Bireme Capital's Evan Tindell on growth tailwinds for African Telecom - Airtel Africa $AAF.L (podcast #181)

Evan Tindell, CIO of Bireme Capital, shares his thesis on Airtel Africa Plc (LSE: AAF), a leading provider of telecommunications and mobile money services, with a presence in 14 countries in Africa, primarily in East Africa and Central and West Africa.

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Transcript begins below

Andrew Walker: Hello and welcome to Yet Another Value podcast, I'm your host, Andrew Walker. If you like this podcast, it would mean a lot if you could rate, follow, subscribe, or view, wherever you're watching or listening to it. With me today, I'm happy to have on for, I think this is the third time, my friend. It says, is it Linnea in the zoom chat, or it is Evan Tindell?

Evan Tindell: Oh, that's hilarious. I never do podcasts on my iPad, but I'm traveling. So I have my... I guess Linnea is my daughter. So yeah, that's fine.

Andrew: Well, look, I appreciate you coming on, traveling. I've been really excited. Really looking forward to this. I think you could probably tell by all the DMS and notes I was sending you and prep for this podcast. But before we talk about the company, we're going to talk about... Let's quickly disclaimer, nothing on this podcast, investing advice, that's always true. But today, we're going to be talking about a London listed stock with basically all of its assets in Africa, which is obviously a developing market all across Africa. But both of those carry a little bit of extra risk versus a lot of the domestic stocks which I'm going to talk about. So, people just please keep that in mind. Not investing advice. Please do your own work. Evan, the company we want to talk about today is Airtel Africa. You had a great note on your blog about 2 or 3 months ago, detailing the thesis for Airtel. I came upon them separately and then realized you were in them, and I wanted to have you on, but I'll just pause there. So, what is Airtel Africa? Oh, I'll include a link to your blog in the show notes obviously. But what is Airtel Africa and why are they so interesting?

Evan: Yes, it's a African Telecom company. Its owned by Bharti Airtel, which is a pretty extremely large Telecom company based in India. They own I think 55% of the shares outstanding. And it's a very interesting asset because, just the Telecom business itself is interesting, because the African Telecom Industry has a number of things that we don't really have in the US. Number 1 we have population growth, 2 there's this huge tailwind of increasing penetration of data use. Still a minority of subscribers have data activated, and even just in terms of number of SIM cards per population, it's like less than 50%, whereas in the west it's 100% plus. And so, despite the fact that you have these kind of tailwinds to growing the business in a track record of growth rate. I think when they bought the asset, it was like 75 million subscribers or something like that and now it's 140 million subscribers. And so despite that those Tailwinds, you have something that's trading for 7 times, free cash flow, something like that, 7 or 8 times earnings. And so to me, it appears to be a really well managed business and it's all come space in Africa. In a lot of markets they are like the challenger, the kind of T-Mobile ask type operator where they're super efficient. They have a little bit lower Arpu and lower pricing than MTN. And most places MTN tends to be the dominant one. Although they actually... Airtel is in 14 different markets. I think most of them MTN is not in actually, but in a lot of markets they're like the growing number 2 player.

And then similar to MTN, they have a very interesting business under the hood, which is this mobile payments business, which I'm sure we'll get into. Where I think on a run rate basis, they have over a 100 billion US Dollars. Obviously it's transferred in local currency but 100 billion US transferred across their network and they generate about 700 million of revenue and over 300 million of EBITDA on that business. And so, 5 billion market cap with a couple billion of net debt, for me that just seems insanely cheap, even if we looked only at the mobile payments business. It's gone from 100 million in revenue to 700 million US. One of the nice things about their accounting is it's all done in US dollars. So it's a 100 million Revenue to 700 million. In some of their markets like 60% of their subscribers actually use the mobile payments business, and in other ones it's like 15-20%. So, I think there's a pretty long runway for growth. And so, I just think, 7 times earnings is insane for this business. Yes, it is Africa, you don't `have to worry about currency, you have a controlling shareholder. So there's all kinds of obviously hair on it, but as far as... I think if you just read the financials, you just looked at the mobile payments business, you would think that it should trade at 20 times earnings. Is my guess.

Andrew: Look, I will be honest, I love this idea but as you said there is a lot of hair on it and a lot of worries, especially... There are a lot of worries that that come with. Let's start with the sexy staff first, actually, right? So you mentioned the mobile money business which is grown quickly. It's doing about 350 million in EBITDA over, and again, that's US over the past 12 months, growing rapidly. I think the real sexy part of this is... One of the sexy parts of the story is, "Hey, they might monetize and crystallized value of the mobile money business." So do you want to talk through that?

Evan: Yes. So they put out a plan, or they put out a goal to IPO the mobile money business by I think that's the end of 2024. Was it 2024 or 2025? I actually don't remember. I think it's 2024.

Andrew: From memory, they have sold a stake in the mobile business to TPG and a few people. They have to IPO that by the end of '25. I think from memory, it's one of the things I found in the AR, is the management team gets like 100% of their salary and a bonus if they IPO Airtel money by the end of their fiscal 2020. I think fiscal 2024, might be calendar. But yeah, so they're really incentivized to get this done.

Evan: Yes. They sold I think it's 25% stake to TPG, I think MasterCard and a couple other...

Andrew: [inaudible] Holding and Chimera Investments. So, I don't know who Chimera is. But yeah.

Evan: I think the valuation was 2.5 or 2.6 billion on that transaction, which honestly now that it's doing 350 million, that was a year or 2 ago. But still that actually feels pretty like they got a pretty good great deal. Those investors on that purchase and now it's doing 350 million EBITDA. If you looked at the financials in this thing and the mobile money business trading in the US, it for sure would trade at 5, 6, 7. I mean, if they traded at 7 billion would be 20 times EBITDA. It's not...

Andrew: Let me give you one question right there. So, I actually don't disagree with you, right? You see this thing, and it's literally like hockey stick up and to the right growing great demographics all this for the mobile payments, right? One thing that did jump out to me is, if I just told you, "Hey, Evan, I know of a company that got a 2 billion dollar, they're a fintech player, they had a 2 billion dollar valuation in March 2021." What do you think that company is worth today? You and I would say, "Oh, well you know without looking to finish the 600 million, 400 million." "Did it file for bankruptcy, what does [inaudible] fact?" So I do look at that 2.5, 2.6 billion, I say, "Oh, that is like 7 times current EBITDA, less on a run rate given how much they're going." But then I'll say, "Oh well, it's Africa and March 2021 was a pretty good time for Fintech." How should I look at that internal evaluation?

Evan: Yeah, that's a great question. I think that would be probably more relevant comparison if it was like a public market valuation in 2021. I think my guess is that TPG thought they got a steal, and obviously when you have MasterCard coming in as well, Airtel probably thought they were giving them a good price, but it's a minority of the business. And they can partner with MasterCard to grow the business across Africa. And so they thought they were getting some add-ons on top of the valuation, I would think. And I think most of the things we would be comping it to, like I'm just thinking of a random company that we were short a firm. Like every other Fintech had negative EBITDA in 2021. Like the vast majority of these businesses were clawing and scratching to acquire customers that they could then lend money to at 7%percent or whatever, depending on... Oh, not not 7%. But, it's like they basically was like a customer acquisition game of not really prime customers and slapping a sales multiple on top of it.

Andrew: I hope Square bought you for a huge premium before all the music starts.

Evan: Yeah, exactly. And then hope someone just ignores the underlying economics of the business, and just pay the even bigger sales multiple, whereas here, you had someone paying 10 times EBITDA and the EBITDA is up by 50% since then. So I think it doesn't quite... I don't think quite a good conversion there.

Andrew: I think we've heard a lot. So one of the really sexy things that it would attract investors to it, the the low valuation on this. But you've got this really fast growing mobile money business, which Airtel owns 74% of after they sold the stakes. Again, I mentioned earlier, the management team, they said they're IPOing. The deal with TPG says the IPO in the next 2 or 3 years. The management seems very incentivized IPO because they get a really nice bonus if they IPO it. So, you could have this real crystallization of a sexy growth story value on lock in the next... Could be at the end of the show, could be next summer, could even be next year, but it seems like it's almost certainly coming.

Evan: Yeah. They definitely... This management team is controlled by a foreign, by a Indian company. And you don't have any control, they don't fit 5%. But in terms of paying dividends and even this whole plan of spinning off the mobile money business, and selling a minority stake, it's designed to... It appears very well-crafted to crystallize the value and reveal the value of the business. And to my knowledge they've given no indication that they're not going fully forward with the plan. So yeah, I think it seems like year, year and a half and you should have an event there, which reveals how undervalued the stock is right now.

Andrew: I want to go to some of the risks because the risks are really important to think about here, but I guess since we've just been talking about mobile money, maybe you should just quickly highlight the sum of the parts here, right? And the stock is trading for a little above, is that a 100 Pence or 100 pounds? I can never remember what it is in London.

Evan: It's pence. I tried put the idea in some zero and I didn't realize that they were going to have it be in pounds on some zero. So I put my target as 300, and so I had a friend be like, "Ah." And my business partner was like, "I don't think a 30,000% return target is really that reasonable." "I love the idea, but"

Andrews: Shoot for the stars.

Evan: Yeah. So you buy it in pence.

Andrew: So trades about 100 Pence. Why don't we just quickly talk about how you look at the sum of the parts here.

Evan: Yeah, so I will say this. First of all, some of the parts get a lot of hate. I'm not big on some of the parts, I think it's really important that you always need to pencil out an actual... Like it needs to translate to IRR, right? And in this case I really think it does because you can value the sum of the parts, but the mobile money EBITDA is going to translate to free cash flow pretty quickly. So that's just some of the parts caveat. But let's say 350 million of EBITDA the mobile money business may depend where you think it's worth. If you think that's worth 5 billion dollars, that's basically the market cap of the firm right there. And then you have another, around 2 billion of EBITDA in the core telecom business against one point something billion of debt, and we could debate how you want to look at the leases and whatnot. Because I think 1.9 billion of lease liability is which I don't like to include in a price value, but the counting rules tell me differently. And so you have 2 billion of Telecom EBITDA that I think should trade for... It's like they do a 50% margin versus Verizon at 35%. So, it's a pretty good business. I think it trades for at least 5 times. So that's 10 billion. So 10 billion plus 5 billion is 15 billion, less 2 billion of debt is 13 billion. And so on 3.8 billion shares outstanding, it should be trading for over 300 Pence, I think, easily.

Andrew: The only 2 differences I have is... And you can tell me and we can live Workshop this. I take out the 26% that TPG owns of the mobile money business.

Evan: Oh yes.

Andrew: [inaudible] But aside from that, I was just using their net, that number when I built a simple thing. But when I do both of those adjustments, I still get like 250 Pence per share. So instead of 3x upside, it's 2.5x or whatever, but it's still quite at the... Let me ask some questions on this. So you mentioned the... I guess just sticking on the sum of the parts and there are some important other questions we have. But you mentioned 5 times EBITDA for the mobile business, and one thing that jumped out to me, and I was talking about this with a friend yesterday, is hey now, Airtel's not killing their customers with lead as Verizon AT&T and stuff might be doing, I don't know. But Verizon trades for about 6 times EBITDA, right?

And you could make an argument, "Hey, Airtel's not killing their customers with lead, Airtel's a real grow story, their customers base is young. A lot of it is still on 3G. They've got a clear version, so its a 4G, selling more services. Plenty of room for Arpus to grow as the population gets a little wealthier. There's not a lot of substitution because these are very poor countries. They couldn't afford satellite service. They can't afford [inaudible] Like there's a great story about that. But I could also say, "Hey, Rising is developed market country with no geopolitical risk [inaudible] and it trades for 6 times EBITDA. Like generally, developing Market countries trade for lower multiples than developed market country. So, when I look at that, I don't know what the right multiple is, right? But could you talk me into, "Hey, maybe it should trade for 4 times giving these risks of all the developed..." I mean every developed Market, Telecom trades for like 6x, so I just don't know.

Evan: Yeah, you can. There's a bunch of puts and takes, right? So on the plus side, you mentioned this, they have demographic growth, they have penetration within the population growth, they have the essential nature. This is people's only access to the internet, right? Like, so there's no substitution like you said. I think EBITDA translates more closely to free cash flow than for Verizon. EBITDA margins are higher, I think they have a better track record of growing market share within their markets relative to their peers. So in that way, maybe the better comparison is something like T-Mobile, which trades at a higher multiple. So I think everything almost everything accepts currency, and Africa, which obviously are tied at the hip, would say that it should trade at a higher valuation.

I think if you only looked at the numbers you would be like, "This is a way better business than Verizon." You would be like, "This is so much better than Verizon." And the numbers are translated into US dollars, so we can get. There's some tricks with that, given some of the currency moves we've seen recently, but I think ex everything else besides the fact that it's developing, should be in a shredded higher multiple. And then maybe the fact that it is Africa and you have to worry about currency means that it should trade at the same multiple. I think I'm hard pressed to think it should trade at much lower. Although, arguably like the math that we just went through, would say that the market price says it's trading at 1 times EBITDA, or half a times of EBITDA if you net out the mobile money business. So certainly that seems too low, and so I think anywhere between 3 and 6 times EBITDA, you'll end up making a lot of money, and it could be higher.

Andrew: It's also one of those things where it's like... I think with coal companies, like okay, if a developed market coal company is trading for 2 times EBITDA, and you're like, I want to discount on a developing market countries coal. I understand where you're coming from, but 2 times EBITDA is like two and a half times cash flow. You can't go much cheaper than that because eventually just like, "Hey I want to trade this at 4 days worth of free cash flow or something, you know. Like you just feel like you...

Evan: And I think the cheaper the absolute valuation of the business, the more the valuation implies that there are problems with the... Or there are issues with the business in terms of like for Verizon Capital intensity, competition, substitution, that will dominate more than the geographic location of... I think if all the competitors were trading at 20 times EBITDA, right? Then I think you have more of an argument of why it should trade for much cheaper. But even here like those things that I read off, most of those things are actually better in Africa. So I think you're hard-pressed to say it should trade 2 times EBITDA, in my opinion.

Andrew: Let's quickly talk currency, because you've got to stock the trades [inaudible] They report are all of their financials in USD, but obviously the local markets have different currencies. So let's talk about currency risk and how you think about that here?

Evan: Yeah. So it is substantial the biggest... Just like a broad view, most of the currencies that they operate in, I don't know, I forget how many there are in total. But they operate in 14 different countries and some of those are in currency blocks, and 1 or 2 of which are actually pegged to the euro, which is nice. And then a couple of them... But then most of them are free-floating or semi free-floating. And they've all depreciated against the dollar at a mid to high single digit rate, except for 1 or 2 which have been worse than that over the past. Depends on how far you go back, 5, 10, 15, 20 years, it's been pretty consistent, kind of high single digit rates. Now I think there's a couple factors that help out with that. One is the financials are in US dollars, so any currency effects are obviously for the most part, well Incorporated in the financial statements.

And they've still been able to grow on a US dollar basis to spike that. 2, I mean, from a purchasing power, parity standpoint, you would expect them to be able to... The reason why I'm a huge component of currency moves is you have local currency inflation, which means prices go up in local currency and then roughly in dollars, purchasing power parity would dictate that they should be roughly the same. So you have that factor where they should be able to grow pricing and local currency if there's that much inflation. And finally, you have this major tailwind of people using more data, using more minutes, and against price by minute and price per gigabyte. So that is also a tailwind, although I actually make the argument that it's very important that they have that, because purchasing power parity is nice. But in a lot of these countries, the prices for Telecom services are actually regulated. So it's a more sticky.... They have gotten through some price increases in places, but it's stickier than coal, it's bigger than some random commodity that's not regulated by the government.

Andrew: I really like that point in your write-up, that, hey, because data is inherently deflationary as you get more services and you go from 3G, to 4G. Like if you've got... Correct me if I'm wrong on any of this, a lot of these are regulated on price, Right? The local government says, "Hey, you can't charge more than a dollar per gig." It's like, "Great, our prices are actually deflating, so it's a nice hedge against regulation to nice hedge against inflation," As you're saying, it's just a nice hedge in general. Not that it's perfect, but it's nice.

Evan: Yeah. And if you look at any developed market, what you've seen is prices deflate massively per gigabyte. So if they're even allowed to just hold it flat, then that's basically like inflationary pricing that they were able to take advantage of.

Andrew: Let me go to, related to the currency risk, right? So the big headline risk here is, "Hey, this is Africa." A lot of these are developed markets, a lot of these are poorer, the governments are less stable. And some of that actually is a benefit. Like, I think one person ask, "Hey, what about Starlink?" And the answer to Startlink is, "Hey, it's Starlink, receiver cost $1000 to send and these people are paying $2 per month for their mobile service. It's like want it to subsidize and they could subsidize them for a cool 20 years worth of more revenue or something. So, it's nice in that but just going to the political risk, right? I was talking to a friend and said, "Hey, if you're going to invest in these, I understand you're looking at it and you're saying look at the growth here." I was looking at Helos[?] Towers, which is another. Said, "Hey this could be American Towers AMT 2025 years ago" which went on to be like, 100 backer. This could be huge and he said, "Look, I understand you're putting your business analyst hat on." "But what you need to do is you need to go put on your historian and geopolitical hat on." And say, "Hey, why is the government not going to seize all of these from me?" Why is this economy not going to collapse into civil war and all this sort of stuff? So how would you respond to that type of risk?

Evan: Yeah, I think they're... This was something that we thought about a lot.
And I think there's a number of reasons why I think it's unlikely that a government would seize the assets. And the first is that these are super critical infrastructure for just the operating of the entire economy. And I don't think the government really wants to risk some type of... Most governments don't want to risk the Telecom system malfunctioning after they took it over. Of course you could concoct all sorts of scenarios where the government just steals it, but keeps the people operating it and then sells it to the highest bidder or something. But I think even that risks disruption to service that I don't think politically is very turnable, especially considering how vital these systems are to the development of the African economy. 2, the government already has huge hooks into these things, in terms of economic exposure to the development of these assets. And those are just profits taxation. Part of the valuation is that these companies pay roughly 40% income tax rates across the business. That's what Airtel ends up paying. You also have spectrum payments that companies have made.

I think last year they paid 300 million dollars for spectrum in Nigeria and one or 2 other countries. And so governments are able to monetize it that way. I think you can theorize that at some point down the road, maybe the Spectrum rules will become so punitive that it'll take increasing amounts of their profit to deal with that. But, I don't know. It doesn't seem likely to me for them to want to risk disrupting the functioning of these assets given how vital they are. And also, in a few cases, you actually have some subsidiaries trading on local exchanges. I don't know if you saw that, but I think it's maybe like Malawi and Tanzania. They have minority stakes that trade on local exchanges, and so the government... I don't fully know the reason, I think the government basically put in rules with respect to local ownership in an effort to spread the wealth around in terms of making sure local investors profit from the growth of these businesses. And so I think in those cases that will also tie the hands of the government a little bit. Their investors are already participating and so they would be hurting their own citizens if they overly burden these businesses with taxes.

Andrew: One friend when I told him you were coming on for Airtel and we're talking about it. He said, :Hey." I told him I was worried about nationalization. Said, "Go look at the history of nationalization." Is very much what you're saying but go look, the history of nationalizations of telecom companies are disaster, and when your Telecom nationalization is a disaster, it's very obvious to your residence. And that's the type of thing that get people out on the street. Especially now if I can't watch
my Netflix on streaming, that is the type to think, "Well, there is 2 hours in my free time gone." "I guess I can go ride in the street." It's something that is very obvious. And the heat, if you look recently, people even the most socialist countries now, generally don't nationalize the Telecom company for exactly all the reasons you're laying out.

Evan: Yeah. Look, if I can only imagine, like in Kenya, Safaricom's Mpesa network does more than the GDP of Kenya in like peer-to-peer transaction, similar to Airtel money. And if that went down for a week in in Kenya, the entire economy would basically... Like a huge swaths of the economy would just cease to function basically, and I doubt that that's something that even the most hardened dictator would want to risk. They actually had a... I forget which country, maybe was Uganda. One of the countries put a 1, or 2% tax on mobile money transfers a couple years ago, and then there was such an uproar then they actually ended up removing it. And I think it just goes to show... I have to remember which country that was, just because it show that if you mess with people's... Don't mess with people's phones. I think that's probably a pretty good rule.

Andrew: So you mentioned the tax in the mobile payments but I guess there's... Tax on mobile payment's one thing, like that shutting the whole economy down, we can talk about seizure of that in second. But what about tax on the Network's, right? I worry about not necessarily men and with guns going and seizing all the towers and seizing the Telecom. But I do worry like almost the the frog that boil slowly where "Hey, nice Telecom company you got there." It's really important, we need to fund the deficit. Last year it was 10% taxes on Telecom, this year's 12, next year's 14 and then suddenly you and I are talking. 8 years from now it's like, "Oh well, Airtel pays 40% of revenues and taxes in all these countries, because it's not that they're seizing them, they're just taxing all that economic probability out of them.

Evan: Yeah. I suppose something like that is, I think possible. I feel like that would also involve pretty large political risks, just because... You need these companies to invest in the future, right? These companies are like some of the most important technology businesses in Africa, in terms of just bringing Africa into the 21st century, 22nd century. 1 of the words [crosstalk] into the current century in terms of digitizing the economy. You need them to have Capital to build the towers, to lease the towers, to invest invest in R&D, and build the next generation of infrastructure. You have Airtel, is also working on... As far as 70,000km of fiber that they've built, I think. And so...

Andrew: I think it's 75 for memory. But yeah, something like...

Evan: It's a lot of fiber. And so, I think they want these businesses to be able to invest, and so the only way to do that is to let them make profits.

Andrew: I'm of 2 minds there because I do agree with you just that you think domestically, right? The most powerful lobbies tend to be the Telecom lobbies among the most powerful, because they employ so many people, and they invest so much money. You go to the representatives like, "Hey, we're a top 3 employer in your district, and we also make the largest Capital Investments consistently in your District." The lobbying arm seem to be very, very powerful when you get that. It's going to be the same here, right? These might be one of the 5 largest employers in every country, they make hundreds of millions of dollars in debt Investments. They need to buy Spectrum. But at the same time, there is a little bit of a difference of, "Hey, we nationalize the Telecom company and all the phone service shut down." Versus, Hey we're taxing the bejesus[?] out of them. So they stop laying fiber and we're never going to get upgrade from 3G to 4G. There is a difference but I do think you're right. Where if you employ 3% of the country's Workforce and you've got that powerful, it's going to be very difficult to tax you into oblivion. I don't know if you can...

Evan: I also think these businesses have been operating in Africa for I don't know what. Like 15, 20 years now, and those many countries in Africa, we haven't really seen any of the countries. Multiply 20 years by whatever, 50 countries in Africa or whatever, I don't think we've seen any large-scale taxation on the scale that you're talking about, where would just crush the business. It's been much more around around the edges and reasonable it seems. Obviously that can change it anytime, but I think the history would indicate that that's seems pretty unlikely.

Andrew: What about nationalization of the mobile payments business, right? Because that is something that's much easier to nationalize. And we have seen that. I think we've seen that or seen attempts at that elsewhere. "Hey, it's very easy, the code's in the cloud." You just say it was your code now code. Not taxation there because that shut the thing down but just nationalization, or loss of political influence. Hey why don't you stop allowing payments are political opponents, or it's a business we don't like. I think we've seen that in some Russian vassal States and that type of thing.

Evan: Yeah, it feels like a risk. I think most of the comments would still apply. It's not going to involve operating towers, but it's still... The code is in the cloud but there's data centers and there's customer data and there's... I don't know. It seems to me much more likely... If I'm if I'm putting my dictator hat on it, just seems much more likely that I'm going to want to tax it.

Andrew: Could be a different business risk. You mentioned that Airtel tends to be kind of the T-Mobile in their markets, right? Which sound... They're the second player. They tend to be kind of the dis... Maybe not the disruptors. Not the right turn because T-Mobile was so unique, but they tend not to be the largest player. And until T-Mobile came along, it tended to be, "Hey, being the largest player is the best, right?" You amortize your spectrum cost over more customers. You advertise your fixed cost over more customers. In a lot of businesses, the best to be the largest especially in a heavily fixed cost business. Does the fact that they tend to be the second placed player, I think they're very cheap, so a lot of it is built since the multiple. But could that limit your returns over time or could that hurt them in other ways?

Evan: : Yeah, I a very smart person that I was talking to, who has a larger position in MTN. He actually does own Airtel as well, but he was saying that he likes MTN more because he thinks that the, especially the mobile money business, is likely to be a winner take most type thing, where the largest player just has the best business. I don't think that the data bears that out so far in the mobile money business in Africa. They've been growing their mobile money business and subscriber base faster than MTN over the past 5 years. They're number 2 in a lot of places, but they've also gained market share and closed the gap in some others. And I think in Uganda now, they're now about to cross and become the the largest player. And if there's a couple other countries like that, where they're encroaching. And to me that indicates that... And this is where I think there's a similarity with T-Mobile. They just are little bit better operationally and with customer acquisition, branding cost-wise, like design of the network, just overall. And actually that was kind of... In India Airtel was known to basically outsource everything from the very beginning in a very unique and contrarian way like 30 years ago, whatever when they were starting. Like everyone said, "Oh, you have to own the technology" and blah blah blah. And they just said, "Listen, we're bringing Ericsson, we're bringing Nokia, we're going to have someone else do this." "We're going to focus on what we know about switches marketing, acquisition costs and pricing and designing, just everything except the core technology. And what they ended up with was a lower-priced service and eventually 300 whatever million, 350 million or whatever it is subscribers in India. And so, I think there's plenty of evidence that they're extremely shrewd operators, and that they've been able to grow market share despite being the number 2 player. And so, I don't particularly worry that that's going to cause them any long-term harm, and if anything it just shows their shrewdness that they've been able to overcome that to date.

Andrew: So that actually the transition especially... So by the way, the investor of yours who mentioned and Sienna, I have a feeling I had lunch with him yesterday and he helped me prep a lot of these questions. But let me just quickly ask on MTN. Airtel over MTN, right? MTN's larger, they've got the mobile payments business. I think they might trade a little bit cheaper than Airtel although they're both trading quite cheaply, obviously. But why did you choose Airtel?

Evan: So, a couple of reasons. 1 is if you look back at the track record over the past 5 years, I think the numbers tell me that Airtel has just executed better in terms of subscriber growth, profitability and even growth of the mobile money business. So that's the main thing. The valuation is interesting because, I actually didn't... I think our common friend, one of the things he pointed out to me was that MTN has a bunch of hidden assets that don't necessarily, aren't obvious in terms of enterprise value, in terms of steaks and other businesses, and non Telecom businesses that are interesting. And so I thought, Airtel look cheaper just on the pure EBITDA and like price to free cash flow metrics that I was looking at. So it may be my second point, which is that it's cheaper valuation, may actually not be true. But I just think if you look at the results over the past 5 five years or so, they've just executed better and it just seemed like therefore cleaner story, like to be able to grow US dollar EBITDA and revenue in the way that they have, despite all the currency moves, is just really impressive to me.

Andrew: That's interesting. I just I don't disagree, or I haven't open to MTN, so I can't disagree or agree with anything strongly though. I think everything you laid out make sense. I am surprised you did not mention the IPO of mobile money, because I know you and I are both.. We do a catalyst and you can tell me if you were just overlooking it, but MTN does not have a plants crystallized value and Airtel does. I thought that might have been a real differentiating [inaudible]

Evan: No. That's actually a good point, something that I had thought of in the past but just completely forgot in the last 2 minutes when I was talking about it. Yeah. I think they've shown with their willingness to sell the minority stake and then plan for the IPO. They've shown, and I think it's actually almost more important than the catalyst of that specific catalyst is just that they're showing themselves to care about shareholder value and revealing, not just letting the pressure price languish at this super cheap. Some of the parts multiple but like actively doing something to release the value in terms of IPO. That just demonstrates that they're going to be good stewards of capital, I think, which is important.

Andrew: Let's talk to care about [inaudible] So there's obviously a shareholder who runs 55% here, anytime I just threw out, "Hey, we've got company that operates completely in Africa." All this other stuff that reside. And they say, "Oh yeah." And by the way, there are controlled company. Say, "Oh my God," I feel like I can get my face ripped off. So, do you want to talk about the controlling shareholder a little bit?
.
Evan: Yes. So the controlling shareholder is Bharti Airtel, they're an Indian Telecom company. Like I said, 500 million subscribers, and they're just... What I generally know about their business is they're thought to be very efficient operators in India. And they bought this asset in... I think there was a couple of transactions. The Kuwaiti Telecom company bought it in 2010, I believe, from a Sudanese company. I think is what happens, and then sometime between then and 2017, Bharti Airtel, I don't know if you remember the exact date of when they they purchased it. So yeah, 5 or 6 years later, they bought it. And I think I've been pretty impressed with how they've run their business so far. They give me no indication. Anytime you have a controlling shareholder, you're like reading the tea leaves in terms of what they intend to do, or whether they intend to do anything shady, or whether you like said, you're going to eat your face ripped off somehow. And just in the way they talk, bringing the Western investors as minority shareholders, promising IPO, they pay roughly 200 million dollars of dividends every year. They don't try to get the money out in some shady...

Andrew: Cleavage party.

Evan: ...Related party transaction. They're just paying dividends out to all the shareholders. So in that sense, it just makes me a lot more comfortable and the fact that they're publicly traded in India, I think also is probably better than it being a private company that doesn't have to answer to anyone. It's also probably nice.

Andrew: And I've done a ton of work on them, but I did look at the stock chart adjusted for US dollars off of the control shareholder, and it is a stock chart that I would not mind owning. The IQ of the mobile money business, right? It depends on the valuation and how much the IPO and everything, but it could easily be hundreds and hundreds of millions of dollars coming into the company. Do you have an idea for what they would do with that money? And would they eventually look to spin out the mobile money business? What do you suppose [inaudible]

Evan: Yeah, that's a great question. I don't know. The simplest thing would just be to pay out dividends, that would obviously go back into the coffers of both shareholders such as myself and the parent company in India, that would be very simple. They've been paying down debt over the years and also trying to move debt from the holding company down into the operating companies, that helps them hedge some of their currency risk. If it's like local currency debt and also it makes the risk of any one country going rogue, less for they know the holding company itself, if you have the debt, down closer to any of the operating companies. And so potentially they could just pay off all the holding company debt, that would be nice. That would save them significant amount of interest expense. Right now it's like a couple hundred million dollars, I think, of interest expense that they pay. And so, yeah. I think there's a number of interesting makes. I love for them to buy back the stock, although I don't know if it's probably definitely not liquid enough for them to put a billion dollars...

Andrew: We will control shares at 55%. I wonder if they would start taking down. Do you know if Bharti is going to try to reduce their steak over time, or what do you think happens there?

Evan: That I have not heard them say anything about. If I was them, I would want the price to be much higher before I started doing that, because...

Andrew: That's how I feel about all my stocks. I want them to be alive, right?

Evan: And if you own 2 billion of one of them it probably would put it...

Andrew: It's also in your control though, right? Because if you own 2 billion you can start pulling levers to crystallize as much value as possible, as you need to get the Sakurai[?] I unfortunately cannot do that with any of my company's current [inaudible] Switch to some stuff that we've touched on a little bit but that I want to make sure we hit fully. Number 1, we said Africa, right now inflation is roaring and for us consumers, it sucks. But it's not the end of the world. But you hear all the time, "Hey, the people who get hit hardest by the Ukraine war is the people in Africa, right?" I think Airtel said in one of their things, in a lot of our countries, 40% of our consumers income goes to food and a decent bit on top of that is going to go to energy. When food prices go up 10 or 15% because Ukraine is not exporting wheat, or gas and oil prices go up, that can cause a serious really rapid reception depression that's [inaudible].That would probably be in the numbers already a little bit but that doesn't look great. I guess I'm asking consumers, incredibly economically, fragile, sensitive inflation. How do you think about that?

Evan: Yeah. Obviously, historically we've seen emerging market economies like the last 20, 30 years, generally do worse. Do worse than developed markets anytime there's some negative thing that occurs in the world, whether it's inflation or financial crisis, or what have you. Although a lot of the African economies are still heavily based on commodities, to the extent that inflation comes with higher commodity prices. It could be not as bad as maybe you would expect, just in terms of overall effect on GDP. And that hopefully trickling down to the common person. But yeah, certainly I worry about the impact of currency on the business and the potential for any one currency, or group of currencies to do very poorly. We just saw in Nigeria, the exchange rate basically was a fixed exchange rate at 400-something naira to the dollar for a long time, and the black market rate was in the 700s. So what I actually did, when I was valuing the company is, I just assumed that Nigeria was going to go to 700 something.

Andrew: Right. I seen the Black Market race for a while.

Evan: I'm a pretty free market person. I think that the free markets can be able to set a better exchange rate than the government, so... But it was a little bit weird because they were able to expatriate some money, a couple million dollars a year from Nigeria at the old rate. But, yeah. It turned out that they caved on that pretty quickly. So, it's always hard to predict how any broader economic event is going to affect any particular country. But I think in this case, you're pretty well protected by the valuation as well as just kind of a fundamental nature of the their service to the African economies. Post-2014, you had a really bad time for the African economy as a whole, after the oil burst, right? Or just the Commodities busting general post-2014. And you saw very little... I mean, you go back to the numbers, there wasn't a ton of impacts to their business, to telecoms in general and Africa. Because even at the much lower GDP per capita of Africa, the Telecom pricing is still a minority of that. And it's so essential that the increased desire for access to the internet just swamped, and likes even large cyclical factors.

Andrew: Oone of the tough things about doing this podcast is it's an hour and you think you can get through a lot in hour, but when you got a business with two different segments and 14 countries and stuff, it's tough. So I want to be conscious of time but there are a few last questions I want to make sure I ask. We talked about mobile money a lot, right? And my history with Telecom companies, I do know like there's Mpesa has a famous case study, that's the Kenyan one that was like African Telecom launching a mobile money. I know that African companies has had success, but maybe I'm too bias by the domestic companies. But like the domestic telecom companies anything they want is just absolutely terrible, and it tends to get run over by small scrappy startup that invest 1/1000 of the resource, because they're focused and they respond really quickly. They can do it. And so far these businesses have done great in Africa, but I guess the question is like, as the economy grows a little bit more and consumers get more access to data and it becomes a little bit more entrepreneurial, what's the stop that my history of, "Hey telecom companies get crushed whenever they try to do anything that's not Telecom." What's this stop that from happening to mobile money? Either on Facebook, or Square, or Jack Dorsey, spends half his time in Africa now. What's this out? Them PayPal from launching something that comes to really attach this? Or them just bungling it in some way shape or form? Or a start-up taking it from them. You know what african-based start up? That'd be great.

Evan: I think the difference is, in the west anything, anything the telecom companies did, that was outside of their core business, they were basically starting from square one against well-funded competition. And there was really no synergies between their core business and the other stuff that they would try to do. Whether that's like Verizon going into the advertising business, or the TV streaming business or whatever. Yeah, they already have subscribers and maybe they can cross sell to them, but they had no advantage, I think in those... And so yeah, they got crushed by other companies. I think here what we've seen is because the mobile payments business... Really the mobile payments business worldwide, pretty much started in Africa, like with the Mpesa in 2007. And their advantage was they were one of the only... Mpesa rollover minutes were one of the only digital assets that... They were people's only connection to the digital world, and they were the only digital assets that people already had. And so, like you said, this case study, it's not even the case study just kind of describes what happened, but they were able to turn those digital assets into a fundamental first mover advantage in terms of subscribers.

Andrew: Something wrong, I don't even think it was them intentionally doing it. I think it was consumers. This was just the only thing and people did it and wisely, it was Vodafone's group, I think that that control. But wisely they said hey everybody's doing it. We might as well start supporting this and it's turned into a massive business that's beneficial for everyone.

Evan: What people realized was when when there's no bank accounts, obviously currency is nice and it's a it's something that everyone can agree on the value on. And everyone accepts it, blah blah. But what people realized pretty quickly was, mobile phone minutes had all the same benefits except you could transfer them digitally from phone to phone. And, like you said, yeah, it wasn't, Mpesa just noticed that this was already happening, and then kind of built a system around facilitating it further. But I think what they've shown is they've... I think arguably, one of the only advantages that really exists in technology is Network effects. Like Network effects and first mover Advantage is that result from that. And I think the fact that Airtel money already has 30 million subscribers and if 30 million users, and they have this base of 140 million user, 140 million Telecom subscribers that will most likely be using Airtel money at some point in the future. I think that's just really hard for startups to go after now. I think the interesting counterpoint or maybe it's the exception that proves the rule, is Nigeria. So in Nigeria the bank's basically lobbied. This is what because the story that most people have taken away is that the financial institutions lobbied to slow down the telecom companies from introducing mobile money for years. And so, it wasn't until last year that MTN and Airtel, finally got approval to operate mobile money businesses in Nigeria. And by then you did have strong competition and other nimble providers that were able to hit the ground running when that got approved. And it's been much harder in Nigeria because they don't have... Yes, they already have subscribers, but everyone knows what mobile money is. And there isn't already this network effect of people having a couple $100 on Airtel and wanting to use it.

Andrew: It's a great story because it shows the difficulty of it. And as you said, it's not like the telecom companies are guaranteed to win. What happens is, as you said, first mover advantage and they can take it. Last question and then maybe we'll wrap it up. You've got investment here, hopefully we get the mobile money IPO in the next couple months, or next year, or so, if we just play this forward 3 or 5 years from now. Like one of the things I do worry about is this an African Telecom company that's traded in London and reports in USD. Yes, it'll be nice to get dividends back and, yes, the cash flow should grow, and hopefully... But I do wonder if I do worry like, hey, do you just have a situation where no one cares. Just no one cares, there's no catalyst. It doesn't seem like there's a natural acquire for them. Like yeah, we'll probably do fine because the dividends keep coming in and the cash flow keeps going up. But what this just trades at 4 times hit it off forever, because just nobody cares.

Evan: Yeah, I think that's my thesis around why the opportunity exists in the first place. There's just kind of like, no one cares because it's this weird thing that trades in London, but it's in Africa, but it's in dollars, but it's in 14 countries, like what's going on. And so I think I tend to to build portfolios of things where the valuation implies no one cares right now and if no one cares in the future, then you can not do okay. But if someone ends up caring then you can do really well. So I think that's a positive optionality that has at this valuation. And if interest rates up 4 times EBITDA forever, then you just end up getting the free cash flow yields, or the dividend yields paid out, and you end up being fine with probably still double-digit return.

Andrew: No, that makes sense. Do you think the dividends weird? It just strikes me, you've got this fast-growing African African Telecom with the controlling shareholder, obviously they spit off tons of free cash flow. So they can pay the dividend, but it also strikes me. Hey, should they be... I don't know. The history of cross-border Telecom MNA is not great, but they've successfully done it. MTN successfully done it. Should they be trying to go roll up some more markets? Or like maybe it's probably too early for 5G but upgrade faster. Is it weird to have a dividend-paying fast-growing company like this? And maybe it's just because I'm so scared of my own shadow when it comes to controlled African company. But in a weird way, almost that dividend makes me like, hey am I missing something like it? Are they trying to lure me in with the dividend and then it's all going to turn out to be a giant fraud Ponzi scheme, run by Sam Brakemanfreed?

Evan: I think maybe the way to think of it is just them up streaming cash to the parent company. The parent company is also growing in India, right? So they have probably multiple good uses for that cash flow. And like if you have 700 million or something of free cash flow, or more in the business, paying using 600 to kind of pay down debt and grow the business and maybe do connect positions. And then pay out 200 million to the parent company, doesn't seem like a very big... It seems quite reasonable. I think it's just that it ends up being a substantial dividend yield because evaluation is so cheap. But it's only like less than a third of free cash flow.

Andrew: Look, I think we've gone out or maybe a little more. Again, as I said at the start, I just I love this idea. It is just... You said it at the start. Hey, this is the sum of the parts idea, but it's not the sum of the parts where you've got 2 publicly traded subs and you're buying it for a discount. It's a publicly traded part where, hey, I think they're going to everything says, including management and senses. They're going to IPO, it's our money and we're going to have some value personalization in the near future. And then hopefully we get that cash back or something. But I just love this idea. But the African Telecom controlled company, it just screams at you, but it's so obvious. It's so cheap. It's really interesting. Anyway, Evan, really appreciate you coming on. I'll put a link to... This is your third appearance, I'll include a link to your Airtel right up for who want to do a little more. But Evan really looking forward to next one. What we really need is, we need Twitter to get bought out again so we can just be DMing each other 5 times a day, and that was a lot of fun.

Evan: I was going to say our, I think the last one when I came on and did the YouTube title was [inaudible] thinks that Elon Musk will close the Twitter deal or something like that. I think that's what you titled the video. So if I just hope that... I wish you luck to all of your video titles can be as prescient as that one.

Andrew: Do you have any regrets of the Twitter process? Just because I think you and I we were very bullish in public but in private, I think you and I were even more bullish, like there's no way this man can get out. Do you regret not? So I would always say, Kelly said you should sell your kidney and put all of your money, plus your kidney's money, plus all your dog and put it in Twitter. Do you regret not selling your kidneys to invest in Twitter?

Evan: We had over a 20% possession in it. So, yes I do. I do think it was the best risk reward that we will ever see in the definitely an Arbitrage World. 100% chance, I would be shocked if there's a better risk reward.

Andrew: [inaudible] Not doing more of it with options? And obviously yes we were yet not definite but...

Evan: Yeah, that I do because I remember some of the things you sent me, and they were just... I just agreed that they were look so obvious, but I still couldn't get my mind around having a higher allocation to the story..

Andrew: I did a little bit with options, but I really regret because I think you and I both said, hey, the downside is a lot higher than the market thinks here, but this is
99.9% going to close and less like you get a literal government intervention or something, which there was [inaudible] worried for a while. But when you think the downsides higher and the likelihood to close is lower that just screams plate with options, and honestly I was just too scared. I don't do crazy amounts with options. I was just too scared and I was also a little bit worried. What if I do the November's and it closes in December? What if I do January and he appeals goes Supreme Court and closed in March. I was worried about timing, but that's in 2020 but that's my one regret with it.

Evan: And the problem with the timing situation is there would be nothing more annoying and more embarrassing to be right on your analysis. That he was not going to bite that you're... Sorry to be correct in your analysis that he was going to lose in court and then somehow be wrong on the timing and have that impair the profits of... Like that would have been so frustrating for me, I think. In a way it was almost like a regret minimization thing from that standpoint where I just couldn't have mentally taken it if we were right on everything about the timing that screwed us over.

Andrew: I do hear you. But again it is the benefit of hindsight, but when I think about it rationally that that was kind of where you want to go. Anyway, it was fun reminiscing the shorter. Those were the glory and truly The Glory Days.

I still owe you a drink, I think, at some point.

Andrew: Next time, you're in New York, I would love to do it. That'd be great. Once you come back from this Scenic Massachusetts...

Evan: There you go.

Andrew: Well, Evan, I appreciate you coming on, and we will chat soon, buddy.

Evan: Right, thanks Andrew.

[END]