the africa 4g spectrum value report

THE AFRICA 4G SPECTRUM VALUE

REPORT4G VALUATION, OUTLOOK, AND BUSINESS MODELS IN

AFRICAN MARKETS

A XALAM ANALYTICS REPORT - SAMPLE PAGES

JUNE 2017

Full Report First Published May 2016

2

Africa Spectrum Licensing: $16bn in Proceeds So Far, and More Is Coming

Since 1998, African countries have sold around $16bn worth of licences – 4G spectrum licensing has the potential of taking these total proceeds to around $20bn.

The first wave of licensing, consisting primarily of 900MHz and 1800MHz spectrum, brought in about $10bn, including renewals

The 2G phase was one of the most prolific phase has operating concession awards the continent has ever seen –across industries.

Operators were not as profligate in the second phase; fewer 3G licences were sold, and 3G spectrum was generally valued lower than 2G spectrum.

2G Spectrum Licensing Phase

~$10bn in Proceeds*

3G Spectrum Licensing Phase

~$4bn in Proceeds

4G Spectrum Phase

?

1998-2010 2006 - 2015 2012 - 2020

Main Phases of African Spectrum Licensing

*including renewalsSource: Xalam Analytics estimates

© Xalam Analytics LLC - 2016

3

The African Operator Predicament

I’m still trying to make money out of 3G. Now they say I must invest in 4G.

Anonymous operator, 2014


4

The 2600 MHz band is still more predominant globally than it is in African markets

The weight of TDD bands is more important in Africa – proportions are 2x higher than at global level. This has potential some short term consequences for device ecosystem, service pricing.

There is no use of the 700 MHz band to speak of.

Africa 4G vs. the World: Not Quite Dovetailing Global Trends (Yet)

The nature of 4G licensing in Africa is directly impacting how well the continent matches up to global trends, in terms of availability of different bands.

Rather than waiting for uncertain regulatory licensing schedules, operators are deploying what they legally can.

The band contribution patterns in African LTE networks largely dovetail global trends –for 1800 MHz and 800 MHz. Outside of those two bands, however, the Africa spectrum band distribution bifurcates from international patterns.

*Estimates as of Year end 2015; Global numbers from GSA.. Sources: GSA, Xalam Analytics Estimates

Distribution of Prime 4G LTE Bands – Africa vs. Global* Africa 4G Networks - TDD vs. FDD*

44%

21%

6%

23%

3%

12%

48%

16% 14%9% 7%

1%0%

10%

20%

30%

40%

50%

60%

1800 MHz - Band3

800 MHz - Band20

2300 MHz - Band40

2600 MHz - Band7

2500 MHz - Band41

700 MHz - Band12-13-14-17

Global Africa

FDD77%

TDD23%

FDD TDD

Outside of the 1800 MHz and 800 MHz bands, Africa does not (yet)

match up with global trends

The global estimate is ~10%


5

Analysis of African 4G Spectrum Proceeds by Band

Distribution of Africa 4G Transaction Proceeds by Spectrum Band – 2010-2016

“Other” refers primarily to 1800MHz, and in some cases, upper 2GHz bands; Data as of March 2016; based on licence proceeds over 1998-2016 period; including one-off entry fees only; excluding FWA spectrum sales.Source: Xalam Analytics Estimates based on regulator, operator data

African regulators have generated ~$1.5bn in 4G spectrum sales as of

March 2016

700MHz25%

800MHz42%

2.6GHz18%

Other15%

700MHz6%

800MHz33%

2.6GHz51%

Other10%

$0.00 $2.00 $4.00 $6.00 $8.00 $10.00

2.6GHz

4G Average

800MHz

Other

700MHz

US$ million

Distribution of Africa 4G Bandwidth Sold by Spectrum Band –2010-2016

Average Revenue per MHz Generated in African 4G Transactions – by Spectrum Band

African regulators have sold an estimated 650 MHz of 4G spectrum* as

of March 2016

*Including some 1800MHz bundled into 4G Blocks.

The 700MHz/800MHz bands are the most sought after – only 40% of the spectrum

capacity sold, but nearly 70% of all proceeds

The 2.6GHz band carries the lowest value of all 4G bands in the African context

Total: ~$1.5bn (as

of March 2016)

Total: ~650MHz (as of March

2016)


6

Spectrum blocks matter – sales of stand-alone 3G and 4G spectrum attract the lowest average valuations in our sample

The above chart confirms a trending that sees 4G more valuable than 3G was in African markets – possible leapfrog effect

Blocks of Spectrum Matter to Value – And 4G will be Pricier than 3G Was

The 800 MHz Band is now arguably the most valuable of non-900 MHz bands; it is now valued nearly as high as (historical) 2G spectrum value.

For 3G spectrum, the higher values generated in Egypt and the larger quantity of single-band transactions are driving up median value levels.

As operators plot their migration to 4G and seek future-proof spectrum, blocks of frequencies that include 4G spectrum are the most valuable. The inclusion of 4G spectrum in 2G renewal processes is also driving up the average value of spectrum block sales.

Median Value for Sample Frequency Bands in African Markets* Median Value by Technology Generation and Spectrum Blocks in African Markets

$0.000

$0.001

$0.002

$0.003

$0.004

$0.005

$0.006

$0.007

$0.008

$0.009

900/1800 MHz 800 MHz 2100 MHz 2600 MHz

Valu

e pe

r MHz

per

Pop

per

Yea

r

In essence, the 800 MHz is valued like 2G was at its height – and

both are valued higher than 3G

The 2.6 GHz band has been heavily

discounted in African valuations

*Median values for markets in which the frequency is sold by a fixed amount, through auction or bilateral negotiation; amounts typically lower in markets with “first come first served” licensing model, or where spectrum is awarded based primarily on non-financial criteria. 3G licence median excluding Egypt (too high). **Very small sample size; Data is as of march 2016 Sources: Xalam Analytics Estimates

$0.000

$0.002

$0.004

$0.006

$0.008

$0.010

$0.012

$0.014

2G-3G 2G - Stand-alone

3G-4G 2G-3G-4G 4G - Stand-alone

3G - Stand-alone

Valu

e pe

r MHz

per

Pop

per

Yea

r Stand-alone 3G or 4G spectrum attracts the lowest

valuations


7

The 2.6 GHz Band – Should it be Valued as 4G, or as FWA/WiMAX Spectrum?

Valuation of 2.6GHz, 2.3 GHz in Sample African Markets - Value per PoP per MHz per Year

The 2.6 GHz band is generally valued as a complementary band – it is priced lower than the main sub-1GHz and the 2100 GHz, but higher than the TDD bands. In African markets, it sells at a 6x-8x discount to other 4G bands (800 MHz and 1800 MHz).

The band is increasingly licensed in block sales combining multiple frequencies, and indeed, its value appears maximized under that type of setup. When sold individually, the bandwidth does not get the “value-pull” benefit from being combined with lower-frequency bands. All the 2.6GHz licenses awarded to mobile operators for 4G purposes in 2015 were awarded as part of a block sale.

There was one instance of a single-band sale for this band (Ghana), which attracted limited proceeds, partly because mobile operators were excluded from the process. Nigeria will similarly auction 2.6GHz spectrum in 2016, with a reserve price point in line with those generated in Ghana.

$0.0000

$0.0005

$0.0010

$0.0015

$0.0020

$0.0025

$0.0030

$0.0035

$0.0040

$0.0045

$0.0050

Tunisia 4G Cote-d'Ivoire 4G Morocco 4G - Leader African 2.6GHz Median Morocco 4G -Challenger

Nigeria 2.6 GHz -Reserve Price

Ghana 2.6GHz Auction Nigeria - 2.3 GHz -Wholesale

Nigeria 2.3 GHz

Pric

e/M

Hz/P

op/Y

ear

Block sales attracts the highest value When sold on a

stand-alone basis, the 2.6GHz band is

valued closer to FWA levels

Cote-d’Ivoire, Tunisia, Morocco were block spectrum transactions; value is Xalam Analytics estimate; Nigeria is reserve price. Data is as of march 2016 Sources: Xalam Analytics Estimates


8

Breaking Down 3G Spectrum Value: The 2100 MHz Band

Niger, Guinea Bissau were block spectrum transactions; 3G estimated based on historical 2G value. The chart excludes Egypt 3G licensing, which is off-scale. Data is as of march 2016 Sources: Xalam Analytics Estimates

Africa 3G: Transaction Values vs. GDP per Capita @ PPP

$0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 $16,000 $18,000GDP per Capita @ PPP

$0.000

$0.005

$0.010

$0.015

$0.020

$0.025

$0.030

Pric

Algeria

Chad

DRC

Gabon

Ghana

Guinea Bissau

Morocco

NigerNigeria

Nigeria

Tunisia

Tunisia

Economic value range for the 2100

MHz Band

More transactions slightly above value

than below


9

Mapping Out Africa’s 800 MHz Band

800MHz Band: Transaction Values vs. GDP per Capita @ PPP

*Only including values for markets in which the frequency is sold by a fixed amount, through auction or bilateral negotiation; Kenya is “suggested” price, not actual; Excl. Moz failed auction; Nigeria 700 MHz transaction is contested; Tunisia, Cameroon, Cote d’Ivoire are Xalam value estimates based on allocation; Data is as of march 2016 .Sources: Xalam Analytics Estimates

$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 $9,000 $10,000 $11,000 $12,000GDP per Capita @ PPP

$0.000

$0.002

$0.004

$0.006

$0.008

$0.010

$0.012

$0.014

$0.016

$0.018

$0.020

Pric

Cameroon

Côte d'Ivoire

GhanaKenya

Morocco

Morocco

Nigeria

Nigeria

Tunisia

Benchmark basis value range for the 800 MHz Band

Old Nigeria Valuation

New Nigeria Valuation


10

Was 3G Worth the Money? The 4G Timing Problem, and Looking Beyond Economics

Stating the obvious – High valuations correlate inversely to return potential; an assessment of the highest 3G valuations in African markets show that the large majority (of those we were able to assess) are NPV-negative. The assessment is even worse for players that are not market leaders, but have paid high valuations.

The rollouts of 4G networks well into the useful life of 3G is making the latter look even worse; in 60% of the markets we examined, the 3G asset still has around 50% of useful value left at the time 4G is launched. In 40% of the cases, the 3G licence still has 75% of its useful life remaining. The launch of 4G impairs this value materially.

On pure economic terms, 3G spectrum investments do not hold up. But in most cases, the investment rationale on African spectrum goes beyond economics. Operators just seek to limit the damage.

% Remaining Useful Life of the 3G Spectrum Asset at the Time 4G Launched

4G launch in Senegal, Algeria, Egypt is projected. Sources: Xalam Analytics Estimates

Number of Years of 3G Service When 4G Launched – Sample Markets

0

2

4 4

5

7

8 8

9 9 9 9

0

1

2

3

4

5

6

7

8

9

10

Cameroon

Algeria

Tunisia

Côte d'Ivoire

Senegal

Ghana

Kenya

France

Egypt

Morocco

Nigeria

UK

Year

s of 3

G Se

rvic

e

3G is essentially leapfrogged

0%

20%

40%

60%

80%

100%

120%

Nigeria

Egypt

Morocco

Kenya

Ghana

UK

France

Tunisia

Côte d'Ivoire

Senegal

Algeria

Cameroon

*Unless the operator can refarm it for 4G purposes; 4G launch in Senegal, Algeria, Egypt is projected. Sources: Xalam Analytics Estimates

The value of the 3G spectrum licence is materially impaired*


11

Is African 4G Spectrum Worth the Money?

Initial returns on 3G spectrum acquisition are not good, and may never be;

The launch of 4G is eating into the remaining value of 3G

3G Hasn’t Paid Off The Returns on 4G are Uncertain

Yet 4G Spectrum is Valued Higher than 3G

Spectrum

High spectrum costs and potentially high rollout costs depending on spectrum available

4G facilitates the emergence of OTT players, which are cannibalizing other revenue lines

The proliferation of Wi-Fi is challenging the 4G prepaid business case

Median value for 4G spectrum in Africa has been higher than 3G value

There is disconnect between valuation on a benchmark basis vs. valuation on a business model basis

The African 4G Predicament


12

A strict application of traditional investment practice suggests that that African 4G spectrum acquisition (and 3G before it), in many cases, is to put it plainly, not worth the money. One of the key tenets in capital investment is that the investor must forgo the investment if the NPV is negative. And yet, as we have noted, African 4G spectrum is one of those peculiar investments where the NPV is negative but operators still have to do it.

The base case for African 4G, in our view, is therefore not primarily an economic one. We see an investment in 4G as more than the potential net present value of cash flows it will likely generate over the duration of the licence. Investing in 4G spectrum is about staking claim in the opportunity to be foundational participants in the build-up of a country’s digital market. In a world that will ineluctably become data-centric, network providers without adequate data-centric infrastructure will be marginalized – and top tier providers cannot afford to be. In effect, the price for 4G spectrum is a price for long term relevance.

The Returns on 4G are Uncertain

Yet 4G Spectrum is Valued Higher than 3G Spectrum

The Case for 4G Goes Beyond NPVs and IRRs

The Case for 4G – More than the Net Present Value of Cash Flows

It’s about being a key player in a data-centric world

If you don’t invest in 4G, somebody else will

It’s the (high) price to pay for long term strategic relevance

Using some alternate measures, the prices are actually not that bad for 4G spectrum, given the fundamental, strategic nature of the asset (see next page).


Xalam Analytics, LLCPart of the Light Reading Research NetworkUS Office: 1 Mifflin Place, Harvard Sq. Suite 400Cambridge, MA 02138London

[email protected]

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