TelecomDueDiligenceandBenchmarking indevelopingcountries

LeChannel August2012
LeChannel,20012012

TelecomDueDiligence
ADueDiligenceisdefinedasa reasonableexaminationofa telecomoperatorinthecontext ofamerger,anacquisition,a privatizationoracorporate financetransaction. Itismandatedbyabuyer,an investororalender. Itsfocusvaries,butnormally includesashareholdervalue analysis. Thegoalofaduediligenceisto evaluateabusinessplanandto validateitsunderlyingstrategy. Ittypicallyinvolvesfuture outcomes,projectedKPIs.

The3stepsofduediligence benchmarking Identifycomparablemarkets

Regional GDPperCapita

Selectoperator
Executingsimilarstrategy Similarmarketshare

BenchmarkonpertinentKPIs

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Identifyingcomparablemarkets
TheBenchmarkPanel:
criteriaoftencombinedfor selectingcomparablemarkets:
o GDP(orGNI)percapita o Population o Marketpenetration:
mobile(%ofpopulation); fixed,broadband(%ofhousehold) Selectingregionalmarkets (hereECOWAScountries) onGDPperCapita

a manageablepanelsizeis5to10 markets ifthepanelistoolargeadditional filterspertinenttothecasemaybe applied:thenumberofoperators, thecountryliteracyrate,the percentageofpopulationunderthe povertyline,etc.

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SelecttheBenchmarkPanel usingdatapublishedby internationalsources. Dataaremorelikelytobe consistentacrossall countries.

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NeighborsandRegions
Neighboringcountriesare importantascultureand behaviorsoftendonotstopat borders. Acountryhowevermaybe singularinitsimmediateregion asillustratedonthefirstgraph: mobilepenetrationinNigeris laggingintheWestAfrica region. Selectingcomparablecountries onGDPpercapitaand extendingtheregiontothe subSaharanAfricacreatesa betterbenchmarkpanelin whichNigerisnotsingledout.
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Mobilepenetration intheWestAfricaregion

Mobilepenetration insubSaharanAfrica

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Timeoffsetbenchmark
Lookingatcomparable countriesbackintime
DueDiligence Benchmarkingoften involvestheidentification ofsimilarsituationsina reasonablepastto compareandevaluate futureoutcomes.
MobilepenetrationinECOWASselectedcountries

Half of selected ECOWAS countries reached Burkina Fasos current mobile penetration 3 to 4 years ago. Mobile operators in these countries that have executed a similar strategy are likely to help validate the targets business plan, based on 3 to 4 years of actual data.

Moreontimeoffsetbenchmarks: SeeLookingbackintimeforBenchmarkingMobileOperatorsinDevelopingMarkets,2012 a whitepaperavailableatwww.lechannel.com

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Selectinganoperator ineachmarket
Inmostcasesthestrategy profile,e.g.valuebasedvs. lowcostoperatorpointstoone operatorineachcountryofthe benchmarkpanel. Themarketshareortheorder ofentryinthemarketmayalso beusedformobileoperators. Sometimesthelackof informationdisclosedbythe operatorofchoicewillleadto theselectionofthesecond best.Thereisnopointin keepinganoperatorinthe benchmarkpanelifitsKPIsare unknown.
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HIGH

Valuebased operators
ARPU

Toogoodtobetrue

Toobadtolastlong

Lowcost operators
HIGH

LOW LOW Revenuesperemployeeor Subsperemployee

Mobile2nd andlateentrantsinAfrica aremainlylowcostoperators

40% 35%

Share of revenues

30% 25% 20% 15% 10% 5% 0% 0%

Valuebased

Lowcost
5% 10% 15% 20% 25% 30% 35% 40%

Share of subscribers

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BenchmarkKPIs
HereareexamplesofmobileoperatorKPIsindevelopingmarketsamonghundredsofpossibleindicators:
Subscriptionbase
#ofactivesubs Monthlychurn Population Area Kmofroads/rail

Performance
AMPU:AverageMarginperUser Subsperemployee AverageRevenueperemployee SubsperBTS Subspersq.Km(urban) Subspersq.KmperMHz CAPEXasa%ofRevenues CAPEXpersub CAPEXpersite(BTS) OPEXpersub OPEXpersite(BTS) OPEXperMoU NetworkOPEXasa%ofRevenues TotalOPEXasa%ofRevenues #ofPointsofPresence(POP) Marketingcostsasa%ofRevenues SubscriberAcquisitionCosts(SAC)pernetadd SACasa%ofARPU SubscriberRetentionCosts(SRC) SRCasa%ofARPU EBITDAMargin EBITDA/CAPEX(ROIC) Revenues/CAPEX(CapitalProductivity) EV/EBITDA,persub etc.

Coverage

MarketShare
Ofsubs Ofrevenues Ofminutes

CAPEX

Growth
Shareofnetadds Marginalrevenuepersub MinutesofUse(MoU):prepaid,postpaid,blended; incoming/outgoing;international Roaming:MoUin,MoUout OutgoingSMSpersub Averagecallduration ARPU:prepaid,postpaid,blended ARPM:prepaid,postpaid,blended AverageRevenuepercall AverageRevenuepersite(BTS) Intercocostsasa%ofrevenues IntercoRevenuesasa%ofrevenues RatioIntercocost/IntercoRevenues

OPEX

Usage

Marketing

Revenues

Financial&Valuation

Interconnect

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KPIvariationsprovide complementaryperspectives
TheCAPEXofthisWestAfrican mobileoperator(thetarget) mayseemhighasa%of revenues.Itisactuallyinthemid tierofthebenchmarkintermof CAPEXpersubscriber,especially whencomputedasamultipleof theoperatorARPU.
CAPEXasa%ofRevenues
CAPEXasa%ofrevenues

35% 30% 25% 20% 15% 10% 5% 0%

CAPEXpersubasamultipleofARPU
CAPEXpersub asamultipleofARPU
6.0X 5.0X 4.0X 3.0X 2.0X 1.0X 0.0X
CAPEXpersubinUSD

7.0X

$50 $45 $40 $35 $30 $25 $20 $15 $10 $5 $0

CAPEXpersubscriber

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Sourcesofbenchmarkdata
Goodsourcesofdatainclude: Telecomoperatorsannualreports,quarterly financialresults,andpresentationstoinvestors (madepublic). Telecomregulatorsreportsandofficial presentations NGOpublicreportsanddatabases,inparticularthe WorldBank,theIMF,theITU,etc. Someinvestmentbankspublications(e.g.Merrill LynchGlobalWirelessMatrix).
Ratiointercoincoming/outgoing vs.marketshare
250% 200% 150% 100% 50% 0% 0% 10% 20% 30% 40% 50% 60% Marketshare

70% 60% 50% 40% 30% 20% 10% 0%

EBITDAMargin

EBITDA Margin

Interconnectioncostsandrevenuesaresensitivedatathat operatorsaretypicallyreluctanttoshare.

OperatorsannualreportsprovidemanyfinancialKPIs

Since2001LeChannelhasanalyzedandcompileddatain developingcountriesfromhundredsoftelecom operatorsannualreports,dozensofregulatorsreportsas wellasmanypublicreportsfrominternationalNGOs. Theresultingdatabaseisveryinstrumentalincreating meaningfulbenchmarks,whichcombinedwithour professionalscomprehensiveknowledgeoftechnology, networksandoperationsprovidesasolidframeworkfora duediligenceinadevelopingcountry.

Ratioincoming/outgoing

Moreatwww.lechannel.com

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Definitions
ARPUorAverageRevenuePerUser isameasureofthemonthlyrevenue generatedbyonecustomerphone.ARPUincludesnotonlytherevenues billedtothesubscribereachmonthforusage,butalsotherevenue generatedfromincomingcalls,payablewithintheregulatory interconnectionregime.TocalculatetheARPU,thetotalrevenue generatedbyallsubscribersduringthemonthisdividedbytheaverage numberofsubscribersoverthemonth. ARPMorAverageRevenuePerMinute isameasureoftheaverage revenuegeneratedbyaoneminutecall.TocalculatetheARPM,thetotal revenuegeneratedbyallsubscribersduringthemonthisdividedbythe averagenumberofminutesoverthemonth. ECOWAS.TheEconomicCommunityofWestAfricanStatesisaregional groupof15countriesinWestAfrica. EVorEnterpriseValueiscalculatedasthecompanymarketcapitalization plusdebt,minorityinterestandpreferredshares,minustotalcashand equivalents. GDP,nominalGDP,GDPatcurrentUSD.GrossDomesticProductat purchaser'spricesisthesumofgrossvalueaddedbyallresidentproducers intheeconomyplusanyproducttaxesandminusanysubsidiesnot includedinthevalueoftheproducts.DataareincurrentU.S.dollars. DollarfiguresforGDPareconvertedfromdomesticcurrenciesusingsingle yearofficialexchangerates. GDPpercapitaatPurchasingPowerParity(PPP) isthegrossdomestic productconvertedtointernationaldollarsusingpurchasingpowerparity rates.AninternationaldollarhasthesamepurchasingpoweroverGDPas theU.S.dollarhasintheUnitedStates. GNIpercapita atPurchasingPowerParity(PPP).GrossNationalIncomeis thesumofvalueaddedbyallresidentproducersplusanyproducttaxes lesssubsidies.GNIpercapitaisGNIdividedbymidyearpopulation.GNI percapitaatPPPistheGNIpercapitaconvertedtointernationaldollars usingpurchasingpowerparityrates.Aninternationaldollarhasthesame purchasingpoweroverGDPastheU.S.dollarhasintheUnitedStates. ROICorReturnOnInvestedCapitalgivesasenseofhowwellacompanyis usingitsmoneytogeneratereturns.Itiscomputedasapercentageby dividingtheNetIncomelessDividendsbythecompanyTotalCapital.

Notes
Allgraphspublishedinthepresentdocumenthavebeencreatedusing publicinformation. Targetreferstotheoperatorsubjecttoaduediligence,eventifalldue diligencesarenotM&Adriven. Illustrationsareextractedfromseveraldifferentprojects.Asaresult Targetmayrefertodifferentoperatorsfromonepagetoanother. Allmaterial,graphsincluded,maybepublishedorreproducedaslongas contentisnoteditedand sourceiscited(LeChannel,2012).

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