Saving Zamtel through Private Equity: Sink or Swim
Telecom, Zamtel

According to the Mckinsey Annual Report for 2016, on private market, there was a huge capital flow into the private equity market space of 625bn dollars into various firms globally, and assets under management also grew to 4.7trillion dollars. Subsequently the number of firms is at an all-time high and the amount of dry powder (marketable securities that are highly liquid and considered cash-like) is also high given the actual volume and velocity of deals.

 

Given the above global private equity state of affairs, it’s easy to infer the connection between private equity financing and Zamtel’s struggling performance throughout the years. The Zamtel debacle goes back to 2010, when the company was sold for 394bn dollars on the grounds that the government had failed to recapitalize it. The then Minister of Finance who oversaw the transaction, Stumbeko Musokotwa, also added that Government decided to sell the company because it had become a drain on the treasury as it was making huge losses, citing the $2 million loss last year. What ensued was the ‘nationalization’ of the company with the 75% shareholding that was sold to LAP Green being given back to the government. The twists and turns continued, this year (2017) the London High Court ordered Zambia to compensate Libya with 380bn dollars for nationalizing Zamtel.

 

Having looked at all this, it’s safe to suggest that private equity financing could be that last best hope to save Zamtel. Zamtel is a quasi-government institution, it has its own governance dynamics and capital structure, but if we were to save this institution and make it a viable commercial entity then we have to seriously consider private equity financing (IDC should be taking notes at this point).

 

Private equity financing has its pros and cons, owing to the fact that PE firms often boost returns by using leverage (borrowed money). This kind of a deal is called a ‘leverage buyout.’ The PE firms pool funds from retail and institutional investors, they then use these funds to buy a majority stake in a company and make it more valuable, so that it can sell its stake later at a profit.

 

This form is mostly used in turn around deals, where a company is in financial trouble and the private equity firm uses its money and expertise to return it to profitability. The million dollar question is, what’s the ‘catch 22’ then? Obviously there’s a trade-off to be made, the PE firm has its skin in the game, therefore a dissolution of ownership from the initial shareholding structure and a change in the management structure of the company is inevitable.

 

Currently, the company is in a quagmire. It wants to compete with cash rich peers, MTN and Airtel in product pricings. The recent slashing of data bundle prices (price war) from all the telecoms was sparked by rumored fourth telecom provider that’s coming following the April 2017 cabinet approval of an additional mobile provider. There lies in the problem for Zamtel, it doesn’t possess the financial muscle to pull out such a stunt without bleeding cash. The disruptive force of the fourth telecom company will alter the oligolistic market structure and consequently dwindle Zamtel’s market share and balloon its cash position problems.

 

Zamtel has its own unique strengths. It is the sole provider of fixed dial-up telephone services and it has one of the longest optic fibre connections (second to Zesco’s Fibrecom). It can easily improve and maintain this unique position. Currently, it’s the third largest mobile telecom provider behind MTN and Airtel, with slightly above 2million mobile subscribers. With the current plans of getting into the mobile money space, Zamtel has the benefits of learning the best practices of the M-Pesa model under Safari Com from Kenya or the Eco Cash model from Econet Telecommunications from Zimbabwe.

 

Once all above business development plans are in place, it will be easy to attract the best PE firms from across the globe to invest into Zamtel and turn it around. There are numerous examples in the telecom industry where private equity financing has been successful. For example, Doughty Hanson, one of the best PE firms in Europe, bought a Hong Kong-based City Telecom for 644million dollars as well a 290million dollars of PE funds that was invested into AboveNet a UK based telecom.

 

Going forward into 2018 and beyond, Zamtel needs to evaluate its position and consider private equity financing. Additionally, the plans that all state owned enterprises will eventually have to be floated on the Lusaka Securities Exchange, calls for no better time than this, to turn Zamtel into a profitable company in accordance with the LUSE listing rules!

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