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International Issue: May 2006
Celtel’s Scramble for Africa
With the Financial Backing
of MTC Kuwait, Celtel
International Appears Well
Placed to Ride the Growth
Curve in Africa’s Mobile
Markets
by Ken Wieland
Celtel International’s headline financial figures look impressive. During 2005, its mobile operations in 14 sub-Saharan African countries — some of which are among the poorest in the world — clocked up a total revenue of nearly US$1 bn.
More impressive still, it’s profitable. Celtel posted a US$200 m net profit last year on the back of an EBITDA performance of US$360 m.
To outside Western observers, squeezing a positive EBITDA out of a country with an annual GDP per capita under US$300 and a monthly ARPU in the US$7-10 range — something which Celtel manages to do in Kenya and Uganda, for example — might seem a remarkable feat.
But Marten Pieters, Celtel’s CEO, is quick to dispel any notion that Africa is hopelessly poverty-stricken and an unattractive place for investment. “There is a danger of looking at general economic statistics in Africa and coming to the conclusion that it’s a very poor place where people have little or no disposable income,” he says. “The reality is that there’s a significant number who have large incomes to spend, out of which a large part is spent on mobile telephony. And what people often don’t realise is that in Africa there is hardly any alternative to mobile telephony apart from travelling, which can be dangerous. So even for those with lower incomes, mobile telephony can be a very cost-effective solution.”
Pieters also highlights the importance of Africa’s ‘informal economy’, which Celtel estimates can be up to five times the size of the official economy. This, he says, helps explain some of the higher ARPU numbers in countries where the official GDP number is low.
Celtel’s CEO concedes that ‘one or two’ of the company’s mobile operations are not net income profitable — he does not disclose their names — but in each of the 14 countries it has a presence it is achieving a positive EBITDA performance.
Across its African mobile footprint, the monthly ARPU ranges from US$7 to over US$35. The higher end of the ARPU scale is found in Sudan and Gabon, which had GDP per capita levels of US$2,100 and US$5,800 respectively during 2005. (By way of contrast, annual GDP per capita ranges from US$24,000 to US$36,000 in the US, Japan and Western Europe.)
Despite the low ARPU levels, at least by Western standards, Pieters doesn’t see this as a problem — so long as the business model is right. “ARPU is not the most important financial barometer for us,” he says. “It became very important in the Western world because operators invested upfront in their customers through handset subsidies and credit facilities on minutes of use. To demonstrate they could achieve a future cash flow on their customers, they needed a monthly ARPU figure to pay off the investment. The situation in Africa is totally different. We don’t subsidise handsets and operate a pay-as-you-go model. A new customer of ours, more or less from day one, covers his marginal cost and very quickly becomes profitable. That’s why we can live with lower ARPUs.”
That’s not to say that Celtel necessarily enjoys lower capex and opex requirements than its Western counterparts, despite the cheaper labour costs in Africa. “It would be wrong to underestimate this side of the business,” says Pieters. “For one thing, our site costs are much higher than the Western world. There are few rooftops so we have to build masts, which, in turn, are usually in the middle of nowhere and so dedicated power generators need to be installed. These also have to be guarded round the clock.”
Given the high amount of upfront capex required in Africa, the US$3.4 bn purchase of privately-held Celtel in May 2005 by Middle Eastern mobile operator MTC Kuwait should make Pieters’ task of raising funds much easier. “Prior to MTC’s involvement, Celtel had been a ‘pure African operation’, which made it difficult to get access to cheap, or relatively cheap, capital,” explains Pieters. “Investors saw us as high risk. Now, with the support of MTC [which is in the process of negotiating a US$5 bn credit facility with a consortium of international banks], a lot of that perceived financial risk goes away.”
Due to MTC’s greater financial muscle, Celtel International was able to extend its stake in its Sudan mobile operation, Mobitel, from 39 per cent to 100 per cent earlier this year in a cash deal worth US$1.33 bn. MTC said at the time that it plans to invest a further US$500 m in Mobitel through to 2007 in order to increase network coverage and capacity.
Pieters adds that Celtel’s capex levels will reach US$1 bn over the next couple of years to fund expansion of existing operations. Beyond its current 14 mobile subsidiaries, Pieters says he is looking at opportunities in Nigeria, Senegal and Ghana. MTC has already made its intention clear to make a bid for Egypt’s third GSM licence.
But MTC does not intend to fund its African and international expansion plans purely through cash. Preparations are under way to IPO an assortment of MTC’s international assets and list outside Kuwait (as well as Celtel, MTC has operations in Jordan, Lebanon, Iraq and Bahrain). This will enable MTC to use shares as currency, something that it can’t do as a company listed in Kuwait. Which assets will come under the IPO hammer, however, has yet to be determined. “The MTC international IPO is a work in progress with some major decisions taken and some still to be taken,” says Pieters.
Looking to the future, Pieters is optimistic about achieving large-scale growth. “With mobile penetration levels averaging between 10-20 per cent in Africa, we’ve just scratched the surface,” he says. “If we assume that Africa’s mobile market will add another 150 million subscribers within the next three to four years, which I think is a reasonable assumption, we should double our subscriber base to 20 million [Celtel currently averages a 50 per cent market share in each country it has a presence].”
Growth would no doubt be further stimulated if the retail price of the handset could drop significantly. Although the efforts of the GSM Association have led to handset factory prices going to sub US$40 levels, Pieters points out that taxes on imported goods — anything between 25-35 per cent in many African countries — cancels out that initial cost advantage. “To break into new market segments, you really need the retail price of the handset to drop below US$25,” he says.
As well as MTC, other foreign operators making a scramble for the African mobile telecom markets include MTN (South Africa), Orange (France Telecom), Vodafone and Etilisat (UAE). To be a success in Africa, however, Pieters advises companies to embrace cultural diversity and to prioritise government and regulatory support. This means hiring locally and establishing local partners, such as banks, which have a financial interest in the success of the operation.
According to Pieters, this skill set is more easily found in European and Middle Eastern companies rather than US companies (which, incidentally, don’t have any interests in Africa’s mobile markets). “The Americans are very good, straightforward businessmen,” says Pieters, “but they are also very impatient and US-centric. If it is not like the US then they feel that it should become like the US. In Africa, people take more of a long-term view and place more importance on relationships.”
Looking at the telecom investment opportunities that remain in emerging markets around the world, Pieters believes that 70 per cent of the deals have already been done — the remaining 30 per cent being primarily available in Asia and Africa. Within ten years, he expects major global players to emerge from India and China, once they have addressed a sizeable portion of their domestic markets and are in a position to fund aggressive expansion abroad. “The likes of Vodafone and AT&T will not be the big global players,” he says. “I expect to see local Indian and Chinese players becoming a lot more dominant.”
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