Ethio Telecom Prospectus Reveals “sketchy” Figures From Latest Deloitte Evaluation

“No way to know except to believe gov’t”: analyst

The prospectus published by Ethio telecom this week as part of its initial public offering contains dubious and unreliable information which experts say prospective investors should be wary of before making the decision to buy equity in the state-owned enterprise.

The figures included in the prospectus were taken largely from a re-evaluation of Ethio telecom’s finances conducted by consulting giant Deloitte over the last year. Among other things, the evaluation places the value of Ethio telecom’s property, plant, and equipment assets at close to 130 billion birr in June 2024, up from the 51 billion birr value stated in the company’s audited financial statements the year prior.

The prospectus attributes the 155 percent increase to the recognition of property values in line with a third-party valuation.

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“The assets were previously accounted for at cost as local legislation did not permit the recognition of the valuation of these buildings,” it reads.

The restatement also resulted in changes in retained earnings, which have jumped to over 10 billion birr from 1.8 billion birr in June 2023. The 227-page prospectus document points to an increase in profits for the disparity.

The increase has also led to a staggering fall in the operator’s receivables from the Ministry of Finance, to the tune of over 67 billion birr, according to the document.

On the other hand, the company’s other financial assets at amortized cost fell by a whopping 92 billion birr to a little over seven billion birr in the year leading up to June 2023.

Overall, Deloitte’s re-evaluation of Ethio Telecom’s balance sheets has marked the firm’s market capitalization at an even 300 billion birr, or around USD 2.5 billion at current exchange rates. The value is considerably higher than the 80 billion birr valuation estimated by Deloitte in 2021, which was subsequently rejected by Ethio Telecom CEO Frehiwot Tamiru.

The disparity between the two valuations in USD terms, however, was not as pronounced as 80 billion birr would have averaged close to USD 1.8 billion in 2021.

The prospectus places Ethio telecom’s paid-up capital at 100 billion birr divided into one billion shares with a par value of 100 birr. The capital is paid up in cash (29 billion birr) and in kind (71 billion birr), according to the document.

The 300 birr per share price named as part of this week’s IPO announcement places a 200 percent premium on share value.

Ethio telecom was registered as a share company in July 2024 in line with the terms of the Commercial Registration Proclamation, according to the document. The conversion from a public enterprise to Ethio Telecom Share Company resulted in a 300 billion birr drop in authorized capital, according to the prospectus, and raises questions about its status as a share company.

Ethio Telecom Share Company’s current sole shareholder is Ethiopian Investment Holdings (EIH). The structure goes against the Commercial Code, which stipulates a minimum of five shareholders to form a share company.

Nonetheless, EIH, which acts as the majority shareholder in Ethio telecom on behalf of the federal government, has recognized and approved the capital restructure and the revised balance sheets.

This and other aspects of the slew of information included in the prospectus have raised the suspicions of a financial analyst who has been keeping a close eye on the IPO. He shared some of his doubts with The Reporter on condition of anonymity.

“The re-evaluation and market capitalization of Ethio telecom is sketchy. As a result, it ended with the introduction of shares in the public offering at an overvalued price. The reason Ethio telecom’s shares are overvalued is because there is no market system for price discovery,” said the analyst.

He suspects that a genuine market system would have put the share value at much lower than the 300 birr on offer now.

“There is no way to know except to believe the figures stated by the government. All the figures are sketchy; nobody knows how they attained them. The shareholder ownership structure is also not clear. These issues must be resolved before Ethio telecom is listed on the stock exchange,” said the analyst.

The prospectus indicates that an infrastructure sharing agreement with entrant Safaricom Telecommunications Ethiopia Plc involving more than 1,300 towers and extensive cable networks generated close to 1.5 billion birr in 2023/24. It also claims that Safaricom controls no more than 5.5 percent of market share.

Ethio telecom’s trade payables climbed by 41 percent to 38 billion birr over the last financial year, with payables owed to foreign creditors accounting for close to half. This presumably includes USD 19 million in outstanding obligations to Ericsson left over from a USD 400 million loan facility from the Swiss telecoms giant in 2014.

Potential Risks

The prospectus lists several concerns that may cast a shadow over the IPO and Ethio telecom’s listing on the upcoming Ethiopian Securities Exchange (ESX).

Key among them is the massive amount of voting power to be retained by EIH even if all 100 million shares on offer as part of the IPO are bought by prospective investors.

“The Majority Shareholder, EIH, will possess sufficient voting power to have an influence on all matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions,” reads the prospectus.

It states that only the company’s Memorandum of Association will govern the relationship between EIH and incoming shareholders.

Ethio telecom is exposed to foreign exchange risks arising from “various currency exposures,” according to the document. These are largely tied to USD and the Japanese Yen.

“The exact impact of the currency regime change is not known and will only impact the future financial performance,” reads the prospectus.

It also notes that the lack of a response from Ericsson on the alterations to the terms of the loan facility it provided to Ethio telecom in 2014 could be a source of trouble in the future.

“…at the date of the conversion [to a share company]Ericsson had not issued its no objection letter in relation to the conversion of the company and as at the date of this prospectus, the company’s request is still under consideration by Ericsson. This raises the potential for a dispute with Ericsson regarding whether there has been a breach of the financing agreement,” reads the document.

The terms of the IPO dictate that once bought, the shares will be subject to a lock-in period during which they cannot be sold or traded until Ethio telecom is officially listed on the ESX.

EIH is not subject to the terms of the lock-in period.

“There can be no guarantee that the company will be able to successfully complete the intended ESX listing onto the ESX, and/or that the company can successfully complete the intended ESX listing within its desired timeframe,” reads the prospectus.

It states the company’s directors will consider the options should Ethio telecom fail to list on the ESX at all.

The prospect of increased competition as a result of additional telecommunications operator licenses granted by the government is also a risk that prospective investors should be aware of.

Ethio telecom executives hope to sell 30 billion birr’s worth of shares by the time the offer closes on January 3, 2025.

The analyst, however, sees the IPO as “just another government debt instrument.”

“The Ethio telecom shares sale is part of the government’s borrowing vehicle,” said the analyst.