Breaking a century-long state monopoly, the state-owned Ethio telecom S.C. has launched an initial public offering to sell 10pc shares to the public, hoping to raise additional equity in hundreds of millions of dollars.

Unveiled by Prime Minister Abiy Ahmed (PhD) on October 16, 2024, at the Sheraton Addis, Taitu Street, the Initial Public Offering (IPO) seeks to raise 30 billion Br (approximately 281.4 million dollars based on last week's central bank rate), valuing the company at a robust 300 billion Br. The partial privatisation opens the door for the public to participate in one of Africa's most lucrative yet untapped telecom markets.

For over a century, Ethio telecom held a monopoly over Ethiopia's telecom sector. The company boasts a 94.5pc market share, serving 78.3 million subscribers. Its dominance is rooted in extensive infrastructure, including over 8,538 network towers and a vast fibre-optic network crisscrossing the country. The company's revenue surged to 91.4 billion Br this year, up from 71.5 billion Br in 2023, demonstrating strong growth across its service segments.

"Ethio telecom's revenue size mirrors substantial growth in its service areas," said a telecom expert familiar with the company's history.

The IPO's pricing reveals a price-to-earnings ratio of 15.78, considering its recent net profit of 19.01 billion Br. This positions Ethio telecom between Safaricom's higher ratio of 21.5 and MTN's lower 13, possibly tempering public expectations. The price-to-book ratio is 2.64, indicating substantial assets and infrastructure, while the price-to-sales ratio is 3.28, a cause for an optimistic outlook for future revenue growth.

Prime Minister Abiy attributed the decision to float a portion of Ethio telecom's shares to his administration’s gradual liberalisation of the economy, inviting public investment and promoting competition.

"The IPO and the establishment of the Ethiopian Securities Exchange are part of our digital strategy to expand financial markets and foster investment," Abiy said. "It'll bring great investments."

The entrance of Kenya's Safaricom into the Ethiopian market has already begun to reshape competitive dynamics. Safaricom secured a license in 2021 and has gained a 5.5pc market share. MTN Group, Africa's largest mobile operator by subscriber numbers, continues to eye opportunities in Ethiopia, illustrating the market's attractiveness.

Industry observers attribute Ethio telecom's higher price-to-book ratio to its near-monopoly status and the potential for growth in a largely untapped market. One of Ethio telecom's most promising ventures is Telebirr, its mobile financial services platform launched in 2021. It has rapidly amassed 47.5 million subscribers and facilitated transactions totalling 1.84 trillion Br this year. Its explosive growth mirrors the success of Safaricom's M-Pesa, which revolutionised mobile money in Kenya and became a major revenue stream.

"Ethio telecom may want to replicate this model, leveraging Ethiopia's large unbanked population and increasing smartphone penetration," said an expert who requested anonymity.

Safaricom trades at a price-to-book ratio of around two, benefiting from a stable Kenyan market and diversified services, including M-Pesa. However, MTN has a lower ratio of around 1.5, influenced by its exposure to multiple African markets with varying degrees of risk.

Ethio telecom's expansion into 5G technology demonstrates its growth ambitions. With networks already live in five cities, the company positions itself to meet the rising demand for high-speed data services. According to experts, this move is strategic, considering Ethiopia's young and tech-savvy population eager for digital connectivity. The company's 4G network covers 34.6pc of the population, and continued infrastructure investment is expected to drive higher data consumption and revenue.

Infrastructure-sharing agreements present another avenue for growth and cost efficiency for Ethio telecom. These agreements with Safaricom provide a steady revenue stream and optimise the use of its extensive assets. However, they also facilitate competition, as Safaricom gains ground in the market.

Despite these growth prospects, Ethio telecom faces increasing competition, with the possibility of additional licenses being issued to foreign operators. Analysts project this could erode Ethio telecom's market share and pressure profit margins. The company's management, led by CEO Frehiwot Tamiru, brings experience in Ethiopia's regulatory environment but may need to adapt to the demands of a competitive, privatised market.

"The transition from a state monopoly to a competitive player requires strategic agility and customer-centric innovation," an industry observer said.

Economic and political instability pose additional risks. Ethiopia has experienced periods of unrest and conflict, disrupting operations and discouraging investment. Following the recent shift to a market-determined exchange rate regime, currency devaluation and inflation remain concerns.

"These factors can affect dollar-denominated contracts and squeeze margins, impacting financial performance," said a person working for a company contracted by Ethio telecom.

Notably, the proceeds from the IPO will not directly fund Ethio telecom's operations. Instead, the funds will go to Ethiopian Investment Holdings (EIH), the government's investment arm and the company's majority shareholder.

"It's privatisation in form, but the state remains in control," said Worku Lemma, an investment banker.

A notable risk involves Ethio telecom's financing agreements, including pending approval from Ericsson related to the company's restructuring, which could pose legal challenges. The company's exposure to currency fluctuations, particularly following the recent shift to a market-driven exchange rate, also raised concerns. Since the Birr has depreciated against the dollar by close to 108pc since July this year, the company's foreign currency-denominated debt presents a challenge.