Liquid Telecoms Gains Scale With Altech East Africa Acquisition

Pan-African fibre and satellite backhaul operator Liquid Telecom has agreed to acquire Altech East Africa (AEA), the East Africa subsidiary of South Africa-based technology firm Altech Group . The sale, which is on a net debt-free and cash-free basis, will see Altech sell its shares in AEA in exchange for an 8.6% equity stake in Liquid Telecom. BMI believes t he deal creates significant scale and synergy opportunities for both companies , with the combined assets creating one of the largest single backhaul infrastructures in the region .

According to a statement to shareholders on the Johannesburg Stock Exchange on January 28 2012, Altech said it intends to hold the 8.6% stake in Liquid Telecom as a ' strategic minority interest shareholding ' . It also plans to buy additional ordinary shares in the operator for around US$16.5mn , but will not be entitled to dividends for the first 18 months after the completion of the deal. Altech will be entitled to 10% voting rights and a representation on the board of Liquid Telecom. Meanwhile, Liquid Telecom ' s controlling shareholders have indicated that Altech may be able to increase its shareholding in the future.

Liquid Telecom Shareholding Post Consolidation
Unit Stake Year established/acquired
Source: Altech
Altech Stream Rwanda (ASR) 75% 2007
Altech Kenya Data Networks (KDN) 80% 2008
Altech Swift Global Limited (ASG) 100% 2008
Infocom 80% 2008
Altech Digital Networks Limited 100% 2008
Altech Data International Limited 100% 2009

AEA operates a network of fibre-optic, satellite, WiMAX, Wi-Fi and microwave radio infrastructure across key markets in East and Central Africa, including Kenya, Rwanda and the DRC. The firm's subsidiaries also have interests in some submarine cable systems in the region such as TEAMs and SEACOM. Liquid Telecom will assume ownership of AEA shareholding in each subsidiary and intends to acquire more shares from minority shareholders in their respective countries.

BMI believes the deal is a win-win situation for Altech and Liquid Telecom. Altech has taken a hit from its East Africa operations in recent months from a myriad of macroeconomic, operational and industry-related factors. These include a sharp depreciation of the local currency in some countries in the sub-region, network stability and reliability issues, and the loss of big telecoms clients investing in their own fibre network infrastructure. For its FY11/12 results, Altech reported goodwill impairment losses of ZAR240mn (US$26.4mn) in its underperforming East Africa and West Africa operations. The trend continued into its 2012/13 financial year, with pre-tax losses for the six months to August 2012 rising to ZAR485mn.

The challenges Altech faces in its East Africa operations were by no means resolved at the time of the transaction with Liquid Telecom. However, we believe the latter is better placed to tackle them and, potentially, return AEA to profitability. Besides the macroeconomic issues, which are mostly beyond the operator's control, we believe Liquid Telecom's industry expertise and experience, as well as long-term relationships with clients and suppliers will be valuable in turning around AEA's operational fortunes.

Liquid Telecom already operates an extensive network in Southern and Central Africa, providing a wide range of services to telecoms operators, internet service providers and large corporations. We believe the integration of AEA's assets into Liquid Telecom's operations will create significant growth opportunities from scale and synergy. Liquid Telecom currently has around 8,500km of fibre connecting South Africa, Zimbabwe, Zambia and DRC. The company intends to increase this to around 13,500km, to link other countries in the east and west coasts of Southern Africa, including Botswana, Namibia, Mozambique and Malawi. For its part, one of AEA's subsidiaries, Altech Kenya Data Networks (KDN) already has around 6,500km of fibre-optic networks running live across East Africa. These networks, along with Liquid Telecom's satellite and microwave radio, make the operator arguably the single largest backhaul provider in the region.

Furthermore, Liquid Telecom's scale will make it more attractive to multinational corporations and telecoms service providers operating in the region. The company has identified Africa's budding enterprise solutions market as a key factor in its growth strategy and is now better positioned to take advantage of the emerging opportunities. Liquid Telecom had previously announced plans to build data centres in some countries in Southern Africa for this purpose. We expect these to be integrated with AEA's earlier plans to build five satellite data centres in Burundi, the DRC, Rwanda, Tanzania and Uganda. We also expect Altech's continued interest in Liquid Telecom to improve the latter's credentials in the enterprise solutions market, with both firms providing complementary services and solutions.

Finally, it is worth mentioning that Liquid Telecom is majority-owned by Zimbabwe-based telecoms giant Econet Wireless. We expect the deal to acquire AEA and, consequently, access to some of East Africa's biggest economies, to impact positively on the operators' valuation, as well as create new opportunities for service and geographic diversification.


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