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.

2. 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

3. 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

4. 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

5. 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 d'Ivoire 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

6. 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

7. 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
d'Ivoire operator (2015) operator operator operator operator operator d'Ivoire (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