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Senegal: The Benin
precedent strikes again
On October 30, the government of Senegal notified mobile
operator Sentel (a Millicom Cellular unit) of its decision to revoke its mobile
license. Sentel acquired its mobile license in 1998.
Senegal is
the latest West African country to succumb to the “Benin precedent”, a
singularly African manifestation of seller’s remorse in which governments seek
to undo licenses awarded to foreign companies under terms that now look awfully
favorable to the latter. Officially, Sentel is accused of not living up to the
terms of its license; in reality, the core issue is the cost of the license
awarded to Sentel in 1998.
Under the
deal struck in 1998, Sentel was to pay annual license fees of about US$100,000.
This was an awfully low fee, even by the standards at the time. With West
African GSM licenses going for $20m to $100m+ over the past three years, the
Senegalese government feels understandably aggrieved. In 2000, the government
decided to establish a “transitory period”, during which Sentel would be
allowed to operate until a new price point was established. For the government,
the sale of a third license to Sudan’s Sudatel for $200m in 2007 effectively
set the new price benchmark.
The
challenge –other than the fact that the government is reneging on a deal- is
that the Sudatel license was substantially overvalued in our view, based on
our projected DCF and comparable transaction analysis. At $200m, the new fee
would be nearly 2x higher than the entire equity valuation of the Millicom
Senegal operation in 2006. This would be Vaudevillian comedy if it didn’t
threaten to shut down one of the largest businesses in Senegal. Sentel
benefited from a low fee, but now has to pay an inflated fee based on another
player’s license (over) valuation. Still, shutting down Sentel sets a bad
precedent; time to find that middle ground.
Seacom construction
begins
Last week, construction of the Seacom sub-sea cable system
began in the Kenyan coastal city of Mombasa. The system remains on track to go
live by June 2009. This matters for a number of reasons:
African
cable projects seem perennially stuck in planning and funding phase, so this is
a refreshing change. There are few examples of such large-scale,
pan-African projects keeping to committed timeframes.
The significant advantage provided by early time
to market cannot be overstated. Getting there first allows Seacom to set a new East
African bandwidth price benchmark below existing levels, while still high
enough to build margins. Competing cables and satellite systems, by contrast, will
come in at the new price benchmark. In essence, Seacom is shortening its own
payback period while lengthening everybody else’s.
In our view, any other
planned East African cable project that does not account for Seacom’s
time-to-market advantage in its projections is being overly optimistic. We believe Seacom is the best opportunity for
returns in the African international bandwidth space over the next five years,
despite our conviction that an ultra-competitive international bandwidth market
–in Africa or elsewhere-is not a great space in which to look for margins.
We note
that the absence of government participation in the Seacom structure. We
are not philosophically opposed to it for projects of this scale. Nonetheless, things
certainly seem to move faster without government involvement - as long as
governments are far-sighted enough to award landing rights.
We are
projecting solid broadband growth in East and Southern Africa and Seacom is
a key part of our forecast rationale. Without it, we’d slash our long term East
African broadband projections by up to 30%-50%.
Event Note:
AfricaNext Research at Africacom2008.
Next week, AfricaNext Founder and Chief Analyst Guy Zibi will chair a
session on African network backhaul challenges at the Africacom 2008 conference
in Cape Town. We hope to see you there.
