Airtel Africa/TPG: private equity makes a good call

Airtel Africa may have found a new calling. In recent years, the London-listed mobile operator has moved into the fast-growing phone payments business. Private equity firm TPG has taken note, announcing plans on Thursday to spend $200m on a 7.5 per cent stake in phone payments holding company Airtel Mobile Commerce. Airtel Africa’s shareholders should be pleased. The sudden interest in AMC makes its stock look undervalued.

Admittedly, mobile telephony, even in Africa, is not always popular with investors. Currency risk — Airtel Africa operates in 14 countries — and a small share float make some brokers blasé about the African operator. India’s Bharti Airtel owns the majority of shares. An enterprise value of 4.2 times forward ebitda, not including mobile spectrum liabilities, is well under half the multiple of Kenya’s Safaricom. The latter has been a forerunner of using simple payment systems via mobile phone messaging.

TPG’s investment would put a $2.65bn valuation on AMC. That looks chunky considering Airtel Africa’s market capitalisation, which includes AMC, is $4.4bn. Without any debt, AMC should now have an enterprise value of just over 12 times the division’s ebitda, thinks New Street Research. This is a fraction of the typical payment fintech multiples in developed markets.

One can understand TPG’s interest. As of September, AMC accounted for a tenth of group revenues and it is growing quickly on an ebitda margin approaching 49 per cent. Safaricom, focused on the more developed Kenyan market, already generates 30 per cent of its top line from its M-Pesa mobile money unit. Moreover, AMC aims to get into the large Nigerian market, which could boost its revenues even more.

Simplistically, TPG’s implied valuation means that Airtel Africa’s main mobile business, including net debt, would be cheaply valued at just three times its forecast ebitda. That is not far from the pandemic low point. Its stock price jumped as much as 5 per cent on the day the deal was announced. It should keep moving up in the weeks ahead.