NEWS

Almost two decades after Vodafone Group Plc (VOD) entered Africa, the region -- where most people earn less than $2 a day and mobile phone towers run on diesel -- is turning into one of the company’s biggest profit generators.

 

The rising powerhouse is helping make up for Europe’s slowdown after Chief Executive Officer Vittorio Colao last year had to write down $9.5 billion on the value of Vodafone’s Spanish and Italian units.

 

Vodafone’s biggest African business, Johannesburg-based Vodacom Group Ltd. (VOD), surpassed the company’s U.K. unit in 2010 by profit, and it outpaced the Spanish division the following year. With earnings expanding at 50 percent annually in some countries, profit from Africa could overtake that from all of southern Europe in as little as three years, said Nick Read, the executive who heads the region.

 

“There’s a massive opportunity in penetration that we need to drive forward on,” said Read, who has run Vodafone’s operations in Asia and the Middle East since 2008 and took on Africa in 2010. “Everyone in Africa wants to be on Facebook. They want e-mail. They want social networks.”

 

Africa will be the mobile phone industry’s fastest-growing region by subscribers over the next five years as companies build advanced networks and customers switch to broadband, according to consultant AT Kearney Inc. While Europe has more mobile-phone accounts than people, there’s ample room for handset ownership in Africa to grow, from about 73 percent of the population last year to 85 percent in 2015, reaching 900 million users, Kearney predicts.

 

In addition to Vodacom, which has customers in South Africa, the Democratic Republic of Congo, Mozambique, Tanzania and Lesotho, Vodafone has a 70 percent stake in Vodafone Ghana and a 40 percent holding in Safaricom Ltd. (SAFCOM) in Kenya. Vodafone also co-owns an operator in Egypt with the country’s fixed-line monopoly, Telecom Egypt. (ETEL)

 

Vodafone reported 939 million pounds ($1.5 billion) in earnings before interest, taxes, depreciation and amortization from its 65 percent share in Vodacom in the six months ended in September. That was an increase of 15 percent from a year earlier excluding the effect of acquisitions and currency swings. The profit margin at Vodacom increased to 34.2 percent of sales from 33.7 percent from a year earlier, while Italy’s margins dropped 1.9 percentage points and Spain fell 5.5 percentage points.

 

“The potential in Africa is enormous, I could see it becoming a second China in terms of growth,” said Ralph Szymczak, a telecom analyst at Landesbank Baden-Wuerttemberg in Stuttgart, Germany. “Vodafone definitely stands to benefit.”

 

Vodafone and its rivals have found that building a modern network from scratch in countries with high growth rates and little infrastructure has given them the chance to become banks and Internet providers as well as phone companies.

 

In sub-Saharan Africa, where just a quarter of adults have a bank account, 16 percent of people say they’ve used a mobile phone to pay bills or receive money, according to the World Bank. About 70 percent of sub-Saharan African adults live on less than $2 a day, the World Bank estimates.

 

M-Pesa, Vodafone’s mobile payment system, is used by 15 million people in Kenya and moves the equivalent of 31 percent of the country’s gross domestic product through its system, according to Safaricom Chief Executive Officer Bob Collymore.

 

“You can pay hospital bills; you can pay taxi bills; you can pay your satellite” TV bill, Collymore said. M-Pesa takes a fee for each transaction it processes, ranging from 3 shillings (3 cents) for small payments to 100 shillings for bigger transfers, up to 70,000 shillings.

 

M-Pesa is in eight countries and has begun offering savings accounts and other banking services in some markets. The system is more successful than traditional banks because it gives people an efficient way of sending small sums and doesn’t require a bank account, Collymore said.

 

Vodafone entered Africa in 1994, the year South Africa ended Apartheid, as one of the founding partners of Vodacom Group. Fixed-line provider Telkom South Africa sold its stake in Vodacom to Vodafone in 2008. A year later the company floated its shares in Johannesburg. They have more than doubled since the initial public offering, compared with a 27 percent increase for Vodafone. MTN Group Ltd. (MTN), Africa’s largest wireless carrier and the No. 2 operator in South Africa, has gained 58 percent over that time period.

 

While Africa is a priority for Vodafone and rivals such as France Telecom SA (FTE), they must grapple with limited infrastructure. Vodafone also faces a growing challenge from MTN, which has 183 million subscribers in 22 African and Middle Eastern markets. “Intense competition” has forced Vodacom to cut rates for mobile broadband in order to take market share, Co-CEO Shameel Joosub said on a conference call in November.

 

Vodacom’s average revenue per megabyte in the six months ending in September fell 24 percent from a year earlier in South Africa as average monthly usage on smartphones grew 46 percent.

 

Shifting regulatory environments and corruption have been “a constant struggle” for Vodafone in some markets, Read said. And last year, Vodafone’s unit in the Democratic Republic of Congo was ordered to pay $21 million to settle a dispute with a contractor.

 

The network investment needed on the continent will be on the order of tens of billions of dollars, predicts Issam Darwish, CEO of African wireless tower company IHS, which has operations in Nigeria, Ghana and Sudan. Much of the cost comes from the need to include backup generators and batteries to guard signals against power failures -- not something carriers in the U.S. and Europe have to worry about, he said.