Emerging Markets Telecom Valuation
"An extract from The European, Middle Eastern and African Arbitration Review 2014 - a Global Arbitration Review special report - www.GlobalArbitrationReview.com
In 2001, mobile phones were capable of little more than voice calls and text messages, and cost, on average, around $200; it seemed that mobile communications would not be affordable to anyone but the wealthy few in emerging markets for many years. By late 2003, however, things had started to change. The cost of mobile phones had fallen to a level below which relatively modest further falls in the cost of ownership would make mobile telephony affordable to much larger segments of emerging market populations. Since the end of 2002, the number of mobile subscriptions in emerging markets has grown from around 500 million to around 5 billion. In the early years of this growth, the financial markets’ expectations of growth soared and then, triggered by the financial crisis, contracted. Valuations of mobile operators have followed a similar pattern. Nonetheless, an enormous amount of value has been created building mobile phone networks over the last 10 years. It is hard to think of another industry that has grown to such a scale so quickly, in so many regions, from such a modest starting point.
The speed and the extent of the industry’s growth has contributed to the genesis of numerous disputes with, potentially, very significant amounts at stake. In order to assess quantum appropriately, it is often necessary to value the entity at the centre of the dispute. This article discusses the potential approaches to valuing telecom businesses in emerging markets and the factors important to consider in addressing the inherent challenges doing so.
Development of the telecoms industry in emerging markets
Emerging markets differ greatly. However, the appeal of communication is universal, and there are significant economic benefits associated with efficient communication. Before the advent of mobile technology, large sections of the population in emerging markets had little or no access to the communication technologies that those of us in developed markets tend to take for granted. For various reasons, the existing fixed-line infrastructure tended to be limited in its coverage, and unreliable or expensive. It certainly was not universally available.
In the early years of the 2000s, things began to change. The cost of semiconductors and screens, accounting for a significant proportion of the cost of manufacturing a mobile phone, began to fall quickly. The falling cost of components – combined with the adoption of a common set of technology standards across most of the world1 and a greater focus by manufacturers on cost-effective ways of deploying and running infrastructure in challenging geographies – drove a rapid fall in the total cost of ownership of mobile communications. As the cost of mobile technology fell, it became affordable for, and accessible to, large proportions of the population.