Telecoms financiers focused on the Africa market are seeing significant business opportunities, writes Kevin Godier, especially in the most technologically advanced sectors.
More than 130mn Africans have been brought far closer together by the mobile revolution, which has made the continent the world’s fastest growing cellular market, where mobile users comprise around 90% of all African telephone subscribers.
South Africa already has a telecoms system ranked close to European standards, while companies such as Vodacom and Celtel have each extended their operations into a swathe of different African countries driving a scenario where Africa is the world’s most rapidly growing market for mobile telephony. This is illustrated by Uganda, where the five existing cellular operators are shortly set to be joined by France Telecom’s Orange mobile subsidiary.
Yet Africa still has some of the globe’s lowest telecoms penetration rates, standing at less than 10% in some markets. This leaves plenty of space for those sectoral investors still scrambling for positions as privatisation and market liberalisation are progressively introduced.
Falling costs online
In parallel, another revolution is gaining traction, as a surge in demand for internet access and broadband capabilities is expected to drive fresh wireless solutions that will be deployed in the coming years to help overcome Africa’s dilapidated fixed-line infrastructure. Several international fibre-optic projects under development will deliver the necessary bandwidth to Africa and bring down costs.
The picture has for some time been one of wide opportunity for finance providers, who, so far, have been most active in supporting network build-outs in the highest-populated markets where multiple licences have been auctioned and awarded, as well as a significant level of merger and acquisition (M&A) activity.
“So far we have been busy,” says Nina Triantis, global head of telecoms and media at Standard Bank, which has worked closely with Sub-Saharan Africa’s biggest mobile phone group, MTN, and with Celtel, now operating under the Zain brand name throughout 14 African countries.
“Telecoms penetration growth across Africa is expected to double between now and 2012 in most cases. Players such as Zain and MTN are still looking to expand their franchises and other sponsors are continuing to build out their networks,” she underlines, adding that Standard Bank was about to complete a local currency placement for Celtel Kenya and on the verge of closing a US$70mn shilling-denominated transaction component for Millicom Tanzania.
“Although the large M&A deals in part surrounding MTN were not concluded, there is still a significant amount of activity in purchasing new licences as well as existing operators in a range of markets such as Burundi, Uganda, Rwanda, Malawi, Mozambique and Madagascar,” Triantis says.
“There is also an increasing requirement for localisation where the big, high-profile players are expected to offer shares to local investors – 2008 saw a number of capital market transactions, including an initial public offering (IPO) for Safaricom,” she comments.
Standard Bank handled an IPO in June 2008 which divested 20% of Celtel Zambia, on the Lusaka exchange. “This raised just short of US$200mn, and was three times oversubscribed, which was a real landmark for us, given the relatively untested nature of the Zambian market,” says Triantis, adding that Credit Suisse was a joint bookrunner for the international placement.
Latest in Nigeria
Elsewhere, Stanbic IBTC, Standard Bank’s Nigerian operation, was sole placement agent for MTN Nigeria, with 9% placed in the local market. Stanbic IBTC also handled an IPO for Nigeria’s leading CDMA operator, Starcomms.
However Triantis points out that the financing environment has changed in Africa, as well as globally, and is creeping in at the edges of the telecoms market. “Countries have had to deal with high inflation and high interest rates, as well as falls in commodity prices and currency values. So local liquidity has been quite constrained, and dollars have been fleeing from markets such as Nigeria and South Africa due to wider world financial events.”
She comments: “Local loan pricing is going through the roof – pricing is now up for most deals, and even the DFIs want wider margins,” referring to the strong cluster of development finance institutions (DFIs) that are deeply involved in supporting Sub-Saharan telecoms financings.
Whereas a US$270mn local currency transaction for Celtel Tanzania at the beginning of 2008 was oversubscribed by some US$60mn, “the market has become harder, and has tightened even more since the summer”, notes Triantis. “Some banks have diluted their operations, such as Commerzbank in South Africa, but the stalwart banks that are always there – mainly ourselves, Barclays, Standard Chartered and Citi – are still there.”
Back down to earth
“It has been quite challenging to close transactions in Africa,” agrees Tony Worthington, Standard Chartered’s global head, telecoms, media and technology.
He explains: “In the first half of the year, banks were misjudging deals, offering the financing terms too cheaply, with covenants too relaxed and tenors too long. The terms and conditions were simply too bullish, and clients are now having to pay higher margins with more onerous terms and conditions. What should have been a good year has been turned around in the last few months, sending the market back to square one. Deals are now generally put together on a best efforts basis.”
He comments: “We have a very full pipeline, including M&A transactions, syndicated loans and export credit agency (ECA) facilities, but it’s very difficult to get near completion in this environment. We need the equity markets – where volatility has been producing daily swings of 5-10% a day – to calm down.”
Standard Chartered’s present focus is “largely on financing syndicated and bilateral loan facilities, very often refinancings for the market number one and number two operators, together with private placement”, says Worthington, adding that the bank spent “many months” this year working on Bharti’s planned US$45bn merger with MTN, but this fell through.
The merger entity would have created a US$66bn emerging markets telecoms giant with operations in about two dozen countries and around 120mn subscribers – which also fell through.
The bank has also provided financing support for the Abu Dhabi-based Warid Telecom, a listed private entity backed by some members of the emirate’s royal family, in markets such as Uganda and Congo-Brazzaville, where it has acquired operating licences.
Worthington says that Standard Chartered remains “extremely bullish” on business case for the growth potential within the African telecoms sector. “With the exception of North Africa and South Africa, the penetration rate is around 20%, yet as much as 50-60% is probably possible, and is there waiting to be tapped.”
Mobile penetration will continue to grow substantially over the next 10 years as well as the number of operators in the various African markets, leading to more competitive markets, according to Martijn Proos, senior investment adviser at Frontier Markets Fund Managers (FMFM), the advisor to the Emerging Africa Infrastructure Fund (EAIF), which has provided telecoms finance in five countries, including Malawi and the Democratic Republic of Congo (DRC).
He says: “There are lots of competitors coming in now for customers. In Tanzania and Kenya, the penetration rate ranges between 22% (Tanzania) -32% (Kenya) and is expected to go up to 50-60% over the next 10 years. New entrants have often a strategy to capture the more marginal African subscribers in the rural areas. Although markets are becoming more competitive, good finance opportunities will remain available but the risk profiles and the differentiating character of the business plans/models of third and fourth licence holders in the African markets will have to be reviewed carefully.”
Worthington believes that the days of non-recourse financing are long gone in cases where an operator holding the fifth or even the sixth licence awarded in a market seeks early stage financing. “These deals will increasingly consist of sponsor equity plus export credit agency ECA money,” he predicts.
Business cases could become less pronounced as competition mounts, adds Winfried Nau, head of Africa department at the German DFI Deutsche Investitions- und Entwicklungsgesellschaft (DEG), which has provided “more than €150mn in executed telecoms projects in Africa”, he says. “The more licences there are in the market, the faster people will have to be to compete. The average return per user is being lowered, as the individual consumer spending per month falls from US$20 in the past to around US$10 now, and even lower even in the future.”
Another point to bear in mind, he suggests, is the extent to which increasing food and fuel prices in Africa might decrease spending on communications.
A growing level of ECA support for African telecoms developments is highlighted by Triantis, who observes that the US$220mn financing for Millicom Tanzania involves support from Sweden’s Exportkreditnamden (EKN) for Ericsson equipment being used to build out the network. “Millicom could have gone entirely to the DFIs and to the local market, but got a good rate from EKN,” she emphasises.
EKN is also lining up to support a telecoms financing in Uganda, in a deal where Standard Chartered has the mandate, says Charles Carlson, global head, structured export finance at Standard Chartered Bank. He argues that EKN “has become a market leader, with a very smart and nimble approach to transactions”, and adds that Office National Du Ducroire (ONDD) can also cover some elements of Siemens’ export operations, as a result of the latter’s operations in Belgium, and has already also supported local currency lending in Kenya’s telecoms sector.
The ECA trend is all about capacity, says Carlson. “Standard Chartered is in good shape right now, but in the syndication market we are only as good as the market around us. The new paradigm is that it doesn’t matter whether it is high or low risk, but the preparedness to commit new liquidity,” he points out.
At ONDD, senior underwriter Lieven Dupon, foresees that “ECA financing will become more popular, as the banks have no syndications market at present”. He notes that ONDD has transacted “high volumes of telecoms business over the past 10-15 years, typically via buyer credits, across several Africa countries”, adding that the most recent involved taking risk on the Malian state operator Sotelma.
“We know that exporters such as Nokia, Siemens and Ericsson are saying that competition has been very tough over the past five years from Chinese suppliers such as Huawei,” he says. “The Chinese can be very aggressive sometimes on the pricing and financing packages offered, and people are wondering if the playing field will be levelled.”
EKN is “very busy in Sub-Saharan African telecoms”, says Ove Nyström, the Swedish agency’s senior underwriter, telecoms, who specialises in Middle East and Africa. “We started to do a couple of transaction back in the mid 1990s, and even more from 1999 onwards, when the demand really kicked off. We see lots of transactions that are ongoing and in the pipeline, because there is so much activity in the region. Ericsson is doing so well, and we follow that company very closely, and from an early stage in many transactions, in order to support their export efforts in markets where banks feel that the credit quality requires risk mitigation. Some of the applications we receive concern some very difficult markets in the Sub-Saharan region.”
Nyström notes that “due to the current financial climate, we have – as of now – not yet seen any decrease in interest in these markets.” He concludes: “Appetite for the business is still there among quite a few banks.”
Consensus is strong that DFIs – for whom direct lending to higher-risk countries, often in local currency, is meat and bread – are also playing an increasingly vital role in creating liquidity. The DFI roster includes the Netherlands’ FMO, which has funded a project in Somalia, among others. “DFIs are really active –and are probably the biggest source of liquidity in the markets where commercial banks will not tread,” says Triantis.
Carlson argues that there has been some merging of the DFI and ECA functions. “DFIs and ECAs seem to be coalescing, to the stage where you could even talk of an agency market,” he says.
DEG’s Nau highlights that “almost all of the major telecoms providers are our clients, including Zain – former Celtel – and Millicom. We started with the big South African sponsors, such as MTN and Vodacom, and have since provided debt to a large number of Celtel operations in Africa, mainly in the less developed markets.”
Nau continues: “If projects are located in higher-risk markets, and commercial banks don’t want to finance them, the sponsors automatically come to DEG and other DFIs. In better markets like Ghana and Kenya and Zambia, you’ll find more commercial banking interest than in Malawi, DRC or Madagascar, where we find our real role alongside strong sponsors.”
But even DEG has its limits, stresses Nau. “Ethiopia lacks a regulator for private telecoms, while the political risks in Somalia and Zimbabwe would make these countries too difficult for us for different reasons. But Chad is a higher-risk, frontier country, and we have worked there.”
He comments: “DFIs like these projects so much because of the developmental angle, more than any risk and return calculation. A significant percentage of economic progress in Africa is down to improved communications via mobile telephony – and we are very happy with the number of jobs created via mobile networks on the continent.”
Further financing packages will be required for an associated technology trend, involving various cable projects around Africa’s east and west coasts.
A financing model was laid down in late 2007, when a series of multilaterals and development banks provided US$70.7mn in long-term loan financing for the US$235mn, 10,000km East African Submarine Cable System, and a second deal was concluded in late 2007 for the Seacom undersea fibre optic cable system, connecting South Africa, Madagascar, Mozambique, Tanzania, Kenya, India and Europe.
The Seacom investors are Industrial Promotion Services (IPS – 25%), Venfin (25%), Herakles Telecom (25%), Convergence Partners (12.5%) and Shanduka (12.5%).
A US$225mn equity funding structure for the African side of Seacom was “unique”, says Per van Swaay, FMO’s senior investment officer, Africa department. “Ourselves and EAIF financed up to US$60mn of the equity investment over 10 years, in return for a reasonable rate aligning with what the equity provider was looking to receive.”
Among other transactions coming, says Worthington, is a financing on which Standard Chartered is working for the Teams project in East Africa, a cable linking Kenya to the UAE. In West Africa, adds Carlson, the bank has the advisory mandate for a private cable that “will probably go the ECA route”.
Worthington emphasises that although no standard loan template exists for these deals, the sponsors of early projects such as Global Crossing and Flag wanted in excess of seven years, “but we are now down to a five-year horizon and in many cases even less. Operators are now taking one-to-three-year facilities and many are grateful for that”.
Such infrastructure will be vital to provide major links in connecting Africa with the rest of the world, and should play a major role in the next step in Africa’s telecoms connectivity, says FMFM’s Proos.
“Because telecoms is proving such a huge success, the expectation is that Africa will embrace the internet equally, through Wimax network rollouts using broadband technology and 3G and 4G telephony services. DFIs will play a role here due to the risks involved, since this market is still at an early, adaptation phase,” he says.
Carlson concurs, foreseeing that “there will be a huge internet access demand across Africa”, and underlining that “ECAs are looking more at technology risk, and seeing where they can position themselves, given that the fixed line infrastructure in most countries cannot cope with broadband and internet access”.
In the past, he adds, “ECAs were focused on traditional political and credit risk, but now are pretty savvy with technology risk and the business plans.”
Observes Worthington: “Major suppliers like Motorola and NSN are pushing Wimax products quite hard. We are bullish where we receive a proposal from a client in which the Wimax component part of a wider network solution, but more sceptical if an entrepreneur cites somewhere like Cote d’Ivoire where we know that the requisite fixed line back-up infrastructure would be lacking.”
A key parallel, says Worthington, is with the situation for GSM in 1993-94 in Europe, “when bankers, including me, were waving fingers in the air” to forecast future penetration rates. “It is exactly the same now, when we try to ascertain where wireless broadband penetration will be in 10 years time.
“People are very bullish, but a Wimax network needs laptops and PCs to offtake the services, and it is difficult to predict what will be affordable,” he concludes.