Out of Africa

As Zain looks for an exit from its short-lived African adventure, CommsMEA looks at Zain’s African operations and asks what other Middle East telcos need to do to make a success of their own African empires.

Tags: Arab Advisors GroupEmirates Telecommunications CorporationGhanaIDC Middle East and AfricaKenyaKuwaitSierra LeoneUnited Arab EmiratesVivendiZain - Kuwait
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Out of Africa Alawi Baroum, CEO of Bintel stresses the importance of scale.
By  George Bevir Published  August 3, 2009 Communications Middle East & Africa Logo

With its acquisition of Celtel for US$3.5 billion in 2005, Kuwait-based Zain blazed a trail across Africa, acquiring operators throughout the continent, from West and Central Africa to the south.

Such a swift expansion lent scale and credibility to the operator's oft-stated desire to become one of the top 10 operators in the world by 2011, but now that it has been confirmed that "the board of directors of Zain ...will consider any proposals that may be submitted" for the bulk of the operator's African assets, it makes achieving the goal look less likely.

IDC's telecommunications group research manager for the region, Said Irfan, says selling such a large part of the group contradicts that strategy. But it may be that Zain does not have any choice.

Fede Membrillera, partner with research firm Delta Partners, says that many of the operators in the Middle East were created on the basis of debt, and now that debt is not so readily available, some operators are not always willing to commit heavily to equity investment that is needed to drive the business forward.

"Devaluations of the local currencies are affecting Africa quite a lot," Membrillera adds. "Also, the overall economies are slowing down and you are seeing a softening on the revenue side in almost every industry, FMCG, hospitality and leisure, telecommunications."

Zain announced in May that it would cut its 15,000 strong workforce by 2,000, in the first sign that the days of rapid growth and expansion may have been behind the Kuwait-based operator.

Zain has said that it will only consider approaches that "maximise shareholder value", and it is the fortunes of one of its main shareholders that may provide a clue as to the reasons for the sale.

The Kuwait Investment Authority has a 24% stake in Zain, and in line with many sovereign wealth funds in the region it has suffered from a decline in the value of its assets over the past year, from $250 billion in 2008 to $169 billion.

French media giant Vivendi was the first company to publicly declare its interest in Zain Africa, but talks between the two groups have been suspended, apparently due to difficulties in reaching an agreement over the price of the assets.

In a note to investors, JP Morgan analyst Johan Snyman questioned Zain's reported valuation of $12 billion for its African operations. He said that "based on a normalised net income of $500 million, and earnings before interest tax and dividends of $2.4 billion, Zain Africa is worth no more than $6.5 billion".

Another factor may be the desire to extract greater value from the group's existing assets. The founder and general manager of Arab Advisors group, Jawad Abassi highlights the high prices paid for licenses, particularly in Saudi Arabia. "The last few years were focusing on growth, now it seems the focus is on not just growth but also on streamlining the operations and making sure there are synergies from their many subsidiaries and operations. The focus is on not just growth but growth and operational efficiency, synergies and cost control."

It was in the Middle East that Zain received the most reward during last year. Kuwait recorded the highest EDITDA and net income, and Zain's African networks accounted for 65% of its subscribers and 56% of revenue, but absorbed more than 75% of its capital expenditure and created just 15% of net income.

While the precise reasons for a sale may not be certain, what is clear is that the different operators that make up Zain Africa make vastly differing contributions to the overall group. Zain has said that it does not want to sell recent acquisition Morocco or Sudan, were it has invested heavily and is the market leader with a 50% share. Irfan points to the operations in Kenya, Madagascar and Sierra Leone as examples of countries that Zain is struggling in, and units in Ghana, Nigeria, Uganda and Chad have all registered losses, reducing Zain Africa's profitability.

Alawi Baroum, the CEO of one of Africa's smaller mobile operators, Bintel, says it is precisely because of these country-by-country differences that it is important that each operation adopts a local outlook. "Africa still presents a large potential for new players as long as they understand the market dynamics," he says.

Karim Sabbagh, vice president of analyst firm Booz &Co says that international operators entering and expanding in Africa are now learning to adjust their business models to the distinctive market environments, but he says it has been an evolutionary process.

Mobile growth

After Vivendi announced that talks with Zain had been suspended, UAE incumbent Etisalat went even further than the French outfit, when the chief executive of Etisalat's international unit was quoted by Reuters as saying the UAE operator was interested in snapping up a controlling stake in the whole group, not just the African operation. At the time of writing, Zain said it had not received any formal offer from Etisalat, and Etisalat released a statement to clarify that no talks were actually taking place, but it was bold talk from the operator.

Etisalat is present in Sudan with CDMA operation Canar, and with Etisalat Misr in Egypt, while Etisalat Nigeria launched last year. The telco is also in Tanzania and West Africa through Atlantique Telecom.

A statement in Etisalat's 2008 annual report revealed the attitude of the telco to its African arm: "The group is aware of the intense competition that exists in the West African market, with higher volumes dictating success."

The drive towards higher volumes continues, and last month Etisalat announced that it was interested in bidding for a licence for fixed and mobile in Libya, with $500 million of investment earmarked, following plans to invest $2 billion in its Nigerian operation.

Etisalat is not alone in targeting further expansion into Africa. Last month also saw the CEO of Bahrain-based Batelco reveal his plans for further expansion of the group, with $2 billion to be spent on acquisitions, possibly in North Africa. Another of the Middle East's telecom giants, Qtel, has a presence in Africa, and it too has focused on the north of Africa.

Opportunities continue to present themselves, either through acquisition of existing players or through new licenses. But some analysts say that in some countries in Africa the number of operators has diluted the opportunity.

"Governments and regulators opened their market beyond what makes sense because there was demand for that," Membrillera says. "There were a lot of operators getting into countries without having a reliable and well thought out and structured approach towards this," he adds.

For the continent as a whole, this is in marked contrast to the Middle East, where there has been a slow and gradual release of licences as governments look to protect the interests of majority owned telcos.

Arab Advisors' Abassi does not agree with the concept that the regulators issued too many licenses. "Nobody can define what the ideal number of licenses is," he says. "It's best left to the market and investors. It is a standard fact of life that in competitive markets you have a period of rapid supply of operators, eventually have some consolidation with mergers and acquisitions, and you have the stable operators until the next disruptive thing happens, and I don't think it is the government's role to even try to decide on the number of optimum operators."

With some markets in Africa populated by as many as five or six operators, consolidation appears to be the next stage for the telecom market, and the sale of Zain's considerable assets in the region could be the precursor to a series of mergers and acquisitions.

Membrillera says that in the long term in Africa there will be five or six main players. "MTN will be one, Zain - or whoever takes over Zain - will be another one. Orange is heavily committed to Africa and they have just come in to Kenya, they have expressed interest in Mozambique. They are committed to develop their presence in the region. Vodafone through Vodacom are already there. Then there is room for one or two more." He says that of upmost importance are economies of scale, and not just on opex side but also on the capex front.

Gaining scale

Abassi points out that the most important aspect of scale is subscribers. "If you have operations in 20 countries and one million subscribers, or operations in five countries and 20 million subscribers, clearly you will get your bargaining power better with supplies and vendors with the larger number of subscribers."

Bahrain-based Bintel, which is already present in Somalia and recently acquired a licence in Congo Brazzaville to complement an existing operation in Central Africa Republic and a soon-to-launched network in Gabon, also subscribes to this idea.

Baroum says: "It's more important that each and every operation is successful by itself. Having three or four strong operations is better than having 20 operations that are in a big mess."

It does not appear to have been a successful strategy for another of the smaller, Middle East based telcos focused on Africa, with former employees of Hits Africa, a subsidiary of Kuwait-based operator Hits Telecom, taking legal action against the company over non-payment of several months' wages and severance packages.

Despite Zain's desire to ditch its African arm, and the travails of some of the smaller players, analysts are still bullish about the prospects. Sabbagh describes the case for expanding into Africa as "compelling". According to the UN Economic Commission for Africa, mobile phone subscriptions rose by 41% in 2008, and while growth is expected to slow this year, there is still room for further expansion.

"I think that the fundamentals are still there, and it is a very high growth environment," adds Membrillera. "If there is a place in the world that needs to grow and will continue to grow, it's Africa," he says. "But it needs to be run in a more professional way. That's why reliable operators willing to have long term commitment will have a shot, that is why the Etisalats, the Qtels, the STCs - the guys that are on the ground - those committed to the industry that can get assets at very attractive prices have a shot in building a presence in Africa."

Sabbagh says that 11 of the top 20 mobile markets in terms of growth in 2008 were in Africa, and that the continent added on average a net of 25 million subscribers per quarter in 2008. "Markets such as Egypt, South Africa, Nigeria, Kenya, Sudan, Tanzania, Uganda, Ghana and Cote d'Ivoire are fuelling 75% of this growth," he says.

While growth remains, there are several factors that operators from the Middle East need to acknowledge if they are to benefit from a return on their investments. While the markets in Africa are diverse, as a whole the region has a low ARPU. And this, combined with the high costs associated with rolling out a network, are potentially troublesome factors.

Bintel's Baroum says that this is where innovation and creativity can play an important role. "We have to select the partner we are dealing with very carefully, because we can talk from now until tomorrow about how people do business and how people use mobile phones, but planning the roll out should reflect the seriousness of balancing our capital spending. We cannot afford to do it in the classical way, and build the Rolls Royce of networks," he says. "Our network should be high quality, but we should build it for the market need, and the need of the people here," Baroum says.

"That is why we have decided to work with a partner and vendor who understand the fact that whatever choice we make today will affect us in the long run, with ideas like hybrid generators and infrastructure sharing," he adds.

Sabbagh agrees that infrastructure sharing is a "must-have" for new entrants. And he says that operators from outside the continent have often to face "the rude reality of needing to master low-cost telco models that run contrary to their institutional DNA. It is a learning process that some master faster than others".

Baroum expands upon this concept and says that what may be attractive in North Africa can be totally different to Central or South Africa.

"We have really to take into consideration and we have to bring in new ideas from the local environment," he says.

"To paraphrase Galbraith," Sabbagh says, "the shortcoming of telcos' strategies in Africa are not original error but uncorrected obsolescence."

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