that for the meantime current profit and loss accounts appear to reflect continuing healthy businesses and margins. Reviewing 1Q07 financial results reported by the likes of Etisalat, MTN, and Wataniya it is clear to see that these operators remain viable, attractive businesses for which additional growth appears a further heightening to their already strong performances.

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