Smaller African GSM cellular operators may find it more difficult to access financing for African projects as the industry moves into a consolidation phase, says a Standard Corporate & Merchant Bank (SCMB) spokesman.
Heloise Smith, SCMB`s head of Africa telecoms project finance, says the African telecoms market is "a changing landscape" with the growing dominance of the pan-African operators, the emphasis on subscriber numbers rather than just a cellphone footprint within a number of countries, the limited number of new licences being issued, and limited vendor financing.
Smith was speaking at the GSM In Africa conference in Cape Town yesterday.
She said the shift in focus to consolidation, refinancing, expansion and acquisition with African GSM networks has meant that non-recourse finance has become the norm for new operations.
Non-recourse finance means the lenders have no recourse to the operating companies` balance sheet should anything go wrong. Essentially the money is borrowed against the future cash generation of the operation. In a worst-case scenario, the parent company could lose its equity.
Lender requirements mean there has to be a bankable business plan and that forecasts are conservative and comparable to other African mobile deals. Acceptable ratios have to be achieved, such as a maximum earnings before tax to equity ratio of 60:40, debt to earnings before income tax, and depreciation and amortisation of less than or equal to 3.5.
Smith said acceptable security packages have to be put in place and these could include assets and contracts generating cash flows, or restrictions on cash already generated.
"Most new licences being issued in Africa are of the 'third licence` type and in many ways these are less profitable as they have to break into markets dominated by more established players.
"However, there are exceptions. For instance, Vodacom is now the largest operator in Tanzania and it was one of the last to obtain a licence there.
"The prepaid products really brought the cellphone market to the masses and also allowed for the creation of strong business cases that allowed the establishment of such networks in markets that would have been very restricted."
According to Smith, a major threat to the future development of GSM networks in Africa is governments that consider them "cash cows" and may be tempted to use them as a means to shore up their own financing and budgetary problems.
SCMB has been involved in eight African GSM financing projects over the past five years and its clients include Vodacom, MTN, MSI, Econet Ericsson, Siemens, Alcatel and Motorola.
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