Breakingviews: Telco IPO is only one way to paint Africa Orange

French telecoms group Orange faces a tough call on floating its African unit. Listing a chunk of the business, which could be worth 13 billion euros, would raise some cash and potentially boost the company’s valuation. Yet Chief Executive Stephane Richard might be better off carving out the division’s mobile towers instead.

It makes sense for a company based in Paris to give far-flung African operations more autonomy, as Richard is considering, according to a statement this month. Barclays and Vodafone have both parked their African divisions under separately listed businesses. Floating a chunk would also bring in funds for Orange to enter the untapped and potentially lucrative Ethiopian market. Crucially, the separately listed African unit could garner a higher valuation than Orange given the continent’s zippier growth prospects.

Richard would be churlish to dismiss that last point. Orange trades at a miserly 5 times forward EBITDA, according to Refinitiv, compared with 8 times for Kenyan market-darling Safaricom and 7 times for South Africa’s Vodacom.

If Orange Africa, which has 122 million customers in 18 countries, maintains its 32% EBITDA margin and hits the 9% revenue growth analysts expect this year, it would deliver 1.8 billion euros of EBITDA. Put that on a conservative 7 times multiple, and its enterprise value would be 12.7 billion euros. Deduct debt equal to, say, 2 times EBITDA, and its equity would be worth 9 billion euros – just over a quarter of Orange’s market capitalisation. Not bad for a unit that brought in just 12% of group revenue last year.

But if he’s looking for a simple valuation kick, Richard might want to consider selling some towers instead. Global pension funds are red-hot on masts thanks to their steady, long-term cash flows. They’re a much bigger investor group than the relatively niche Africa-focused funds. Masts in Europe have fetched almost 20 times EBITDA. Last year, American Tower paid 12 times EBITDA for Africa-focused Eaton Towers. Leaving Orange’s local towers locked within the African business would mean passing up that kind of valuation.

To borrow from the company’s advertising jingle, Orange Africa’s future is bright. The question is how to make it brighter still.

_____________________________________________________________________

Request a free trial of Breakingviews here