At $12.5bn, analysts say Zain Africa could be overvalued

Vivendi Telecom’s purchase of Zain Africa could easily be the continent’s largest deal to date.

More significantly, Kuwaiti-based Zain Group’s exit from Africa for a reported $12 billion underscores the strain firms are having with capital hungry overseas operations.

Coming in the thick of a global recession, the planned sale points to opportunities Africa holds as trying economic times face investors worldwide.

Billed as the next frontier for information technology, Africa’s mobile telephony industry is eliciting massive interest from the world’s biggest telecoms companies.

Yet regardless of the interest and the profitability the continent’s mobile telephony incumbents have enjoyed, questions are being raised over the $12 billion price tag for Zain Africa.

Take analysts at investment bank JP Morgan who recently published an investment note doubting the valuation that came up with the $12 billion for Zain Africa for instance.

“We would argue that based on a normalized net income of $500 million, and earnings before interest tax and dividends of $2.4 billion, that Zain Africa is worth no more than $6.5 billion,” reckons Johan Snyman, the JP Morgan analyst who compiled the research note.

To determine what Zain Africa is worth, Mr Snyman takes what Zain paid for Celtel plus acquisition of 65 per cent of V-Mobile in Nigeria, 75 per cent of Westel in Ghana, acquisition of minorities in Tanzania and acquisition of Madacom in Madagascar, added to the cumulative capital expenditure the firm Zain has sunk since 2005.

Mr. Snyman estimates that this all adds up to $8.9 billion, an amount exclusive of loans. He argues that if the asking price for Zain Africa were to be $12 billion as per the press reports, this implies a premium of 35 per cent to the total investment-to-date of $8.9 billion.

Nonetheless, the sale would have been more exciting had there been an auction.

This would have brought in players ranging from those who have established a footprint in the continent and thirsting for more and others looking to make up for previous lost opportunities or were affected by the telecoms crash of the early 2000s. Here the likes of AT&T, Vodafone and MTN would have fought it out for a piece of the action.

What some analysts argue is that the $12 billion figure being touted is a tactic used in investment banking to gain the most favourable price by the vendors’ investment bank.

One thing is for sure, if Zain decides to dispose of its African operations, the cash received from such a transaction would be useful to repay loans and other outstanding commitments.

To be sure Zain Africa has remained a profitable operation. Of the 16 countries in which it operates, Zain Africa is the leading mobile telephony operator in 11 of them. In 2008, Zain Africa reported revenue of $4 billion which marked a year on year increase of 31.5 resulting in doubling of Revenue since 2006.

But ironically, Zain Africa’s growth in earnings has not kept pace with the growth in revenues. Within the same period, earnings margins fell from 38 per cent in 2006 to 33.6 per cent in 2008.