Beware the Ethio Telecom Fire Sale

Apr 20 , 2020
By Clay Webster

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No one can deny with a straight face that Prime Minister Abiy Ahmed (PhD) has undertaken an ambitious reform agenda since being named to his office two years ago.

The Homegrown Economic Reform Agenda, as it has come to be known, sets out a number of goals that if achieved would place Ethiopia far higher in the World Bank’s annual Ease of Doing Business report in Africa. Most reforms deal with non-controversial policy changes such as reducing the formerly onerous regulatory burden to incorporate a business and cutting the time it takes to establish an electric connection by 75pc.

Taken as a whole, the strategy is to make the investment climate simpler and thus increase business investment to foment higher job creation and increased taxes.

But outside this potpourri of micro improvements, an enveloping reform has received much more controversy and for apparent reason: the partial privatisation of Ethio telecom.

Alongside Ethiopian Airlines, the crown jewel of state-owned enterprises, the telecom monopoly grew fat and profitable (as any monopoly should) over the last decade for its only shareholder - the government. Now, in anticipation of the Ministry of Finance’s goal of auctioning off a minority stake in the cash cow this year, the telecom has undergone a series of price and investment initiatives to transform into a more competitive, dare I say lean, contender in the forthcoming telecom wars.

But unfortunately, and I say that as a cheerleader of the government’s privatisation efforts, now is not the time to hold such a momentous auction. In light of the flagging animal spirits among the global corporate elite due to the COVID-19 pandemic, it is unlikely the government will receive prime bids for what might be called the “crown prince” of its portfolio.

Economists are now routinely predicting 15pc unemployment across many of the OECD countries, rates that are much higher even than those experienced during the 2008 Financial Crisis. While some say they expect this recession to be much shorter due to a quick uptick in economic activity after worldwide stay-at-home orders are rescinded, there simply is no telling at this point how deep and long these doldrums will last.

If the government were to hold the auction during such a dismal season, when there literally is blood in the streets, it would likely force some potential bidders out of contention that would otherwise make competitive bids if they were not so worried about their balance sheets. The loss of competitive bidders, the narrowing of the field in a sense, might then have a negative impact on the final valuation price.

In a separate sense, the banks that normally lend the cash to corporations to make large-scale investments like this will likely charge higher interest rates in such a gloomy environment. In tandem, this would have the probable effect of decreasing interested investors’ bid prices as well.

In a foreshadowing of what is likely to transpire across the industry, CEO Jamie Dimon said he was mulling a suspension of dividend payments at JPMorgan Chase, the largest bank in the United States and sixth in the world. He added that he expects “a bad recession.”

It may be true that when China sneezes, the rest of the world catches a cold; but then we must also consider the possibility that when the United States gets laid off, the rest of the world starves.

If the Ministry of Finance decides to postpone the auction, the final sale price will also likely gain ground. In the first half of the current fiscal year, revenue leapt by a third - a level normally reserved for startups. A few more quarters like that and valuation models would need to be updated.

In the meantime, Ethio telecom is being run as well as it ever has. After Frehiwot Tamiru, the CEO, pushed through a 40pc tariff cut on domestic mobile calls, a 43pc price reduction on texts and mobile data services, and a 54pc decrease in broadband internet prices last year, internet demand increased by 169pc.

In February, the CEO went right back to the playbook and sliced the price of residential internet by another 69pc and for enterprises by 65pc. The cut in prices, which is expected to further increase subscribers across platforms, has been made in tandem with new investments in 4G LTE.

To make future privatisation even more appealing, the company has embarked on another segment that will lease smartphones to users who cannot afford a more pricey handset outright. This will not only bring in new leasing revenue but will expand the number of users paying for mobile internet data.

In light of all these recent reforms at the telecom, which will likely make future privatisation more valuable, the government should not shy away from holding off on the largest privatisation in national history. After all, even a 10 to 15pc reduction in valuation in the context of a global downturn could shave hundreds of millions of dollars off the final price tag.

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PUBLISHED ON Apr 20,2020 [ VOL 21 , NO 1043]

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