UBS Investment Research Q-Series : African Telecoms

Transcription

1 ab UBS Investment Research Q-Series : African Telecoms Global Equity Research EMEA Emerging Telecommunications Sector Comment Consolidation on the continent? Are we entering a period of heightened telecoms M&A in Africa? We believe African telco M&A prospects are increasing, driven by the mkt maturing, increasing (not always effective) competition causing greater price pressure & also presenting possible take-out targets, and the relative under leverage of key operators. What are the most attractive markets? We have built a proprietary screening tool for assessing objective attractiveness of a range of 54 African telecoms markets, considering macro, telecoms-specific, and general business criteria. We highlight 12 markets as being the most attractive, on different bases (including South Africa, Nigeria, Ethiopia, Algeria, Egypt, Morocco and Angola), although stress that clearly not all are likely to see M&A. 19 June Chris Grundberg Analyst chris.grundberg@ubs.com Which operators should we be watching? Three operators in particular seem in expansionary mode: MTN, Vodacom, & Etisalat. Each also has the requisite firepower for one or more transactions. A range of smaller competitors in each of these operators major mkts might make good fill-ins, while asset swaps or a break-up of some of the other foreign operators African assets (inc Millicom, France Telecom, Bharti Airtel) are a (less likely) option. Conclusion: M&A would be good for the overall health of the industry We believe M&A, embarked on for the right reasons (strategic fit, in-market consolidation, or greenfield) would be good for the African mkt overall. MTN (Buy; R200 PT) could be a consolidator in mkts where it isn t #1, as well as pursuing the Ethiopian greenfield; Vodacom (Neutral; R118 PT) could bolster its topline via M&A. Millicom (Buy; SeK630) could benefit by selling/swapping African assets, albeit this is less likely. Figure 1: African Telecoms M&A Heatmap where is M&A most likely? Source: UBS estimates This report has been prepared by UBS Limited ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 20. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

2 Consolidation on the continent In this report we explore the potential and likelihood for a pick-up in telecoms M&A across Africa in the coming one to two years. What are the prospects of greater telecoms M&A in Africa and why? We believe increased M&A across Africa is likely in the short-medium term, catalysed by (1) a general slowdown in easy (subscriber) growth, (2) increased (albeit not always effective) competition whittling away at returns and also presenting potential take-out targets (especially for in-market consolidation), and (3) cash-rich, or at least under-levered large African operators especially those with expansionary strategies (MTN, Vodacom, Etisalat). What are the most attractive markets? We have put together a proprietary screening tool to assess 54 African markets. For investors who would like to receive the sheet please contact us and we will be happy to share it. Using this, and applying a weighted scoring system, we highlight 12 of the more attractive African markets, both for the incumbent operators, and flag them as either being potential targets for new entrants, or for in-market consolidation (or both). More African telecoms M&A appears likely to us Tool to assess and compare attractiveness of markets Table 1: 12 African markets we assess as attractive, for prospective M&A Very Attractive South Africa Nigeria Egypt Ethiopia Algeria Reasonably Attractive Tunisia DRC Kenya Ghana Rwanda Morocco Angola Source: UBS estimates Who is best placed to benefit? (Who are the likely protagonists?) Given management comments and recent corporate actions, we highlight 3 main operators who appear to have specifically expansionary strategies MTN, Vodacom/fone and Etisalat. We would also highlight that Orange (France Telecom) has made strides to establishing its brand more across the continent (and notably in South Africa recently). CONCLUSION M&A, if embarked on for the right (rational) reasons, and in particular if consolidating crowded markets (of which there are many in Africa) is to be welcomed across the continent, for the overall health of the telecoms industry. We believe the single biggest market development in Africa is likely to be the (eventual) issuing of a second mobile license in Ethiopia the last greenfield market, and one which is likely to continue to receive strong attention from international operators. Mean-time, we would play the African Telecoms M&A theme by backing regional champions (such as MTN: B R200 PT), itself a wellcapitalised likely protagonist in any M&A. We highlight 3 operators with expansionary strategies: MTN, Vodacom, Etisalat M&A and industry consolidation generally ought to lead to a healthier telecom landscape in the long run We continue to favour regional champion MTN (B R200 PT) UBS 2

3 Prospects for greater telecoms M&A in Africa? Following a few recent examples of both actual and mooted M&A (in recent press reports, e.g Financial Times, Bloomberg, Telegeography), African mobile operators are likely to pursue M&A more actively in the short to medium term. Both MTN and Vodacom have specifically commented in recent results presentations on their increasing appetite for M&A. Whilst we do not envisage a free-for-all with overseas expansion purely for expansion s sake we do believe that some corporate activity is likely, for a variety of reasons, including: We explore the question of whether we are entering a phase of increased M&A across African telecoms, brought on by slower growth, greater competition, and a couple of key operators being underlevered (1) SLOWER GROWTH MARKETS. (2) INCREASED COMPETITION (3) CASH RICH (or UNDER-LEVERED) OPERATORS Slower growth Looking across Africa, the period of peak subscriber growth has passed (taken as a proxy for overall industry growth). Whilst still offering scope for further increases in penetration, the industry has shifted from an era of build it and they will come, to one where growth is likely to be slower in the next decade from the last. Chart 1 shows the total subscribers (SIMs) across a range of 54 African telecoms markets, which as of December 2012 now number over 745 million. It also shows the overall year on year growth seen across all these markets since 2000 which we note has come down from 40-60% to a more modest c15%. African mobile markets remain relatively healthy in growth terms, but it s slowing Chart 1: African mobile subscribers (SIMs) and subscriber (SIM) y/y growth , , , , , , , , Subs (LHS '000) Growth (RHS y/y) +70% +60% +50% +40% +30% +20% +10% +0% Source: UBS estimates, WCIS/Informa data (Countries/markets: Algeria, Angola, Benin, Botswana, Burkina Faso, Burundi, Cameroon, Cape Verde, Central African Republic, Chad, Comoros Islands, Congo, Cote d Ivoire, Djibouti, DRC, Egypt, Equatorial Guinea, Eritrea, Ethiopia, Gabon, Gambia, Ghana, Guinea Republic, Guinea Bissau, Kenya, Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritania, Mauritius, Morocco, Mozambique, Namibia, Niger, Nigeria, Rwanda, Sao Tome & Principe, Senegal, Seychelles, Sierra Leone, Somalia, South Africa, South Sudan, Sudan, Swaziland, Tanzania, Togo, Tunisia, Uganda, Zambia, Zimbabwe) Increased competition On a range of measures, including both the simple number of operators per market, and the more telling Herfindahl-Hirschman Index (HHI), we can see that African mobile telecoms markets have become substantially more competitive over the past decade. On the former measure, in 2000 the weighted average number of operators per market across Africa was just 2.1, while the and competition is increasing UBS 3

4 HHI score was 57%. These have moved over the course of 12 years to a weighted average of over 5 operators per market (admittedly skewed by some large numbers in markets such as Nigeria), with a blended average HHI score for the continent s mobile markets of 39%. In our view, one thing this illustrates is that although many markets have seen new entrants, most new entrants remain small and arguably ineffective in terms of real competitive threat (average of 5.3 operators per market, but the average weighted HHI score implies an aggregate market structure with c2.6 equivalent sized operators). Further, despite coming down from c64% in 2000, the average weighted market (SIM) share of the #1 operator across all markets remains 49%. So these newer smaller players may have succeeded in bringing the impression of greater competition to the market (and in many markets have catalysed price competition in an effort to gain share), but in many cases could present interesting consolidation opportunities (either for new entrants looking for a vehicle to enter the market, or for existing players looking to consolidate inmarket). The new competition is not always effective and as such is in some cases simply detrimental to pricing, whilst also presenting interesting take-out targets Chart 2: African mobile markets weighted number of operators per market, and weighted HHI % % 55% 52% 50% 49% 47% 47% 45% 42% 41% 40% 39% 39% 50% 40% 30% % % 0% Weighted Operators per Mkt (LHS) Weighted HHI (RHS) Source: UBS estimate, WCIS/Informa data (Countries/markets: Algeria, Angola, Benin, Botswana, Burkina Faso, Burundi, Cameroon, Cape Verde, Central African Republic, Chad, Comoros Islands, Congo, Cote d Ivoire, Djibouti, DRC, Egypt, Equatorial Guinea, Eritrea, Ethiopia, Gabon, Gambia, Ghana, Guinea Republic, Guinea Bissau, Kenya, Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritania, Mauritius, Morocco, Mozambique, Namibia, Niger, Nigeria, Rwanda, Sao Tome & Principe, Senegal, Seychelles, Sierra Leone, Somalia, South Africa, South Sudan, Sudan, Swaziland, Tanzania, Togo, Tunisia, Uganda, Zambia, Zimbabwe) Cash-rich/under-levered operators We note that there are a range of operators with African assets who benefit from being either cash-rich, or at least not over-levered. These would include (but not limited to) MTN, Vodacom, Etisalat (depending on the success or otherwise of their bid for Vivendi s stake in Maroc Telecom). Unlike some global telco peers, there are a notable couple of African operators who are either in a net cash position (MTN), or under-levered We believe operators might be more tempted to pursue M&A in an attempt to delay the inevitable slowdown in growth, and given a selection of both smaller operators in some of the larger markets which might present interesting take-out opportunities, as well as perhaps some larger-scale assets becoming available if one of the multi-national operators decided to exit the continent, there may well be some targets for them to aim for. UBS 4

5 Good or bad for the market (objectively)? In our view, some consolidation across the African telecoms landscape would be welcomed, especially by investors. We believe the principal attractions of an increase in M&A would be: A smaller group of healthier operators would make for a healthier industry in the long-term, and might lead to a lessening of some of the competitive price erosion seen in recent years in many markets improving returns for those remaining, and as such allowing greater network investment ultimately benefiting the consumer If executed well, and especially in the case of in-market consolidation, operators could theoretically be able to reduce some costs through synergies, or at least be left with more scalable operations. Further, if the price paid is fair, there could in some cases be opportunities to benefit from hastening infrastructure expansion, and technology advancement such that 3G and even LTE/4G could be rolled out quicker with the accompanying opportunity from data revenue growth In the case of under-levered (or even net cash) operators, M&A offers an opportunity to lever up and make better use of the balance sheet, offering more geared returns to equity investors. Implications for the market? Fewer, more robust operators Opportunities for in-market synergies For the under-geared, a chance to improve equity returns By contrast, the negative issues around a spate of M&A are clear: A major risk from pursuing an aggressive M&A strategy lies in finding a true strategic fit (regardless of the size of the transaction). We believe investors will be concerned at any hint of operators empire building (buying assets purely for scale), or making any assumptions that they can run an asset dramatically better than the current owner. Risk of empire building Execution risk is a self-evident one as is the concern that if a senior management team devote too much time to M&A there may be a lack of focus on the core operations. As such, management bandwidth becomes a focus point. Financial strain having noted that some of the operators would appear to have capacity for more (or some) debt, others may come under stress if they take on too much debt or be forced to sacrifice network or capital investments. Eyes bigger than stomach Market dynamics as a part of the earlier point regarding assuming that the current owner hasn t run the operations well enough to grow the market share, but it ll be different for us, buying #3 or #4 operators in any market can be risky if the buyer s case is predicated largely on improving share. In our view, if there are already too many competitors in the market the best outcome is inmarket consolidation rather than a new entrant (either starting afresh or buying one of the also-rans ) UBS 5

6 Recent mooted and completed transactions We note a range of recent examples of press reports of M&A discussions across Africa, including Etisalat s interest in Vivendi s stake in Maroc Telecom, Bharti Airtel s acquisition of Warid in Uganda, and press reports suggesting either Vodacom or MTN (or NTT, via subsidiary Dimension Data) might be in discussions to be Neotel (subsidiary of Tata Communications). Lastly, we also note press discussions over whether MTN might be pursuing discussions with Reliance Telecoms in India over a possible merger or acquisition. Recent mooted M&A has included Etisalat-Maroc, Bharti Airtel-Warid, and discussions of Vodacom/MTN(NTT?) and Neotel Historical M&A transactions We show in Table 2 a sample of some historical African M&A transactions, and note the very high EV/EBITDA multiples paid by both MTN for Investcom and Bharti Airtel for Zain (both over 10x EBITDA). Table 2: African M&A: Summary historical transactions Date Buyer Seller Country/(ies) Transaction value* Multiple paid* Aug 2004 Altech Econet Wireless Group (50:50)JV Botswana, Nigeria (amongst others) $70m c0.7x EV/Sales (historic pro-forma) Apr 2005 Gateway Link Africa (from Celtel) 15 African countries $50m c0.7x EV/Sales (CY04) Jun 2006 MTN Investcom Ghana, Syria, Sudan, Benin, Cyprus, Guinea Bissau, Yemen, Liberia $5.5bn 10.2x (CY06E EV/EBITDA) Feb 2007 Telkom Africa-Online Pan-African (9 countries) $20m n/a Mar 2007 Jan 2009 Telkom Multilinks Nigeria $200m for 75% $130m for remaining 25% n/a May 2007 Gateway GS Telecom 27 African countries $38m 6.3x EV/EBITDA (CY06) April 2008 Altech Kenya Data Networks, Swift Global, Infocom (from Sameer ICT) Kenya, Tanzania, Uganda $85m n/a Aug 2008 Vodacom Gateway Pan-African key markets including Nigeria $700m n/a Mar 2009 MTN Verizon Business South Africa, Namibia, Botswana, Zambia, Kenya Jun 2010 Bharti Airtel Zain Nigeria, Ghana, Kenya +12 assorted other African countries n/a $10.7bn n/a 10.8x (CY11E EV/EBITDA) Apr 2013 Bharti Airtel Warid Uganda n/a n/a Jun 2013 Econet Wireless Altech Group (East Africa telecoms assets, inc 61% stake in Kenya Data Networks) DRC, Kanya, Rwanda, Uganda, Zambia $17m (paid by Altech to Econet Wireless for a 8.6% stake in Liquid Telecom subsidiary of Econet Wireless) n/a Jun 2013 Liquid Telecom Rwandatel Rwanda, Uganda $4m n/a Source: UBS, various press sources (including TechCentral, TechZim, BusinessDay, Independent Online) UBS 6

7 Which markets are attractive? We have built a proprietary screening tool looking at 54 African markets, assessing and comparing them on a range of factors, including macro economic, telecoms specific, and business-related. Proprietary screening tool to evaluate and compare African telecoms markets Table 3: Factors to consider in evaluating attractiveness of African mobile markets Macro Factors Mobile Market Factors Business Factors TOTAL population Active SIMs in the market CPI Index (Corruption Perception Index) score Population (Ages 15-64) Mobile market penetration (based on TOTAL population) Ease of Doing Business ranking (regional) Urban population (% of total) Land mass (sq km) GDP (USDm) GDP per capita (USD) Mobile market penetration (based on population aged 15-64) Number of mobile operators Mkt share of #1 mobile operator HHI score for mobile market GDP forecast growth (real) CAGR Source: UBS estimates Based on these factors, we have derived a relative (weighted) score for each of the 54 markets, in terms of their attractiveness to a telecoms operator (either existing or potential new entrant). Our heatmap (Figure 2) shows 12 countries which we consider to be objectively the most attractive telecoms markets across Africa. Establishes an Attractiveness score for each market we highlight 12 of the largest which might see some M&A Figure 2: African Telecoms M&A Heatmap where is M&A most likely? 12 key attractive markets Source: UBS estimates We summarise in Table 4 why each of these markets is attractive, and might be the location for some form of M&A (either a new entrant buying one of the existing operators local assets, or entering the market via a new licence/new spectrum being issued, or some form of in-market consolidation). We caution however that simply because a market is attractive, if there is no viable means of UBS 7

8 entry (ie a take-out target, willing or otherwise), or new spectrum/license becoming available, the market may simply remain attractive for the incumbents. Table 4: Most Attractive African Markets Country/Market South Africa Nigeria Egypt Ethiopia Algeria Morocco Angola Tunisia DRC Kenya Ghana Comment Despite relative saturation, and having two fairly dominant incumbents, the SA market is still the largest in Africa (in value) and with the potential exit from mobile by Telkom there may be smaller assets available to international players, or some form of consolidation with #3 player Cell C. The largest African market by SIMs, and still far from fully mature (gross penetration c70%), the Nigerian market may yet be attractive to a new entrant, and we believe would certainly be a candidate for in-market consolidation. The third largest market in Africa in terms of population (and value), and although fairly well penetrated, with only 3 operators the opportunity may yet attract a foreign operator, either as a new entrant or in the event that one of the incumbents were to sell. The biggest and most anticipated greenfield opportunity in Africa. Population of over 80m, gross SIM penetration of population of 24%, and only one licensed operator. The licensing process for a further operator(s) is ongoing. We expect this to be fairly hotly contested. Another relatively more mature African market (gross penetration over 100%), but also one of the largest, and with only 3 operators it may also be an attractive proposition for an international operator, either as a new entrant or in the event that one of the incumbents were to sell. Very similar to Algeria (gross penetration even higher at over 110%), also one of the largest, and again with only 3 operators could be an attractive proposition for an international operator, either as a new entrant or in the event that one of the incumbents were to sell (ie Vivendi s stake in Maroc) A relatively large (population c20m) market, with relatively low (c65%) gross penetration, and only 2 operators albeit the number 1 is dominant with c70% share. If Portugal Telecom were to sell its stake this would likely attract interest, poor CPI and EOB ranking notwithstanding. Relatively penetrated market, but a sizeable one (given population and GDP per capita). Small land-mass, and large urban population suggests costs of coverage also relatively low. 4 th largest African country in population terms and one of the lowest in terms of gross penetration (c30%). Poor CPI and EOB ranking, however. Large number of MCOs already (7) makes in-market consolidation a potential option. Another market with a large population (>40m), and relatively low (c75%) gross penetration. Highly successful take-up of mobile money transfer makes market poster-child for this service A stable, reasonably sized (c25m population) market with good economic growth prospects (and good governance/macro backdrop). Rwanda Just over 10m population, with gross penetration still relatively low at c50%, only 3 competitors (albeit the #1 has a substantial share 60%) Source: UBS estimates Key issues for evaluation In assessing the relative attractiveness of any country to a telecoms operator, we take the highest level consideration first simple population size. Coupled with that, we look at existing total penetration (taking total SIMs in the country as a % of total population). Whilst this is a relatively crude measure of true penetration (in terms of phone-carrying individuals) it is at least a helpful illustration of how prevalent mobile communications is in the country. Size (population) and mobile penetration the first two high level questions Chart 3 shows the African markets with total populations plotted against total SIM penetration. We highlight the markets with populations over 20 million, and gross penetration under 60% as of December 2012 (except Nigeria, which has a gross penetration of 69%). Ethiopia stands out as being one of the most attractive markets on this basis, given its substantial population (over 80 million) and penetration of <25% given the existence of only one (state-owned) mobile operator in the country. The ongoing licensing process for a new entrant remains the source of considerable attention for several Africa operators, we believe. Ethiopia stands out UBS 8

9 Chart 3: African mobile markets mobile penetration (SIMs as % of Population) vs size of country (TOTAL Population) Mob Pen (SIM % of TOTAL POP) 375% 350% 325% 300% 275% 250% 225% 200% 175% 150% 125% 100% 75% 50% 25% 0% Seychelles Libya Gabon Botswana South Africa Tunisia M orocco Ghana Algeria Sudan Kenya Cameroon Angola UGANDATANZANIA MOZAMBIQUE M ADAGASCAR DRC Egypt ETHIOPIA NIGERIA 0 20,000 40,000 60,000 80, , , , , ,000 POPULATION (TOTAL m) Source: UBS estimates, WCIS/Informa, WorldBank data The DRC is also relatively under-penetrated, and also having a very large population, indicating the potential opportunity in that market. Africa s largest markets (populations over 20 million) Looking at the data from our screening tool on the basis of the markets with the largest populations, we see that in total 16 countries across the continent have populations of over 20 million (Figure 3). 16 countries with populations of over 20 million Figure 3: African countries with population of over 20 million (1) RANK COUNTRY TOTAL Pop '000 Population '000 Urban Pop % of TOTAL Land area (sq km) Population density (people per sq km) Country Pop 2012 Adj Pop 2012 Urban Pop 2011 Land area (sq km) Gross Adjusted for urban 1 Nigeria 162,471 87,392 50% 910, Ethiopia 84,734 47,294 17% 1,000, Egypt 82,537 52,457 44% 995, DRC 67,758 34,786 77% 2,267, South Africa 50,587 33,061 62% 1,213, Tanzania 46,218 24,059 27% 885, Kenya 41,610 22,845 24% 569, Algeria 35,980 24,667 73% 2,381, Uganda 34,509 16,970 16% 199, Sudan 34,318 19,422 33% 2,376, Morocco 32,273 21,558 57% 446, Ghana 24,966 14,412 52% 227, Mozambique 23,930 12,620 31% 786, Madagascar 21,315 11,535 33% 581, Côte d'ivoire 20,153 11,184 51% 318, Cameroon 20,030 11,225 52% 472, Source: UBS estimates, Population - World Bank Database, Population World Bank Database, Urban Population as % of TOTAL - World Bank Database, Land are (sq km) World Bank Database, Population density? Our screening tool also looks at the urban population and general population density (broadly adjusted for how much of the population lives in cities). On this measure both Algeria and DRC stand out as having low population density, a consideration for network coverage, and the simple cost of rolling out a network. Mobile penetration? Looking at existing (gross) SIM penetration of population across these same large markets (in Figure 4), Ethiopia and DRC again stand out given very low gross penetration (24% and 31% respectively), but so do the smaller markets of Madagascar (28%), Mozambique (44%), Uganda (54%), Tanzania (57%), Cameroon (66%) and Sudan (68%). Population density also makes a difference to the cost of network rollout and population coverage How developed are the markets today in terms of mobile penetration? UBS 9

10 We also show an adjusted penetration rate based on the number of SIMs per head of population between the age of 15 and 64. While still not a perfect measurement, this illustrates the number of SIMs per person of (rough) phonecarrying age. What we cannot demonstrate accurately is the true impact of multi-siming in any market (even in those with only 1 operator it s clearly possible for a single person to have multiple active SIMs). Figure 4: African countries with population of over 20 million (2) RANK COUNTRY TOTAL Pop '000 Subs (SIMs) '000 TOTAL Pop Penetration (SIMs) ADJ Pop Penetration (SIMs) # of Operators Share of #1 Operator HHI Country Pop 2012 Yr 2012 Pen 2012 Adj Pen 2012 MCOs 2012 #1 Share 2012 HHI Nigeria 162, ,881 69% 129% 13 42% 28% 2 Ethiopia 84,734 20,296 24% 43% 1 100% 100% 3 Egypt 82,537 89, % 170% 3 45% 36% 4 DRC 67,758 20,749 31% 60% 7 38% 29% 5 South Africa 50,587 67, % 206% 6 45% 37% 6 Tanzania 46,218 26,288 57% 109% 7 36% 29% 7 Kenya 41,610 31,262 75% 137% 4 63% 44% 8 Algeria 35,980 38, % 156% 3 46% 36% 9 Uganda 34,509 18,487 54% 109% 8 39% 27% 10 Sudan 34,318 23,222 68% 120% 3 54% 42% 11 Morocco 32,273 37, % 176% 3 47% 36% 12 Ghana 24,966 25, % 178% 6 46% 29% 13 Mozambique 23,930 10,414 44% 83% 3 59% 44% 14 Madagascar 21,315 5,996 28% 52% 3 42% 34% 15 Côte d'ivoire 20,153 18,150 90% 162% 6 34% 28% 16 Cameroon 20,030 13,124 66% 117% 3 56% 51% Source: UBS estimates, Subs (SIMs) - WCIS/Informa data, Population - World Bank Database, TOTAL Population Penetration - taken as SIMs as a % of TOTAL population, ADJ Population Penetration - taken as SIMs as % of Population 15-64, # of Operators - WCIS/Informa data, Share of #1 Operator - WCIS/Informa data, HHI: UBS calculation - taken as SUM of square roots of % mkt share of all operators per mkt, Existing mobile competition We also show the level of mobile competition looking at both the absolute number of mobile operators in the market (GSM or CDMA) with any active SIMs, the share of SIMs which the number 1 operator has, and lastly looking at the HHI score for the market. On these points, we would note that Nigeria, despite MTN s recent dominance determination from the NCC, actually has an HHI score of 28%, and along with Uganda (where fierce price competition has also been seen) is one of the more competitive markets in the group. By contrast, Ethiopia is clearly very uncompetitive (with just one operator). How many players are there already in the market, and how entrenched are they? Figure 5: African countries with population of over 20 million (3) RANK COUNTRY TOTAL Pop '000 GDP (current) USDm GDP per cap (current) USD GDP CAGR CPI Score Ease of Doing Business UBS Attractiveness Score Country Pop 2012 GDP 2011 GDP per cap 2011 GDP CAGR CPI 2012 EOB 2012 Attractiveness 1 Nigeria 162, ,986 1, % Ethiopia 84,734 30, % Egypt 82, ,531 2, % DRC 67,758 15, % South Africa 50, ,237 8, % Tanzania 46,218 23, % Kenya 41,610 33, % Algeria 35, ,681 5, % Uganda 34,509 16, % Sudan 34,318 64,053 1, % Morocco 32, ,221 3, % Ghana 24,966 39,200 1, % Mozambique 23,930 12, % Madagascar 21,315 9, % Côte d'ivoire 20,153 24,074 1, % Cameroon 20,030 25,236 1, % Source: UBS estimates, GDP (current) USDm - World Bank Database, GDP per capita (current) USD - World Bank Database, GDP CAGR IMF estimates, CPI Score - Transparency International (Corruption Perceptions Index), Ease of Doing Business - IFC/World Bank - "Measuring Business Regulations" We caution that any operator looking at entering one of these markets would be unlikely to do so on the assumption that just because it is uncompetitive today they would automatically be able to change this given the leadership position established by the #1 (and #2) operators in many markets, including both in network terms, and also in distribution/branding etc. UBS 10

11 Macro economic factors/backdrop In Figure 5 we also show some of the broader macro-economic factors such as absolute current GDP, GDP per capita, and forecast growth over the next 5+ years (per IMF forecasts across all markets, for consistency). In addition, we consider some of the softer factors to be taken into account, especially by any prospective new entrant including both the country ranking in the Corruption Perception Index (CPI) carried out by Transparency International, and the Ease of Doing Business ranking attributed by the IMF. Considering the macro On these bases, Nigeria, Mozambique, Tanzania and Cote d Ivoire all emerge as showing the best forecast economic growth prospects, while South Africa, Ghana, Morocco, Tanzania, Algeria and Ethiopia all come out at the higher end on the softer issues (specifically CPI). Weighted score UBS Attractiveness Index Lastly, we apply a weighted score to our range of criteria to come up with an overall index score for each country. Of these markets (those over 20 million in population) the top 4 markets are Nigeria, South Africa, Ethiopia and Egypt. Whilst the attractiveness of the market is somewhat skewed by its overall size, we think this is a fair reflection of one of the main M&A priorities for operators. Putting it all together the UBS Attractiveness Index Africa s middle markets (populations over 10 million) We show in Figures 6-8 the same cuts of data for the 12 African markets with populations between 10 million and 20 million. Figure 6: African countries with population of over 10 million (1) RANK COUNTRY TOTAL Pop '000 Population '000 Urban Pop % of TOTAL Land area (sq km) Population density (people per sq km) Country Pop 2012 Adj Pop 2012 Urban Pop 2011 Land area (sq km) Gross Adjusted for urban 17 Angola 19,618 10,057 59% 1,246, Burkina Faso 16,968 8,914 27% 273, Niger 16,069 7,850 18% 1,266, Mali 15,840 8,033 35% 1,220, Malawi 15,381 7,855 16% 94, Zambia 13,475 6,798 39% 743, Senegal 12,768 6,908 43% 192, Zimbabwe 12,754 7,323 39% 386, Chad 11,525 5,975 22% 1,259, Rwanda 10,943 5,970 19% 24, Tunisia 10,674 7,447 66% 155, South Sudan 10,314 10,314 18% 644, Guinea Republic 10,222 5,515 35% 245, Source: UBS estimates, Population - World Bank Database, Population World Bank Database, Urban Population as % of TOTAL - World Bank Database, Land are (sq km) World Bank Database Figure 7: African countries with population of over 10 million (2) RANK COUNTRY TOTAL Pop '000 Subs (SIMs) '000 TOTAL Pop Penetration (SIMs) ADJ Pop Penetration (SIMs) # of Operators Share of #1 Operator HHI Country Pop 2012 Yr 2012 Pen 2012 Adj Pen 2012 MCOs 2012 #1 Share 2012 HHI Angola 19,618 12,709 65% 126% 2 71% 59% 18 Burkina Faso 16,968 9,359 55% 105% 3 41% 36% 19 Niger 16,069 5,465 34% 70% 4 52% 37% 20 Mali 15,840 14,605 92% 182% 2 59% 52% 21 Malawi 15,381 4,475 29% 57% 2 55% 50% 22 Zambia 13,475 10,254 76% 151% 3 41% 36% 23 Senegal 12,768 11,595 91% 168% 3 61% 45% 24 Zimbabwe 12,754 12, % 177% 3 63% 47% 25 Chad 11,525 4,301 37% 72% 3 50% 47% 26 Rwanda 10,943 5,691 52% 95% 3 60% 48% 27 Tunisia 10,674 13, % 183% 3 53% 41% 28 South Sudan 10,314 2,875 28% 28% 5 40% 28% 29 Guinea Republic 10,222 6,475 63% 117% 5 35% 28% Source: UBS estimates, Subs (SIMs) - WCIS/Informa data, Population - World Bank Database, TOTAL Population Penetration - taken as SIMs as a % of TOTAL population, ADJ Population Penetration - taken as SIMs as % of Population 15-64, # of Operators - WCIS/Informa data, Share of #1 Operator - WCIS/Informa data, HHI: UBS calculation - taken as SUM of square roots of % mkt share of all operators per mkt UBS 11

12 Figure 8: African countries with population of over 10 million (3) RANK COUNTRY TOTAL Pop '000 GDP (current) USDm GDP per cap (current) USD GDP CAGR CPI Score Ease of Doing Business UBS Attractiveness Score Country Pop 2012 GDP 2011 GDP per cap 2011 GDP CAGR CPI 2012 EOB 2012 Attractiveness 17 Angola 19, ,332 5, % Burkina Faso 16,968 10, % Niger 16,069 6, % Mali 15,840 10, % Malawi 15,381 5, % Zambia 13,475 19,206 1, % Senegal 12,768 14,291 1, % Zimbabwe 12,754 9, % Chad 11,525 10, % Rwanda 10,943 6, % Tunisia 10,674 46,435 4, % South Sudan 10,314 19,172 1, % Guinea Republic 10,222 5, % Source: We show in Figures 9-10 the full country list of all 54 African markets which we have screened. UBS 12

13 Figure 9: UBS African Telecoms Attractiveness Table (1) RANK COUNTRY Subs (SIMs) '000 TOTAL Pop '000 Population '000 Urban Pop % of TOTAL Land area (sq km) TOTAL Pop Penetration (SIMs) ADJ Pop Penetration (SIMs) # of Operators Share of #1 Operator HHI Country Yr 2012 Pop 2012 Adj Pop 2012 Urban Pop 2011 Land area (sq km) Pen 2012 Adj Pen 2012 MCOs 2012 #1 Share 2012 HHI Nigeria 112, ,471 87,392 50% 910,770 69% 129% 13 42% 28% 2 South Africa 67,975 50,587 33,061 62% 1,213, % 206% 6 45% 37% 3 Ethiopia 20,296 84,734 47,294 17% 1,000,000 24% 43% 1 100% 100% 4 Egypt 89,078 82,537 52,457 44% 995, % 170% 3 45% 36% 5 Eritrea 310 5,415 3,029 21% 101,000 6% 10% 1 100% 100% 6 Algeria 38,450 35,980 24,667 73% 2,381, % 156% 3 46% 36% 7 Sao Tomé & Principe % % 138% 1 100% 100% 8 Swaziland 806 1, % 17,200 75% 129% 1 100% 100% 9 Djibouti % 23,180 33% 54% 1 100% 100% 10 Seychelles % % 352% 2 81% 69% 11 Morocco 37,963 32,273 21,558 57% 446, % 176% 3 47% 36% 12 Cape Verde % 4, % 170% 2 78% 65% 13 Angola 12,709 19,618 10,057 59% 1,246,700 65% 126% 2 71% 59% 14 Comoros Islands % 1,861 47% 87% 1 100% 100% 15 Botswana 2,732 2,031 1,294 62% 566, % 211% 3 60% 47% 16 Equatorial Guinea % 28,050 80% 138% 3 79% 67% 17 Namibia 2,602 2,324 1,402 38% 823, % 186% 3 81% 67% 18 DRC 20,749 67,758 34,786 77% 2,267,050 31% 60% 7 38% 29% 19 Tunisia 13,630 10,674 7,447 66% 155, % 183% 3 53% 41% 20 Lesotho 1,349 2,194 1,289 28% 30,360 61% 105% 2 79% 67% 21 Mauritius 1,520 1, % 2, % 165% 3 50% 39% 22 Kenya 31,262 41,610 22,845 24% 569,140 75% 137% 4 63% 44% 23 Rwanda 5,691 10,943 5,970 19% 24,670 52% 95% 3 60% 48% 24 Ghana 25,618 24,966 14,412 52% 227, % 178% 6 46% 29% 25 Tanzania 26,288 46,218 24,059 27% 885,800 57% 109% 7 36% 29% 26 Malawi 4,475 15,381 7,855 16% 94,280 29% 57% 2 55% 50% 27 Sudan 23,222 34,318 19,422 33% 2,376,000 68% 120% 3 54% 42% 28 Cameroon 13,124 20,030 11,225 52% 472,710 66% 117% 3 56% 51% 29 Mozambique 10,414 23,930 12,620 31% 786,380 44% 83% 3 59% 44% 30 Mali 14,605 15,840 8,033 35% 1,220,190 92% 182% 2 59% 52% 31 Libya 17,707 6,423 4,171 78% 1,759, % 424% 2 64% 54% 32 Senegal 11,595 12,768 6,908 43% 192,530 91% 168% 3 61% 45% 33 Liberia 2,210 4,129 2,219 48% 96,320 54% 100% 3 54% 47% 34 Zambia 10,254 13,475 6,798 39% 743,390 76% 151% 3 41% 36% 35 Madagascar 5,996 21,315 11,535 33% 581,540 28% 52% 3 42% 34% 36 Gabon 2,329 1, % 257, % 250% 4 41% 32% 37 Togo 4,312 6,155 3,527 38% 54,390 70% 122% 2 58% 51% 38 Burkina Faso 9,359 16,968 8,914 27% 273,600 55% 105% 3 41% 36% 39 Uganda 18,487 34,509 16,970 16% 199,810 54% 109% 7 39% 27% 40 Niger 5,465 16,069 7,850 18% 1,266,700 34% 70% 4 52% 37% 41 Sierra Leone 3,429 5,997 3,313 39% 71,620 57% 103% 4 46% 39% 42 Mauritania 3,278 3,542 2,041 42% 1,030,700 93% 161% 3 61% 45% 43 Côte d'ivoire 18,150 20,153 11,184 51% 318,000 90% 162% 6 34% 28% 44 Zimbabwe 12,960 12,754 7,323 39% 386, % 177% 3 63% 47% 45 Gambia 1,890 1, % 10, % 197% 4 47% 35% 46 Chad 4,301 11,525 5,975 22% 1,259,200 37% 72% 3 50% 47% 47 Guinea-Bissau 1,142 1, % 28,120 74% 133% 3 57% 45% 48 Congo 4,283 4,140 2,311 64% 341, % 185% 4 41% 34% 49 Benin 8,309 9,100 4,863 45% 112,760 91% 171% 5 35% 28% 50 Central African Republic 1,248 4,487 2,509 39% 622,980 28% 50% 4 43% 31% 51 Burundi 2,837 8,575 5,113 11% 25,680 33% 55% 5 48% 32% 52 Guinea Republic 6,475 10,222 5,515 35% 245,720 63% 117% 5 35% 28% 53 South Sudan 2,875 10,314 10,314 18% 644,329 28% 28% 5 40% 28% 54 Somalia 4,691 9,557 5,006 38% 627,340 49% 94% 6 27% 21% AFRICA 743,540 1,044, ,716 42% 30,022,730 71% 125% 5 49% 39% Source: UBS estimates, Subs (SIMs) - WCIS/Informa data, Population - World Bank Database, TOTAL Population Penetration - taken as SIMs as a % of TOTAL population, Population World Bank Database, Urban Population as % of TOTAL - World Bank Database, Land are (sq km) World Bank Database, ADJ Population Penetration - taken as SIMs as % of Population 15-64, # of Operators - WCIS/Informa data, Share of #1 Operator - WCIS/Informa data, HHI: UBS calculation - taken as SUM of square roots of % mkt share of all operators per mkt, GDP (current) USDm - World Bank Database, GDP per capita (current) USD - World Bank Database, GDP CAGR IMF estimates, CPI Score - Transparency International (Corruption Perceptions Index), Ease of Doing Business - IFC/World Bank - "Measuring Business Regulations" UBS 13

14 Figure 10: UBS African Telecoms Attractiveness Table (2) RANK COUNTRY Subs (SIMs) '000 TOTAL Pop '000 Population '000 GDP (current) USDm GDP per cap (current) USD GDP CAGR CPI Score Ease of Doing Business UBS Attractiveness Score Country Yr 2012 Pop 2012 Adj Pop 2012 GDP 2011 GDP per cap 2011 GDP CAGR CPI 2012 EOB 2012 Attractiveness 1 Nigeria 112, ,471 87, ,986 1, % South Africa 67,975 50,587 33, ,237 8, % Ethiopia 20,296 84,734 47,294 30, % Egypt 89,078 82,537 52, ,531 2, % Eritrea 310 5,415 3,029 2, % Algeria 38,450 35,980 24, ,681 5, % Sao Tomé & Principe , % Swaziland 806 1, ,090 3, % Djibouti ,239 1, % Seychelles ,060 12, % Morocco 37,963 32,273 21, ,221 3, % Cape Verde ,901 3, % Angola 12,709 19,618 10, ,332 5, % Comoros Islands % Botswana 2,732 2,031 1,294 17,328 8, % Equatorial Guinea ,790 27,478 (3.5%) Namibia 2,602 2,324 1,402 12,511 5, % DRC 20,749 67,758 34,786 15, % Tunisia 13,630 10,674 7,447 46,435 4, % Lesotho 1,349 2,194 1,289 2,426 1, % Mauritius 1,520 1, ,260 8, % Kenya 31,262 41,610 22,845 33, % Rwanda 5,691 10,943 5,970 6, % Ghana 25,618 24,966 14,412 39,200 1, % Tanzania 26,288 46,218 24,059 23, % Malawi 4,475 15,381 7,855 5, % Sudan 23,222 34,318 19,422 64,053 1, % Cameroon 13,124 20,030 11,225 25,236 1, % Mozambique 10,414 23,930 12,620 12, % Mali 14,605 15,840 8,033 10, % Libya 17,707 6,423 4,171 34,707 5, % Senegal 11,595 12,768 6,908 14,291 1, % Liberia 2,210 4,129 2,219 1, % Zambia 10,254 13,475 6,798 19,206 1, % Madagascar 5,996 21,315 11,535 9, % Gabon 2,329 1, ,052 11, % Togo 4,312 6,155 3,527 3, % Burkina Faso 9,359 16,968 8,914 10, % Uganda 18,487 34,509 16,970 16, % Niger 5,465 16,069 7,850 6, % Sierra Leone 3,429 5,997 3,313 2, % Mauritania 3,278 3,542 2,041 4,213 1, % Côte d'ivoire 18,150 20,153 11,184 24,074 1, % Zimbabwe 12,960 12,754 7,323 9, % Gambia 1,890 1, % Chad 4,301 11,525 5,975 10, % Guinea-Bissau 1,142 1, % Congo 4,283 4,140 2,311 14,426 3, % Benin 8,309 9,100 4,863 7, % Central African Republic 1,248 4,487 2,509 2, % Burundi 2,837 8,575 5,113 2, % Guinea Republic 6,475 10,222 5,515 5, % South Sudan 2,875 10,314 10,314 19,172 1, % Somalia 4,691 9,557 5, % AFRICA 743,540 1,044, ,716 1,901,384 1, % 30 Source: UBS estimates, Subs (SIMs) - WCIS/Informa data, Population - World Bank Database, TOTAL Population Penetration - taken as SIMs as a % of TOTAL population, Population World Bank Database, Urban Population as % of TOTAL - World Bank Database, Land are (sq km) World Bank Database, ADJ Population Penetration - taken as SIMs as % of Population 15-64, # of Operators - WCIS/Informa data, Share of #1 Operator - WCIS/Informa data, HHI: UBS calculation - taken as SUM of square roots of % mkt share of all operators per mkt, GDP (current) USDm - World Bank Database, GDP per capita (current) USD - World Bank Database, GDP CAGR IMF estimates, CPI Score - Transparency International (Corruption Perceptions Index), Ease of Doing Business - IFC/World Bank - "Measuring Business Regulations" UBS 14

15 Who might be involved? Having considered which the most attractive African mobile markets are, we also take a look at the mobile operators who might be involved in M&A in those markets (either buyers or sellers), with a specific view on the larger international operators. Scenarios In our view, there are a range of broad categories into which we can allocate any corporate action in the above-mentioned markets: Table 5: Scenario set for African telecoms M&A Target Example mkt position Acquiror Positives Risks Comment Small Operator #3 or below, depending on market structure (c15% share or lower) Larger Operator inmarket A larger player in the same market ought to benefit from synergies and hence justify a higher purchase price May face competition scrutiny In-market consolidation is one of the more rational M&A outcomes, and as such we see a good degree of likelihood of this happening in select markets New Entrant Potential that a new entrant has better operational expertise and can do more with the asset than the current owner High risk of hubris and that any new entrant can do no more with a small operator than the existing owner Not particularly likely Large Operator #1-#3, depending on mkt structure (c20% share or higher) Large Operator inmarket New Entrant Theoretically good fit again would offer synergies A better capitalised new entrant with a long timeframe could be healthy for the market than an under-invested cashstrapped large operator More likely to fall foul of competitive scrutiny Depending on the depth of funding of a new entrant (and hence timeframe for returns versus desire for market share) could see immediate price aggression Not particularly likely Could be healthy if the new entrant is disinclined to rock the boat likewise the reverse is also true. More risky than in-market consolidation, more likely than the other two Greenfield New spectrum/licence becomes comes available Any Opportunity to build a telecoms operation organically Largely dependent on the state of development of the existing telecoms market in the country Not many true greenfields left in Africa Ethiopia is the main opportunity here Source: UBS estimates Who is where? In order to assess the potential outcomes in terms of African consolidation, we set out below a summary of some of the larger international operators with presence on the continent, a list of the countries in which they are operational, and a summary view of whether they are more likely inclined to be buyers or sellers of assets. Figure 11 shows a summary picture of the major international operators, and a selection of the smaller regional players, in terms of the markets they are in, and their position within those markets. UBS 15

16 Figure 11: Who is where? (The major international operators presence across Africa, and a selection of the regional players) % = mkt share; # = mkt position; Of = total players France Telecom % # Of MTN % # Of Airtel % # Of Vodacom/fone % # Of Millicom % # Of 1 Botswana 30% 2 3 Benin 32% 2 5 Burkina Faso 40% 2 3 DRC 35% 2 7 Chad 44% Cameroon 44% 2 3 Botswana 61% 1 3 Chad 54% 1 3 Egypt 46% 1 3 DRC 14% Central African Rep 29% 2 4 Cameroon 56% 1 3 Congo 37% 2 4 Ghana 21% 2 6 Ghana 15% Cote d'ivoire 34% 1 6 Congo 42% 1 4 DRC 37% 1 7 Kenya 62% 1 4 Mauritius 35% DRC 10% 4 7 Cote d'ivoire 33% 2 6 Gabon 35% 2 4 Lesotho 79% 1 2 Rwanda 33% Egypt 33% 2 3 Ghana 44% 1 6 Ghana 11% 4 6 Mozambique 24% 2 3 Senegal 22% Equatorial Guinea 78% 1 3 Guinea Republic 35% 1 5 Kenya 17% 2 4 South Africa 44% 1 6 Tanzania 23% Guinea Bissau 34% 2 3 Guinea-Bissau 58% 1 3 Madagascar 42% 1 3 Tanzania 36% Guinea Republic 28% 2 5 Liberia 55% 1 3 Malawi 57% Kenya 10% 4 4 Nigeria 42% 1 13 Niger 52% Madagascar 30% 2 3 Rwanda 61% 1 3 Nigeria 20% Mali 61% 1 2 South Africa 38% 2 6 Sierra Leone 40% Mauritius 49% 1 3 South Sudan 24% 2 5 Tanzania 33% Mayotte 1% 3 3 Sudan 36% 2 3 Uganda 23% Niger 29% 2 4 Swaziland 100% 1 1 Zambia 39% Reunion 47% 1 3 Uganda 40% Senegal 61% 1 3 Zambia 42% Tunisia 15% Uganda 2% 5 8 Comium % # Of Africell % # Of Etisalat % # Of Globacom % # Of Econet % # Of 1 Cote d'ivoire 8% 4 6 DRC 5% 5 7 Benin 36% 1 5 Benin 19% 3 5 Burundi 25% Gambia 19% 3 4 Gambia 46% 1 4 Egypt 21% 3 3 Ghana 9% 5 6 Lesotho 21% Liberia 4% 3 3 Sierra Leone 46% 1 4 Nigeria 13% 4 13 Nigeria 22% 2 13 Zimbabwe 64% Sierra Leone 14% 3 4 Source: UBS estimates, WCIS/Informa data UBS 16

17 France Telecom We consider that France Telecom s major focus in Africa is Egypt (via Mobinil), and that, aside from reasonably-sized markets where it has a strong market position such as Cote d Ivoire, most of the rest of its African operations are relatively insignificant in the scheme of the group. FT has made some forays into the South African market recently (launching the Orange brand in time for the African Cup of Nations, of which it was the title sponsor), and the company has been cited in the press as saying it has considered the option of a mobile presence in the country most likely via an MVNO arrangement. We see FT as most likely to consolidate its existing holdings, and probably exercise its various call options rather than pursue fresh M&A. That being said, it would very likely be interested in a greenfield opportunity such as Ethiopia (where it has been running a managed services agreement for the state-owned incumbent and current sole operator). MTN We see MTN as a likely consolidator in the African market. Company commentary has centred on strategic M&A and in-market consolidation has been referenced. Given MTN s very strong market position (a very enviable #1 spot in 12 of its 17 African continent markets, with the remainder all #2 spots), there are relatively few markets where MTN would in fact be able to consolidate and receive approval from the relevant competitive authorities. The only markets where there might be potential for MTN to buy one of the smaller players would be theoretically Benin, Cote d Ivoire, South Africa, South Sudan or Sudan, of which optically South Sudan would appear the most possible (a 5 player market with MTN a distant #2 with 24% while #1 Vivacell has 41% share). MTN might be tempted by larger-scale M&A in the event that a well-positioned operator in a reasonably sized market were to become available. We would consider that MTN would be unlikely to take an interest unless the market had a population of over 10 million, and would be unlikely to look seriously at any asset in anything other than #1 or #2 position. Egypt a big focus Some brand presence in SA ahead of football competition Ethiopian 2 nd licence is almost certainly on FT s radar, given its managed services contract with Ethio Telecom MTN appears a natural consolidator in Africa but in-market is tough, given the enviable market positions MTN enjoys across its portfolio of assets Larger deals are a possibility for the right asset Most likely, in our view, is MTN prioritising the greenfield opportunity in Ethiopia, as and when it becomes available. MTN set up office premises in Ethiopia in March 2012, and already has a VAS (Value Added Services) licence in the country 1. Airtel Airtel s $10bn acquisition of Zain in 2010 brought with it operations in 15 African countries, of which 5 (Nigeria, DRC, Tanzania, Kenya, and Uganda) are amongst the top 10 most populous on the continent. Of these, its only market leading position is in DRC, which also remains the least penetrated (and on our most attractive list as a result). $10bn for 15 ops, of which 5 are in the top 10 most populous African countries 1 Ethipian Investor: UBS 17