Looking back in time for benchmarking - developing countries

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Due diligence benchmarks often involve the identification of reasonably similar situations in the past to compare and evaluate future outcomes. An application to telecom due diligence in developing countries in general and sub-Saharan Africa in particular.

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Looking back in time for benchmarking - developing countries

  1. 1. Benchmarking Mobile Operators in Developing Markets August 2012 TABLE OF CONTENT I  INTRODUCTION .................................................................................................... 3  I.1  Due diligence and benchmarking ................................................................... 3  I.2  Telecom operators in developing countries ................................................. 3  II  MARKET PANEL SELECTION ............................................................................. 4  II.1  Selecting comparable countries ..................................................................... 4  II.2  Using market penetration to drive back in time ............................................ 5  III  SELECTING COMPARABLE OPERATORS ........................................................ 7  FIGURES Figure 1: Select, research, offset ............................................................................................................. 4  Figure 2: Example of benchmark panel selection .................................................................................... 4  Figure 3: Mobile penetration in ECOWAS countries ................................................................................ 5  Figure 4: … and in sub-Saharan Africa .................................................................................................... 5  Figure 5: Mobile penetration and market ARPU ...................................................................................... 5  Figure 6: Looking at comparable countries back in time .......................................................................... 6  Figure 7: Value-based vs. low-cost operators .......................................................................................... 7  Figure 8: Revenues per employee benchmark ........................................................................................ 7  Figure 9: EBITDA Margin at 3 years ........................................................................................................ 7  © Le Channel, 2001-2012 Page 2
  2. 2. Benchmarking Mobile Operators in Developing Markets August 2012 I INTRODUCTION I.1 Due diligence and benchmarking The essence of benchmarking. Theoretically benchmarking is the process of identifying Learning from the best and learning from best practices in the market in order to improve the company performance. Learning from to produce the best to produce superior performance is the superior performance. essence of benchmarking. When applied to a business process benchmarking comes down to a cycle of five basic steps:  Identifying the company with the best practice (“one-to-one” benchmark);  Probing its own operations and measuring the gap with the best practice;  Adapting the best practice to its own realities;  Implementing; and  Measuring the improvement. The measurement (gap; improvement) is based on descriptive KPI (Key Performance Indicators), i.e. indicators that are accessible, actionable and auditable. What is special with due diligence benchmarking? For the purpose of this document, a due diligence is defined as a reasonable examination of an organization in the context of a merger, an acquisition, a privatization or a corporate finance transaction. It is mandated by a buyer, an investor or a lender. Its focus varies, but normally includes a shareholder value analysis (valuation). The goal of a due diligence is to evaluate a business Due Diligence plan and to validate the underlying strategy. It typically Benchmarking often involves future outcomes, projected KPIs. involves the identification of Benchmarking is also a very important tool in the reasonably similar context of a due diligence. It is however a different type of benchmarking. The goal is no longer to compare an situations in the past to existing process, a current performance with a best practice. The goal here is to compare the projected compare and evaluate outcomes of a strategy execution with the actual future outcomes. outcomes of a “similar” strategy executed under then comparable market conditions. It implies identifying reasonably similar situations in the past to compare and evaluate future outcomes. The further in the past, the longer the period of actual observation, but the trickier finding similar situations. And time lags come into play. I.2 Telecom operators in developing countries A recent report from Delta Partners1, a Dubai-based firm, projects that the Telecom Industry in emerging countries will pass the $200 Bln mark by 2013, fuelled in particular by the explosion of mobile network and services. Investment opportunities have been multiplying. So have due diligences and needs for benchmarking. While developing markets are by definition lagging behind mature ones the differences are often too significant to find reasonably similar market conditions without going too far in the past. Due diligences in developing markets require benchmarks with other developing markets, typically regional benchmarks. 1 “ICT in emerging markets: a USD 200 Bln opportunity that cannot be ignored”, May 2011 © Le Channel, 2001-2012 Page 3
  3. 3. Benchmarking Mobile Operators in Developing Markets August 2012 The challenge is therefore Figure 1: Select, research, offset twofold:  Define and identify similar market conditions in comparable countries; and  Dig out the pertinent data (“lagging KPIs”) to create the benchmark. This document aims at illustrating the challenges of due diligence benchmarking in developing country telecom markets. It is documented by real-case examples, all of which from recent due diligences performed in sub- Saharan African countries. II MARKET PANEL SELECTION There are many ways to create a benchmark, and the best way will certainly depend of the target2, and of factors important to its strategy. In the rest of this document we discuss a few practical observations based on our experience. There is seldom one market leader that faced in a reasonably recent past similar market conditions to the ones the target is facing and that would be willing to share enough information for a one-to-one benchmark. In the mobile industry specifically the leaders are multi-operation Figure 2: Example of benchmark panel selection Selected countries are from the same economic region (ECOWAS) groups that are likely to be or with a GDP per Capita at PPP within 25% of the target’s one. could become a direct competitor of the target in one or another country. They will not share data beyond public information, and will not share best practice information beyond corporate communication statements Due diligence benchmarking is therefore “one-to-many”, measuring the target business plan KPIs against a panel of comparables often spread over several similar markets. II.1 Selecting comparable countries A first step is to create a benchmark panel of countries that were comparable to the target country in a recent past. The most common criteria for selecting comparable countries are the size (e.g. population), the proximity (geographic, i.e. West-Africa); or economic, e.g. members of ECOWAS), the country productivity (e.g. GDP per Capita at PPP) or wealth (e.g. GNI per Capita at PPP). 2 In the rest of this document we refer to the operator subject to the due diligence as the “target”, even if all due diligences are not M&A driven. © Le Channel, 2001-2012 Page 4
  4. 4. Benchmarking Mobile Operators in Developing Markets August 2012 These criteria may be combined with indicators key to certain elements of the target’s strategy. For benchmarking a low-cost mobile operator for instance, it makes sense to look at the number of people below the poverty line, or at the GINI Index. Here are some observations and recommendations:  Use data published by international sources to select the benchmark panel: ITU, World Bank, FMI, etc. The data are easier to find and are consistent across all countries. This may not be the case of data published locally. For instance some regulators have been known to Select the benchmark panel use creative definitions of an active subscriber to grossly improve the country mobile using data published by penetration. international sources.  A good, manageable panel size is 5 to 10 markets. Data are consistent across  Neighboring countries are important as culture and behaviors often do not stop at borders. all countries. The Figure 3 features the mobile penetration rates over the past decade in ECOWAS countries. Penetration rates in 2011 vary from 30% to 90%, which is wide, and only 3 other ECOWAS countries are in the same range as Burkina Faso, the target’s country in our example. If the Region is defined as sub-Saharan Africa, we can create a large panel of countries whose mobile penetration is currently between 30% and 50% as illustrated in Figure 4 Figure 3: Mobile penetration in ECOWAS countries Figure 4: … and in sub-Saharan Africa Source: the World Bank DataBank, 2012 Source: the World Bank DataBank, 2012 100.0 60.0 90.0 50.0 80.0 70.0 40.0 60.0 50.0 30.0 40.0 30.0 20.0 20.0 10.0 10.0 0.0 0.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Benin Gambia, The Guinea-Bissau Ghana Burkina Faso Cameroon Comoros Guinea Liberia Mali Nigeria Congo, Dem. Rep. Madagascar Mali Senegal Cote dIvoire Burkina Faso Niger Mozambique Niger Uganda  Some indicators are correlated. For instance GDP per Capita and Mobile Penetration are correlated at any given time in unsaturated markets. This is also illustrated by Figure 4: the listed countries were actually selected on the GDP per Capita at PPP (between 1,200 and 1,800 USD). If GDP per Capita is used in the selection of the panel countries, the range of market penetration rates at current time will be limited as a Figure 5: Mobile penetration and market ARPU result. Sources: Le Channel, 2011 based on data from ITU, regulators & Merrill Lynch II.2 Using market penetration to drive back in time In unsaturated markets, the penetration rate is an indication of the level of development of mobile telephony in the country. The market opportunities and many forces impacting its players are linked to the market penetration. For instance the market ARPU is correlated to mobile penetration, as illustrated by Figure 5. © Le Channel, 2001-2012 Page 5
  5. 5. Benchmarking Mobile Operators in Developing Markets August 2012 By definition the market penetration is supposed to measure the adoption of a product or a service compared to the total theoretical market for that product or service. In mobile telephony though it was assumed that the theoretical market was one, and only one, mobile phone by inhabitant, regardless of age. As a result some markets have market penetration well over 100% and are still unsaturated, due for instance to rapid turnover of SIMs, multi-SIM / multi-phone users or M2M products. Others are saturated at 70% or below, for reasons such as the lack of coverage (very low population density), affordability (poverty line) or a wide-base pyramid of age. Evolution of the market penetration in time is a typical S-curve. Its shape illustrates a slow initial growth, Mobile penetration follows a subsequent rapid growth, followed by declining growth as saturation levels are achieved. We assume in the S-curve over time, rest of the paragraph that the target market is still away with a slow initial growth, from saturation or near-saturation. subsequent rapid growth, The second step of the benchmark creation process is followed by declining to research the mobile penetration rates in the short- listed countries going back 5 years. The markets in the growth when reaching panel must be ahead of the target market (by 2 to 5 years) in order to find pertinent data. In other terms, we saturation levels. are looking at countries where the penetration rate 2 to 5 years ago was similar to the target country current penetration rate. More than 5 years and the technology gap would become a serious factor. Less than 2 years would limit the observation period. Figure 6: Looking at comparable countries back in time Half of neighboring countries had similar market penetration rates 3 to 4 years ago As illustrated in Figure 6, half of the ECOWAS countries listed in the panel reached Burkina Faso’s current mobile penetration 3 to 4 years ago. Mobile operators in these countries back at that time that would have executed a similar strategy are likely to be very instrumental to validating the target’s business plan, based on 3 to 4 years of actual data. © Le Channel, 2001-2012 Page 6
  6. 6. Benchmarking Mobile Operators in Developing Markets August 2012 III SELECTING COMPARABLE OPERATORS The third step of the due diligence Figure 7: Value-based vs. low-cost operators benchmark creation process is to select in each country of the benchmark the mobile operator that present the best HIGH similarities with the target. This is typically done using: Value‐based Too‐good‐to‐be‐true  the order of entry in the market, operators or the market share; or, ARPU  the strategy profile: for instance value-based vs. low-cost (see Figure 7). Low‐cost Too‐bad‐to‐last‐long The best solution will depend on each operators situation. Sometimes the lack of information disclosed by the best choice LOW operator will lead to the selection of the second best choice operator. LOW Revenues per employee or HIGH Subs per employee The figures hereunder are examples of time-offset benchmarks. Figure 8 and Figure 9 respectively compare the KPIs “Revenues per employee” and EBITDA Margin of the target three years into its projections with what was actually achieved by operators executing a similar strategy in countries at then comparable mobile penetration rates. Figure 8: Revenues per employee benchmark Figure 9: EBITDA Margin at 3 years 700 60% Revenues ($K) per employee  600 50% 500 EBITDA  Margin 40% 400 30% 300 20% 200 100 10% 0 0% Cote Senegal Target at 3Y Ghana Gambia Benin Senegal Ghana Cote Target at 3Y Gambia Benin dIvoire operator (2015) operator operator operator operator operator dIvoire (2015) operator operator operator (2011) (2011) (2010) (2011) (2011) (2011) operator (2010) (2011) (2010) (2010) Definitions: Le Channel, LLC ARPU or Average Revenue Per User Le Channel is a strategy and management consulting ARPU is a measure of the monthly revenue generated by one customer phone. To calculate the ARPU, the total revenue firm based in the U.S. We have specialized in generated by all subscribers during the month is divided by the commercial and technical due diligences of telecom average number of subscribers over the month. operators in emerging and developing countries. GDP per capita at Purchasing Power Parity (PPP) Our references include: PPP GDP is gross domestic product converted to international dollars using purchasing power parity rates. An international dollar  the World Bank has the same purchasing power over GDP as the U.S. dollar has in  the African Development Bank the United States.  Caisse des Dépôts GINI Index  ARCEP (the French regulator) The Gini index measures the extent to which the distribution of  Orascom Telecom Holdings income among individuals or households within an economy  Wind Mobile deviates from a perfectly equal distribution. A Gini index of 0 represents perfect equality, while an index of 100 implies perfect  Etisalat, etc. inequality. www.lechannel.com © Le Channel, 2001-2012 Page 7

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