Reference Reports

AFRICA: the Virgin land for investing

The SCOTSMAN, James Dow, Sat 3 Jul 2004

AFRICA is a continent blighted by war, disease and poverty. Or so we are often told. And that's a large part of the battle for the African business community - struggling to overcome this gut reaction of so many foreign investors. Three cheers, then, for Sir Richard Branson.

Branson's Virgin empire confirmed to The Scotsman yesterday that it is looking seriously at setting up both a low-cost airline and a mobile phone network on the African continent. Its investment has the potential to spark a reappraisal of some of the world's most under-appreciated economies. Branson is not an idiot when it comes to spending his money. He knows the war, disease and poverty story is a somewhat lazy generalisation.

An African no-frills airline "is something we've looked quite hard at", said Virgin director Will Whitehorn. "It's still early stages, but I wouldn't bet the house against it. We're also looking at mobile - it's been booming for the past couple of years now." Part of Virgin's interest is opportunistic. Many of Africa's domestic airlines have been under severe financial pressure since the events of 2001. Their ability to cope with a well-capitalised new rival is limited.

"And parts of the African economy are really starting to pick up," says Whitehorn. Namibia, to take a handy example, yesterday reported GDP growth of 4.5 per cent in the first quarter of 2004, versus 1.5 per cent in Q4 2003.

Whitehorn points out that Virgin Atlantic already flies to four cities in Nigeria and South Africa - "so it's a natural market for us to look at domestic operations". With a flotation of Virgin Mobile expected to raise £700 million this month - and with its sister wireless joint venture in the US due to float next year - the group is looking at a predicted pot of around £1.65 billion to invest. Whitehorn stresses that Virgin America is the airline startup first on the group's agenda. But he says Virgin will start looking at an African project in 2005.

Mobile telecoms is a different story. "People find it hard to believe," says Whitehorn, "but mobile saturation rates in parts of Africa are higher than in Western Europe."

Partly that's because mobiles are "as much a status symbol as a fridge or a TV in the 1950s in Britain", he adds. But more to the point, Africa is a vast continent where fixed-line telecoms are in short supply. It's a natural market for mobile usage. Masts on the ground can link to already-orbiting satellites, doing their job over hundreds of miles. Demand is clearly there. Mobile subscriber numbers across Africa grew by more than 1,000 per cent between 1998 and 2003, to a current 51.8 million. Mobile usage long ago passed fixed line, which stood at 25.1 million at the start of this year.

With only six mobile users per 100 inhabitants, however - despite those high density areas - African markets still have plenty of growth left in them. The most conservative forecast by research group ITU says 10.2 per cent of Africans will have mobiles by 2010 - double the existing base.

South Africa, of course, is already a well-established market. Local giant Vodacom, 35 per cent owned by Vodafone, has just unveiled annual revenues up 19% to 23.5 billion Rand. In pounds and pence, that's a turnover of about £2.1bn, which equates to over 60 per cent of what O2 earned last year in the UK - one of the world's biggest wireless markets.

In fact, so competitive is the South African mobile industry that Vodacom has been battling a squeeze on its margins. That's one of the reasons that it, like Virgin, is interested in sub-Saharan markets elsewhere on the African continent. It has already assembled operations in Tanzania, the Democratic Republic of Congo, Lesotho and Mozambique.

Whitehorn declined to say where Virgin intends to put its mobile money. But a good bet looks like Nigeria, Africa's second-largest economy. Local GSM operator M-Tel has just sent a signal that market margins are fat, casually chopping its tariffs 60 per cent. Yesterday it emerged the Lagos government will launch a second mobiles satellite in 2006.

For small investors, the opportunities to put money into Africa are still poor. Typical emerging economy equity problems - scant stock coverage by analysts, illiquid markets, currency risks and bad governance to name but a few - are all too common. But investment by the likes of Richard Branson can only help to improve the image of the African continent with large foreign investors. And in doing so help its virgin markets grow stronger.


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