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There are eight operators in Tanzania, but the top four have a combined market
share of 99%. This is the fourth-largest market for Bharti in Africa by EBITDA
contribution, with wireless penetration of 48% and ARPUs of US$5-6. Average
MoU is low at 60 minutes, and recently there appear to have been more aggressive
price cuts in the range of 40-50%. Interconnect rates are high, at US¢7, with telcos
lobbying for a review, we understand. Tower sharing/divestments are also more
prominent. Bharti appears to have maintained its share at around 28% in the past
few years and its margins have been relatively stable at the mid-30% level.
Catalysts
Operational improvements in Africa and progress on 3G/data would be positive
catalysts. Regulatory risks on MNP, USO and spectrum prices remain.
Anchor themes
The subscriber growth cycle is by no means over, but returns on incremental
subscribers are uncertain. 3G/data should offer further growth opportunities.
Tanzania — as challenging as
scaling Kilimanjaro?
Country overview and competitive landscape
Tanzania is a relatively stable and diversified economy, with per
capita GDP (PPP) of US$1,500 and GDP growth of 7% for 2010F
(IMF). It is a preferred tourism destination and has strong gold
production and agricultural exports. We think its population of 44mn
and wireless penetration at 48% make it one of the more appealing
regional markets, but there are currently seven operators and an
eighth (ExcellentCom) is expected to launch this year. Bharti is the
No 2 player, with a 28% share that has been broadly stable in recent
years, while Vodacom is the market leader with 41% share. MoUs are
low at 60 and ARPUs are around US$6.
Competition… likely to go in overdrive?
Millicom (Tigo) started cutting prices in 2009, reducing them by 2/3rd
to Tsh1 per second (US¢0.06) and recording 50% growth in EBITDA
in subsequent periods. Since then, other operators have lowered their
on-net pricing, and Tigo recently cut its pricing by a further 50% (now
offering Tsh0.5 per second rates). Bharti has also waded in and now
offers rates of Tsh0.25-0.50 per second. Off-net pricing is also coming
down (led by Vodacom), and currently appears quite high at
US¢22/minute, versus interconnect at US¢7/minute.
Significance to Bharti
Tanzania contributes 7-12% of subscribers/revenues/EBITDA and is
Bharti’s fourth-largest market by EBITDA contribution to Africa. EBITDA
margins have been broadly stable at the mid-30% level and our
forecasts assume they stay broadly flat. We understand Zain has
invested US$500m in the past five years and Bharti intends to invest a
further US$150mn over the next few years.
Tanzania – as challenging as scaling Kilimanjaro?
Tanzania
Economic overview
Tanzania is a country formed from the union of Tanganyika (in mainland Africa) and
the island of Zanzibar in 1964. It is known for being home to Africa’s highest mountain,
Kilimanjaro, and the Serengeti national park. Led by the global economic and fuel
crisis, Tanzania’s GDP growth was around 6% in 2009, and the IMF expects 6.5-6.7%
growth in 2010-11F. This is supported by implementation of a counter-cyclical
economic stimulus plan that was endorsed by Parliament in July 2009, according to
African Economic Outlook. Agriculture accounts for 20% of GDP, with diversification
efforts having brought other sectors to prominence, such as finance, real estate,
business services, communication, and tourism. Nevertheless, the cost of doing
business remains high in the country, we understand. We understand one-third of the
population still lives below the poverty line and income distribution is skewed; however,
progress is being made on the 2nd National Strategy for Growth and Reduction of
Poverty (NSGRP), which was planned to be implemented in 2010/11F.
Key political facts
Tanzania assumed its present form in 1964 following a merger between Tanganyika
and the island of Zanzibar; the latter is semi-autonomous, with its own parliament and
president. We understand Tanzania is quite stable, with democracy continuing to
improve — multi-party politics were introduced in 1992. Zanzibar, however, has
witnessed some tensions surrounding election periods in the past. In November 2009,
a breakthrough was made we understand from African Economic Outlook, with the
ruling and opposition parties beginning a reconciliation and accepting proposals to
share power. President Jakaya Kikwete was re-elected in the November 2010
elections in Tanzania. The next elections will be in 2015F.
Telecom landscape
Tanzania has a population of 44mn and telecom penetration of 48%. It is a
crowded market — four established players have a combined market share of 99%,
but in total there are seven players with operational networks and 14 licensees.
ExcellentCom (Hits Tanzania), which is to become the 8th player, is looking to
launch services in 2011F and has started rolling out networks, we understand.
Bharti is the #2 player, with a 28% share (September 2010).
MoUs are quite low in the market, at around 60 per month per sub, and ARPUs are
around US$6, according to data available from the regulator. We note that
operators such as Vodacom have reported much lower ARPUs of US$3 in 3Q10
(but this may be likely due to a majority of its subscriber base carrying a second
SIM to avail lower tariffs from other operators, we think). Millicom reported ARPUs
of US$5 in 3Q10.
3G has been in the market since 2006-07; currently, Vodacom, Tigo, Zantel and
Bharti are offering 3G services.
Competition… likely to go in overdrive?
The Tanzanian market is dominated by four operators with significant market
share – Vodacom, Bharti, Millicom, and Zantel – although there are seven active
operators. Vodacom is the market leader, with a subscriber share of 41%. Bharti is
second with 28%, followed by Tigo with 22%. Despite close to 50% penetration,
and seven existing players, ExcellentCom (listed as Hits Tanzania) intends to
launch services in 2011F.
At the beginning of price cuts?
We believe there is good evidence of positive elasticity and increase in service
adoption in Tanzania — from 2008 to September 2010, on-net tariffs were down by
~50% on average and we estimate total minutes volume across networks nearly
tripled in this period (annualising the 9M10 minutes volume for both on-net and offnet;
off-net is 4% of total national traffic). MoUs are up by 43%, we estimate.
Millicom’s Tigo brand started cutting prices in 2008/09, reducing on-net prices by
two-thirds to Tsh1 per second (or US¢0.06) from Tsh3 and saw 50% growth in
EBITDA in subsequent periods (Exhibit 8). Tigo notes this was largely due to the
economies of scale achieved through higher traffic volume.
Since then, other operators have gradually lowered their on-net pricing to levels
matching the Tigo offer (Exhibit 9). More recently, Tigo further cut prices by 50%
and is now offering rates of Tsh0.5 per second. Bharti has waded in and is offering
rates of Tsh0.25-0.50 per second for on-net calls.
Off-net prices were broadly stable until recently. Vodacom appears to have taken
the first step on off-net tariffs, reducing them by 50% (ie, from Tsh6.5 to Tsh3,
implying USc12 per minute) in September 2010. Tigo recently matched these rates.
(Vodacom Tanzania halves off-net call tariffs, Telegeography, 17 September, 2010;
Mobile phone business still glitters, 20 December 2010, Business Daily)
We understand Bharti and other operators are lobbying for interconnect to be
lowered to levels below the existing glide path. Currently, interconnect for 2011 is at
US¢7.3 per minute, with off-net rates currently at US¢22 per minute — suggesting
significant potential for these rates to come down even before interconnect is
lowered, we believe.
Significance to Bharti
Tanzania is one of the key markets for Bharti — it is the #2 player here, with a
share of 28%. More importantly, Bharti doesn't appear to have ceded much share
in this market over the past two years.
Tanzania contributes to 7-12% in subscribers/revenues/EBITDA and is the fourthlargest
market for Bharti by EBITDA contribution to Africa. EBITDA margins have
also been relatively stable at around the mid-30% level compared to other markets.
We also understand that Zain has invested around US$500mn in networks in the
past three-five years, which could allow it to offer better quality of services (as per
comments from Zain Tanzania’s Marketing Director at the time of the acquisition).
We also understand that Bharti is looking to invest a further US$150mn in this
market over the next few years. (TelePhony Price war to intensify in telecom
industry, The Citizen, 6 May, 2010; Bharti targets US$150m investment in
Tanzania, 22 July, 2010, Telegeography).
Regulatory overview
Interconnect: Currently, interconnection rates are based on a glide path: 2010:
US¢7.49; 2011: US¢7.32; 2012: US¢7.16 (based on The implementation of
Interconnection determination No. 2, issued in 2007). Currently, operators charge
at the cap rate. We understand that lobbying is underway for a reduction in these
rates below the current glide path.
Subscriber registration: In June 2009, a law was passed by parliament for all
operators to register and identify all mobile users by 30 December, 2009; the
deadline was extended to October 2010 and operators were required to deactivate
subscribers who have not registered by then.
Local listing requirements: Tanzania's government has passed a controversial
law that will require local mobile network operators to list shares in their companies
on the local Dar es Salaam Stock Exchange. Companies will have up to three
years to list their shares on the stock exchange. (Tanzania to Require Local Stock
Exchange Listing for Mobile Networks, 1 February, 2010)
Tanzania seeing the formation of tower cos
The Tanzanian market has also seen developments in terms of towers. Eaton
Tanzania, Tanzania’s first tower company, began operations last year. It is an
Africa-focused tower company that owns, builds, manages and maintains telecom
towers for operators. (IT News Africa, First independent mobile tower company
established in Tanzania, July 2010).
More recently, in December, the 3rd-largest player, Tigo, agreed to sell
approximately 1,020 towers to Helios Towers. Tigo Tanzania expects to receive
US$80mn of cash up front and will retain a significant minority interest in HTT.
Mikael Grahne, President and CEO of Millicom, said: “Millicom created the first
tower joint-venture in Africa with Helios in January 2010. The initial results proved
very satisfactory, with an improved service level and a reduction in both capex and
operating expenses.” The transaction is expected to be completed in 2Q11F.
(Cellular News, 4 December, 2010, Tigo Tanzania Sells Tower Assets to Helios
Towers).
About Vodacom…
According to our EMEA analyst, Martin Mabbutt, Vodacom remains powered by its
South African operations, and in particular its mobile data business. Meanwhile, its
international operations have gone through a painful readjustment to a more
competitive environment. They are now showing some signs of reducing their rate
of decline but are still a long way short of an overall improvement. Vodacom is
Vodafone’s vehicle for investment in Africa. Vodacom has indicated it is still
prepared to look beyond its current footprint for growth, but we do not expect this to
encompass more than one or two markets.
Vodacom Tanzania, the current market leader, last week announced plans to
expand its network and improve network quality. It is targeting to increase its sub
numbers from around 8.5mn now to around 10mn, we think in the coming year
(Vodacom eyes 10 million subscribers, 3 October, 2010, All Africa). Although it took
the lead on reducing off-net tariffs recently, the company has said the tariff wars
might not be sustainable in the long run and believes these could negatively affect
investment in networks.
We understand Vodacom now has a nationwide coverage with around 1,000
towers; a large majority of these were built in the past 18 months.
Vodacom has also been driving its mobile banking services and its M-PESA service
has already seen over 1mn registered users since the launch in April 2008.
(Developing Telecoms, Tanzania’s mobile market in 2009: encouraging growth
follows a shaky start, 7 July, 2010)
About Hits Tanzania and Hits Telecom
ExcellentCom (which is listed as Hits Tanzania) is expecting to launch services as
the 8th operator in 2011. The company was awarded a licence in 2007 but its
launch in 2008 was delayed due to the financial downturn. The company notes that
it has invested US$50mn in the country since and is likely to invest another
US$200mn over the next 10 years. It is also reviewing network-sharing options.
Hits Tanzania is a subsidiary of Hits Africa, which in turn is a subsidiary of Hits
Telecom. Hits Telecom is a Kuwait-based holding company that moved into
telecoms in 2008. According to its website, Hits Africa aims to take advantage of
the African opportunity by pursuing an aggressive roll-out strategy for growth and
building networks in its regions of operation. It has a number of licences, most
significantly in Tanzania and the DRC, but has yet to launch service in any
meaningful way, according to Mr Martin Mabbutt. The Hits group overall also has
operations in Brazil, China and Saudi Arabia. In 2009 (December year end) it
reported revenues of KWD126mn (US$ 440mn).
Risks: Risks to our price target include stronger-than-expected competition and
unfavourable regulatory developments related to various fees and charges. Upside
risks include benign competition and faster-than-anticipated stability in pricing.
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