Telecom opportunities have surfaced for investors in emerging markets following the industry undergoing dramatic reforms and changes since the 1990s.
Spurred by poor mobile penetration rates and an understanding that connectivity was key to economic growth, many countries, particularly in sub-Saharan Africa, have transformed their local telecom sectors and state-backed companies.
The boom of telecommunications in regions like sub-Saharan Africa led to a rush of private equity firms into the space. Those firms that own three of Africa’s biggest operators (e.g., IHS Towers, Helios Towers, and Eaton Towers) are looking to expand and be acquisitive, especially after dropping IPO ambitions in 2018 (due to low valuations).
So recent news of a telecom merger of state entities in Mozambique and a potential privatization scheme in Ethiopia have rightfully excited investors with an eye on the telecom space in both countries.
The recent merger of Mozambique Telecommunications (TDM) and Mozambique Cellular (Mcel) is the first step towards a greater opportunity.
The government remains crippled by state loans taken out in 2013 to support a state-backed tuna fishing company. The government did not disclose the loans to the International Monetary Fund (IMF) and other donors. Thus, when those same donors discovered these hidden debts, they suspended aid and Mozambique defaulted on the loans.
As the country remains entangled by its own finances, the merger of TDM and Mcel is part of a larger strategy to reduce spending. The merger reduces the costs for the government that has largely underwritten the expansion costs of these two state-backed firms.
To further reduce the cost, investors are actively pitching the idea of partial or full privatization of the new local telecom behemoth. The investment opportunity remains large in this young economy. All the past troubles cannot overshadow the reality of the vast offshore gas reserves for Mozambique and the foreign direct investment (and attention) that follows such reserves.
The greater Mozambican economy has to recover and hit full stride again because the local leaders and foreign leaders both need it to (and will work to see it through). Having oil or gas, as one official put it, always makes you relevant in the global economy.
The IMF expects the Mozambican economy to grow north of 5 percent in 2018 and potentially reach 14 percent growth in 2022. As the economy expands, the telecom sector is vital. In the current situation, mobile penetration remains below the average for the region, hovering around 70 percent according to many analysts covering the sector. Internet penetration sits at around 20 percent.
Governmental efforts pushing the sharing of network infrastructure has aided in reducing operational and capital expenditure costs and led to greater convergence of data, voice, and television services on a single network.
The next phase of expansion remains capital intensive and a private sector player may be better positioned than the government to pay the bill (and equally enticed by the long-term return potential).
Ethio Telecom has made great efforts to expand mobile usage across the country in recent years. The mobile penetration rate has more than doubled since 2013 from approximately 25 percent to nearly 55 percent, which still places it far behind regional counterpart Kenya. Analysts estimate mobile penetration north of 90 percent for adults with internet penetration right behind it in Kenya.
It is no secret that these Kenyan statistics are weighing into the Ethiopian privatization conversation, at least, on the end of those business owners openly advocating and supporting the government to cross the finish line. Mobile penetration rates north of 90 percent in Ethiopia would easily propel 10 percent-plus growth for the next decade.
The recent decision by the government to pursue a privatization scheme is fuelling optimism as Africa’s second most populous country looks to elevate its economic status and power in Africa and beyond.
A privatization plan, according to some critics, is a buy-in fee to the greater international power ecosystem. That is likely an overstatement of the situation.
Ethiopian officials can do the math. Their ‘cash cow’ telecom company reportedly brings in more than $400 million to the state coffers. That number will still increase with more mobile phones coming online, especially if the private investor group includes regionally experienced telecom operators. Auctioning off licenses in the process could also be in the works as it would net billions of dollars.
Critics will highlight concerns centered on government monitoring, which will remain at some level (as it does anywhere in the world). Critics will also argue that privatization, in the name of efficiency, may mean a cut to jobs or there will be a repeat of the privatization calamities of Bangladesh in early 1990s and Bolivia in late 1990s. Layoffs were an issue in the Argentina process for rail, oil and steel.
All that said, Ethiopian officials read history and see the traps in their timeline (and will attempt to avoid them). The private investors who come along for this ride will make out well as the numbers suggest that it is an serious opportunity for growth in Ethiopia.
Kurt Davis Jr. is an investment banker with private equity experience focused on Africa and the Middle East. He earned an MBA in finance, entrepreneurship and operations from the University of Chicago and J.D. in tax and commercial law at the University of Virginia’s School of Law. He can be reached at kurt.davis.jr@gmail.com.
