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Monday, December 11, 2006

Telenor: Bangladesh Valuation

Telenor reiterated its stance that GrameenPhone is worth US$3bn in a press release over the weekend attempting to calm the flames that GrameenBank have stoked. Telenor owns 62% of GrameenPhone worth US$1.86bn. At Friday’s close, the Telenor Market Cap was US$32.19bn so GrameenPhone is worth around 5% of Telenor. In the overall context Telenor assets GrameenPhone is not substantial, but not immaterial.

I look at the US$3bn and think how can even the dominant cellular provider in Bangladesh with 63% market share be valued so highly?

In the 3Q, GrameenPhone delivered US$105m of EBITDA and US$78m of Operating Profits. There can’t be many borrowings in the division because profit before taxes is within US1m of operating profits. If we annualise the EBITDA to US$420m, it puts GrameenPhone very roughly on an EV/EBITBA of 7x. This is in the ball-park that I’d expect given that GrammenPhone still seems to have quite a lot of growth left but that should be balanced with the risk of an emerging world asset. This is quite a traditional way for analysts to value mobile networks.

The true indicator of value is if Telenor is actually generating some cash from the investment and repatriating the cash back to the head office.

Telenor released a press release portraying that Grameenphone is a win-win for everyone stated:
Over the last 8 years, the company has had earnings (EBITDA) of USD 1.08 billion, and of this amount USD 1.06 billion is invested in the country.
As a shareholder, Telenor has received dividends amounting to approximately USD 55 million while investing a total of almost USD 87 million in shareholders capital. Accepting dividends from Grameenphone reflects the success the company has demonstrated in the Bangladeshi market and is a manifestation of Telenor’s belief in the future profitable growth of the company.
I think the emerging argument with Dr Yunus can be traced to the statement above. GrameenPhone is now probably entering excess cash generating mode. Telenor will want that cash paid out in dividends. It appears that Dr Yunus wants a completely different result. This is from his Noble Peace prize winning Speech:
Our vision was to ultimately convert this company into a social business by giving majority ownership to the poor women of Grameen Bank. We are working towards that goal. Someday Grameen Phone will become another example of a big enterprise owned by the poor.
I would in normal circumstances expect the main shareholder of Telenor, the Norwegian Government (54%) to support Telenor, but it does not appear to be the case:
Minister for International Development, Erik Solheim, says in a comment that it must be a goal to re-invest the profits in the nations where one has invested.
We soon reach a point in poorer nations where one achieves a much greater profit on Norwegian privaate investments than we give in development aid to the same countries, the Development Minister says. The controversy between Grameen Phone and Telenor visualizes difficulties that may arise when Norwegian companies withdraw large profits from poor nations, Solheim says. However, those who invest must be allowed to make a profit. But at the same time they must show maximum social responsibility.
Norway's government minister in charge of business and trade said he's staying out of the conflict, leaving it for Grameen Bank and Telenor to resolve on their own.

To be honest, I do not know what the end result will be, but even if the Dr Yunus vision of giving the company away to its subscribers is not realised, I seriously doubt whether any profits will be repatriated for a long, long time.

In my opinion given this uncertainly, the Telenor holding in GrameenPhone cannot be valued at anywhere near US$1.86bn.

On this my sympathies actually lie with Telenor and I think their problems in Bangladesh may be repeated over the coming years in a whole host of emerging countries for a whole series of operators.