Out of Africa

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

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 management advisory and investment 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.

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