zain profile

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mmC Group’s point of view on Zain’s profile and it’s International Expansion Strategy Point of view May 2009 For further information please contact: Carlos Valdecantos (+34 696 940 221, [email protected]) Fran González (+34 616 285 092, [email protected])

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mmC Group's company analysis on Zain. More info at www.group-mmc.com and www.consultantvalueadded.com

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Page 1: Zain Profile

Page 1 mmC GROUP Strategy Consultants – Zain Profile – Internationalization strategy

mmC Group’s point of view on Zain’s profile and it’s International Expansion Strategy

Point of view May 2009

For further information please contact: Carlos Valdecantos (+34 696 940 221, [email protected])

Fran González (+34 616 285 092, [email protected])

Page 2: Zain Profile

Page 2 mmC GROUP Strategy Consultants – Zain Profile – Internationalization strategy

Zain’s footprint is concentrated in Africa and the Middle East in order to exploit the advantages of the close geographic proximity. PEER PROFILES > ZAIN > GEOGRAPHIC FOOTPRINT

Markets

22 Subs

63.5 Million

Revenues

7.4 EBITDA

2.8 Billion $ Billion $

2008 Highlights

Page 3: Zain Profile

Page 3 mmC GROUP Strategy Consultants – Zain Profile – Internationalization strategy

Characterization of subsidiaries

Zain maintains an operational standard that leads to similar EBITDA margins, although markets vary substantially in potential.

Source: Zain 2008 annual report.

PEER PROFILES > ZAIN > SUMMARY OF INTERNATIONAL INVESTMENTS

Page 4: Zain Profile

Page 4 mmC GROUP Strategy Consultants – Zain Profile – Internationalization strategy

There s a dramatic jump in net income in 2006 – the year where the full impact from the Celtel acquisition was felt. PEER PROFILES > ZAIN > EVOLUTION OF MAIN FINANCIAL INDICATORS

Evolution of main financial indicators

Source: Zain annual reports

•  Revenues have been growing rapidly thanks to the new acquisitions and the high take up of mobile services. •  The company has not been able to maintain profitability due to:

A.  Adding less profitable businesses to its portfolio (lower ARPU or startup phase). B.  Costs related with integration and improving efficiencies. C.  Forex losses.

USD (Mn.)

1,344 2,254

4,466

5,912

7,441

557 914

1,953 2,424

2,776

407 622 1,015 1,130 1,196

41.4% 40.6% 43.7%

41.0% 37.3%

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

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2004 2005 2006 2007 2008

Revenues EBITDA NET PROFIT EBITDA %

Revenues: 100% mobile

EBITDA Margin CAGR: 53%

Page 5: Zain Profile

Page 5 mmC GROUP Strategy Consultants – Zain Profile – Internationalization strategy

Zain is the only peer where growth is financed in larger proportion by equity than debt – for every dollar borrowed from the bank, shareholders put 1.13 $. PEER PROFILES > ZAIN > SOURCES OF FUNDS

Source: Operator, mmC analysis.

1,478 5,683

9,608 13,923

16,796

724

1,349

2,388

2,016

2,839

2,202

7,032

11,996

15,939

19,635

2004 2005 2006 2007 2008

Current Assets Non-current assets USD (Mn)

Current assets

Evolution of consolidated assets and net debt Sources of funds to finance expansion

Total increase in assets +17,433

Incrase in liabilities and equity 2004 – ‘08

Increase in assets 2004 – ‘08

-381 -1,501

-4,767 -7,246 -6,847

146 1,002 1,636 953 1,324

-235 -499

-3,131

-6,293 -5,523 +

-

Cash

Debt

Net debt

+2,114

+15,319 Non-current assets

+7,317 Equity, reserves & minority interests

+6,466 Bank debt

+3,649 Other liabilities

Key Highlights

1.  Zain’s expansion started in 2003 with their 1st acquisition but it was in 2005 they bought Celtel.

2.  Debt represents 37% of the funding needed for the expansion whilst shareholders equity supports 42%.

37%

42%

21%

Page 6: Zain Profile

Page 6 mmC GROUP Strategy Consultants – Zain Profile – Internationalization strategy

The Group has a healthy EBITDA level despite the negative impacts of new deployments and currency issues in certain countries. PEER PROFILES > ZAIN > SUBSIDIARIES PROFITABILITY

Profitability per subsidiary in 2008

Source: Zain annual reports

EBITDA (%)

51% 48% 47% 46% 46% 45% 44% 42% 42% 41% 39% 37% 36% 33% 22% 22% 20% 19% 16%

-15% -22%

-27% -40% -30% -20% -10%

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

Kuw

ait

Zam

bia

Suda

n

Jord

an

Nig

er

Gab

on

Iraq

Tanz

ania

Mal

awi

Bur

kina

Fas

o

Cha

d

Con

go

Nig

eria

Bah

rain

DR

Con

go

Uga

nda

Leba

non

Sier

ra L

eon

Mad

agas

car

Ken

ya

Gha

na

KSA

16% 4% 10% 6% 1.5% 3% 15% 4% 1.5% 1.5% 1.5% 2.5% 19% 2.5% 4.5% 1.5% 1% 0.5% 1% 2% 0.1% 1.5%

Share of group revenues xx%

Group EBITDA: 37%

Deployment stage Laggard

Need to improve performance Performers

•  Madagascar , DRC and Sierra Leone have experienced issues with local currencies •  Lebanon is a controlled market a management contract where there is little room for action •  Established operations coming mostly from Celtel’s buyout show a strong performance based on market leadership

Currency volatility in 2008

Page 7: Zain Profile

Page 7 mmC GROUP Strategy Consultants – Zain Profile – Internationalization strategy

Except Nigeria, Sudan and Iraq the subsidiaries have small individual subscriber bases.

Subscriber base and ARPU per market

Source: Zain annual reports Note: Lebanon ARPU has been calculated since it is not disclosed due to managemnt contract

Subscribers (Mn.)

•  The two main revenue generators are Kuwait (16%), with a small subscriber base but high ARPU, and Nigeria (19%) with a large subscriber base and a medium ARPU

•  Other important contributors to the Group’s revenue stream are Iraq (15%) and Sudan (10%)

ARPU (USD/month)

17.2

9.7

5.2 3.9 3.3 3.1 2.7 2.3 2.1 2.0 1.8 1.3 1.3 1.3 1.2 1.1 1.0 0.8 0.8 0.7 0.5 0.3

9 13 16

9 11 6

12 19

6

25

52

16 11 9 7

12 13 19

31 29

9 10

-20 -10 0 10 20 30 40 50 60

0

4

8

12

16

Nig

eria

Iraq

Suda

n

Tanz

ania

DR

Con

go

Ken

ya

Zam

bia

Jord

an

Uga

nda

KSA

Kuw

ait

Con

go

Mal

awi

Bur

kina

Fas

o

Mad

agas

car

Nig

er

Cha

d

Leba

non

Gab

on

Bah

rain

Sier

ra L

eon

Gha

na

Total Subscribers (M) ARPU Blended (USD/month)

The two biggest revenue contributors

PEER PROFILES > ZAIN > SUBSIDIARIES BASE

Page 8: Zain Profile

Page 8 mmC GROUP Strategy Consultants – Zain Profile – Internationalization strategy

Zain’s strategy is to build its assets by owning and operaing them - mostly done by acquiring established operations. PEER PROFILES > ZAIN > EVOLUTION OF INTERNATIONAL EXPANSION

1) Sources: Zain annual reports

Merger Continuing operation

Fastlink (Jordan) MTC Vodafone (Bahrain)

MTC Touch (Lebanon) Celtel (Niger) Celtel (Chad) Celtel (Burkina Faso) Celtel (Sierra Leone) Celtel (Gabon) Celtel (Congo) Celtel (DRC) Celtel (Uganda) Celtel (Tanzania) Celtel (Kenya) Celtel (Zambia) Celtel (Malawi) Celtel (Sudan)

Madacom (Madagascar) Mobitel (Sudan)

MTC (KSA) Westel (Ghana)

Wana (Morocco)

2004 2006 2007 2008 2003 2002 2001 2000 1999 1998 2005 2009

2004 2006 2007 2008 2003 2002 2001 2000 1999 1998 2005 2009

MTC (Kuwait)

MTC Atheer (Iraq) Iraqna (Iraq) Zain (Iraq) Zain merged MTC Atheer

and Iraqna immediately after Iraqna’s acquistion from Orascom in 2007. The new company was rebranded “Zain”.

Page 9: Zain Profile

Page 9 mmC GROUP Strategy Consultants – Zain Profile – Internationalization strategy

Zain has consolidated a leadership both in terms of operations and image in Africa and the Middle East.

•  With a focused regional approach, all operations are inside the Africa-Middle East region

•  Specialised in mobile services, the markets it operates fall under two typologies: –  High penetration but high ARPU (e.g. Lebanon) –  Low penetration and mid-to-low ARPU (e.g Sudan)

•  Zain pursues a market leadership strategy and is, in effect, market leader in 14 of its operations and holds 2nd place in 5 other operations

•  Entry strategy into most of the countries it operates in has been through the acquisition of an already established operator.

•  Equity has been a relevant source of financing for Zain’s expansion compared to peers.

PEER PROFILES > ZAIN > STRATEGY OVERVIEW

Page 10: Zain Profile

Page 10 mmC GROUP Strategy Consultants – Zain Profile – Internationalization strategy

Zain has a very focused and consistent strategy leveraging on its regional footprint. However, this also provides an inherent risk. PEER PROFILES > ZAIN > INTERNATIONAL EXPANSION STRATEGY ASSESSMENT

Pros

•  The dual market approach offers Zain an interesting situation: -  Mature markets bring in stable revenues, with minimum

investment in CapEx, that can be employed in the other typology of markets

-  Meanwhile, growth markets although still of relative importance in terms overall contribution assure future revenues

•  Through the acquisition of up-and-running operations, Zain reduces significantly the time-to-market of its services in high growth markets

•  Its regionally focused strategy gives Zain a deep understanding of the markets it operates in

•  Aiming for market leadership gives Zain the benefit of taking the top layered subscribers in low ARPU markets -  This has a significant impact on bottom line e.g. in Sudan

Zain has a blended ARPU that is over 100% more than that of 2nd placed

Cons

•  Regional concentration of the operations portfolio increases the exposure in case of a downturn affecting the region

•  Growth through the acquisition of existing smaller operations in Africa presents the complication of integrating systems and processes since there are no existing quality standards

-  Not only systems and processes will face issues regarding integration, business culture homogenization will also be a significant challenge

•  Certain operations carry some inherent risk due to historical social and political unstableness that might affect Zain’s performance

Options for the future 1.  Expansion outside current geographic footprint to diversify risk exposure 2.  Further inorganic growth through the buy-out of smaller African operations thanks to their available funds