A discussion on how benchmarks are different in the context of a due diligence. Regional benchmarks in developing countries. Meaningful Telecom benchmark Key Performance Indicators (KPI).

1. Telecom Due Diligence and Benchmarking
in developing countries
Le Channel
August 2012
© Le Channel, 2001‐2012

2. Telecom Due Diligence
• A Due Diligence is defined as a
reasonable examination of a
telecom operator in the context The 3 steps of due diligence
of a merger, an acquisition, a benchmarking
privatization or a corporate
finance transaction.
Identify comparable markets
• It is mandated by a buyer, an Regional GDP per Capita
investor or a lender.
• Its focus varies, but normally
includes a shareholder value Select operator
Executing similar strategy Similar market share
analysis.
• The goal of a due diligence is to
evaluate a business plan and to Benchmark on pertinent KPIs
validate its underlying strategy.
It typically involves future
outcomes, projected KPIs.
© Le Channel, 2001‐2012 Page 2

3. Identifying comparable markets
The Benchmark Panel: Selecting regional markets
(here ECOWAS countries)
• criteria often combined for on GDP per Capita
selecting comparable markets:
o GDP (or GNI) per capita
o Population
o Market penetration:
 mobile (% of population);
 fixed, broadband (% of household)
• a manageable panel size is 5 to 10
markets
• if the panel is too large additional Select the Benchmark Panel
filters pertinent to the case may be using data published by
applied: the number of operators, international sources.
the country literacy rate, the Data are more likely to be
percentage of population under the consistent across all
poverty line, etc.
countries.
© Le Channel, 2001‐2012 Page 3

4. Neighbors and Regions
• Neighboring countries are Mobile penetration
important as culture and in the West‐Africa region
behaviors often do not stop at
borders.
• A country however may be
singular in its immediate region
as illustrated on the first graph:
mobile penetration in Niger is
lagging in the West‐Africa
region.
Mobile penetration
• Selecting comparable countries in sub‐Saharan Africa
on GDP per capita and
extending the “region” to the
sub‐Saharan Africa creates a
better benchmark panel in
which Niger is not singled out.
© Le Channel, 2001‐2012 Page 4

5. Time offset benchmark
Looking at comparable Mobile penetration in ECOWAS selected countries
countries back in time
Due Diligence
Benchmarking often
involves the identification
of similar situations in a
reasonable past to
Half of selected ECOWAS countries reached Burkina Faso’s
compare and evaluate current mobile penetration 3 to 4 years ago. Mobile
future outcomes. operators in these countries that have executed a similar
strategy are likely to help validate the target’s business
plan, based on 3 to 4 years of actual data.
More on time‐offset benchmarks:
See “Looking back in time for Benchmarking Mobile Operators in Developing Markets”, 2012
a white paper available at www.lechannel.com
© Le Channel, 2001‐2012 Page 5

6. Selecting an operator
in each market
• In most cases the strategy HIGH
profile, e.g. value‐based vs. Value‐based
Too‐good‐to‐be‐true
operators
low‐cost operator points to one
ARPU
operator in each country of the
benchmark panel. Low‐cost
Too‐bad‐to‐last‐long
• The market share or the order operators
of entry in the market may also LOW
be used for mobile operators. LOW Revenues per employee or
Subs per employee
HIGH
• Sometimes the lack of
Mobile 2nd‐ and late‐entrants in Africa
information disclosed by the are mainly low‐cost operators
operator of choice will lead to 40%
the selection of the second 35%
Value‐based
best. There is no point in Share of revenues
30%
25%
keeping an operator in the 20%
15%
benchmark panel if its KPIs are 10%
Low‐cost
unknown. 5%
0%
0% 5% 10% 15% 20% 25% 30% 35% 40%
Share of subscribers
© Le Channel, 2001‐2012 Page 6

7. Benchmark KPIs
Here are examples of mobile operator KPIs in developing markets among hundreds of possible indicators:
• Subscription base • Performance
– # of active subs – AMPU: Average Margin per User
– Monthly churn – Subs per employee
• Coverage – Average Revenue per employee
– Population – Subs per BTS
– Area – Subs per sq. Km (urban)
– Km of roads/rail – Subs per sq. Km per MHz
• Market Share • CAPEX
– Of subs – CAPEX as a % of Revenues
– Of revenues – CAPEX per sub
– Of minutes – CAPEX per site (BTS)
• Growth • OPEX
– Share of net adds – OPEX per sub
– Marginal revenue per sub – OPEX per site (BTS)
• Usage – OPEX per MoU
– Minutes of Use (MoU): prepaid, postpaid, blended; – Network OPEX as a % of Revenues
incoming/outgoing; international… – Total OPEX as a % of Revenues
– Roaming: MoU in, MoU out • Marketing
– Outgoing SMS per sub – # of Points of Presence (POP)
– Average call duration – Marketing costs as a % of Revenues
• Revenues – Subscriber Acquisition Costs (SAC) per net add
– ARPU: prepaid, postpaid, blended – SAC as a % of ARPU
– ARPM: prepaid, postpaid, blended – Subscriber Retention Costs (SRC)
– Average Revenue per call – SRC as a % of ARPU
– Average Revenue per site (BTS) • Financial & Valuation
• Interconnect – EBITDA Margin
– Interco costs as a % of revenues – EBITDA / CAPEX (ROIC)
– Interco Revenues as a % of revenues – Revenues / CAPEX (Capital Productivity)
– Ratio Interco cost / Interco Revenues – EV / EBITDA, per sub
– etc.
© Le Channel, 2001‐2012 Page 7

8. KPI variations provide
complementary perspectives
• The CAPEX of this West African CAPEX as a % of Revenues
mobile operator (the “target”) 35%
CAPEX as a % of revenues
30%
may seem high as a % of 25%
revenues. It is actually in the mid‐ 20%
15%
tier of the benchmark in term of 10%
CAPEX per subscriber, especially 5%
0%
when computed as a multiple of
the operator ARPU.
CAPEX per sub as a multiple of ARPU CAPEX per subscriber
7.0 X $50
CAPEX per sub in USD
$45
as a multiple of ARPU
6.0 X $40
CAPEX per sub
5.0 X $35
$30
4.0 X
$25
3.0 X $20
2.0 X $15
$10
1.0 X $5
0.0 X $0
© Le Channel, 2001‐2012 Page 8

9. Sources of benchmark data
Good sources of data include: Ratio interco incoming/outgoing vs. market share
• Telecom operators’ annual reports, quarterly 250%
financial results, and presentations to investors
(made public). 200%
Ratio incoming/outgoing
• Telecom regulators’ reports and official 150%
presentations
• NGO public reports and databases, in particular the 100%
World Bank, the IMF, the ITU, etc.
• Some investment banks’ publications (e.g. Merrill 50%
Lynch Global Wireless Matrix).
0%
0% 10% 20% 30% 40% 50% 60%
Market share
70%
60%
EBITDA Margin Interconnection costs and revenues are sensitive data that
operators are typically reluctant to share.
EBITDA Margin
50%
40%
30%
20%
Since 2001 Le Channel has analyzed and compiled data in
10% developing countries from hundreds of telecom
0% operators’ annual reports, dozens of regulators’ reports as
well as many public reports from international NGOs.
The resulting database is very instrumental in creating
meaningful benchmarks, which combined with our
professionals’ comprehensive knowledge of technology,
networks and operations provides a solid framework for a
Operators’ annual reports provide many financial KPIs due diligence in a developing country.
More at www.lechannel.com
© Le Channel, 2001‐2012 Page 9

10. Definitions Notes
• ARPU or Average Revenue Per User is a measure of the monthly revenue • All graphs published in the present document have been created using
generated by one customer phone. ARPU includes not only the revenues public information.
billed to the subscriber each month for usage, but also the revenue
generated from incoming calls, payable within the regulatory • “Target” refers to the operator subject to a due diligence, event if all due
interconnection regime. To calculate the ARPU, the total revenue diligences are not M&A driven.
generated by all subscribers during the month is divided by the average • Illustrations are extracted from several different projects. As a result
number of subscribers over the month. “Target” may refer to different operators from one page to another.
• ARPM or Average Revenue Per Minute is a measure of the average • All material, graphs included, may be published or reproduced as long as
revenue generated by a one minute call. To calculate the ARPM, the total
content is not edited and source is cited (Le Channel, 2012).
revenue generated by all subscribers during the month is divided by the
average number of minutes over the month.
• ECOWAS. The Economic Community of West African States is a regional
group of 15 countries in West Africa.
• EV or Enterprise Value is calculated as the company market capitalization
plus debt, minority interest and preferred shares, minus total cash and
equivalents.
• GDP, nominal GDP, GDP at current USD. Gross Domestic Product at
purchaser's prices is the sum of gross value added by all resident producers
in the economy plus any product taxes and minus any subsidies not
included in the value of the products. Data are in current U.S. dollars.
Dollar figures for GDP are converted from domestic currencies using single
year official exchange rates.
• GDP per capita at Purchasing Power Parity (PPP) is the gross domestic
product converted to international dollars using purchasing power parity
rates. An international dollar has the same purchasing power over GDP as
the U.S. dollar has in the United States.
• GNI per capita at Purchasing Power Parity (PPP). Gross National Income is
the sum of value added by all resident producers plus any product taxes
less subsidies. GNI per capita is GNI divided by mid‐year population. GNI
per capita at PPP is the GNI per capita converted to international dollars
using purchasing power parity rates. An international dollar has the same
purchasing power over GDP as the U.S. dollar has in the United States. www.lechannel.com
• ROIC or Return On Invested Capital gives a sense of how well a company is
using its money to generate returns. It is computed as a percentage by
dividing the Net Income less Dividends by the company Total Capital.
© Le Channel, 2001‐2012 Page 10