Commentary on the Ethiopian Telecoms IPO: 17 October 2024

The first day of the announcement of the Ethiopian Telecoms can only be described as bit of a PR challenge for the company. In the face of unprecedented interest in the IPO announcement, neither the link to the IR section of the website nor the super app through which shares may be purchased work.

Ethiopian Telecoms' IPO was announced on their company LinkedIn website page which has +/-100k followers

Background to the Ethiopian Telecoms IPO

Ethio Telecom, the state-owned telecommunications company in Ethiopia, has set the share price for its initial public offering (IPO) at 300 birr ($2.54) per share. The company plans to sell 100 million shares to Ethiopian nationals through its mobile payment platform, prior to a full listing on the stock market. This IPO represents the first 10% stake being offered to Ethiopians as part of a larger privatization plan.

The Ethiopian government intends to sell an additional 45% stake to foreign investors in the future. The share offering is part of Prime Minister Abiy Ahmed's broader strategy to attract private investment and open up Ethiopia's economy.

The total value of the IPO is over USD254m which is significant for a first listing.

It's absolutely vital that the first IPO is a success and with the transaction being a privatisation the Government is in a unique position to price the IPO at a very attractive price for the Citizens of Ethiopia.

The PR campaign running up to this point has been very high profile and expectations are high.

In my recent LinkedIN post (before I even knew of this announcement today) I set out the structural aspects needed to ensure the successful growth of a new stock exchange. I was first broker and Secretary of the Malawi Stock Exchange and have lead over 5 IPOs in African markets so I have had unique insights (and some pretty hard lessons) into what works in our markets.

IPOs can present significant challenges from a public relations perspective. Overhyped expectations can lead to distorted perceptions, and regulatory attempts to influence outcomes often result in unintended consequences. I will provide further insights on this later, and for the moment have flagged some worrying aspects of the structure of Ethiopian Telecoms' IPO.

The Definiton of a Successful Ethiopian Telecoms IPO

The complexities of African capital markets taught me to be absolutely clear as to what the definition of a successful IPO should be.

Here is my definition of a successful IPO (I have added a brief commentary on each of the parameters)

Ethiopian Telecoms investment case is simply presented and well understood.

I have not reviewed the digital marketing of the IPO yet and do not have access to the prospectus.

Ethiopian Telecoms investment case should be overly hyped

I will be on the look out for inappropriate marketing and promotional jargon which arises when retail investors are targeted. This is the first day and I have not had time to consider anything other than a single LinkedIN post.

The legal responsibilities of the board should be complied with in full

This is a complex parameter to appraise as the Board's responsibilities extend to is the prospectus complete and does it disclose all that should be disclosed. Common key areas of obfuscation are

• not disclosing forecasts
• not disclosing the valuation and pricing report
• not disclosing a single core IPO objective

The Ethiopian Telecoms IPO offer must be underwritten to ensure that demand exceeds supply

It is crucial that this first IPO is underwritten by financial institutions, allowing them to earn commissions, as this underwriting provides retail investors with confidence in the pricing. Unfortunately, lead advisors sometimes prioritize sales commissions over underwriting, which can undermine this assurance.

The initial offer is valued at USD 250 million, which poses a significant risk to Ethiopia's capital markets if sufficient demand for this amount has not been properly assessed.

With the minimum share application set at USD 83 and the maximum at USD 8,300, the IPO would require between 3,000 and 30,000 investors. In a newly established market, reaching this level of participation seems highly unlikely.

Retail investors should not bear unnecessary costs

Ethiopian Telecoms retail investors have to bear a 1.5% VAT and an asset tax, costs that should be borne by the company on behalf of the investors. I would not recommend this in any other instance than a privatisation IPO.

No restrictions should apply on any investors at all: share allocation should happen AFTER subscriptions

Price discovery is fundamentally driven by the free interaction of supply and demand in the market. Any restrictions on who can participate in an IPO hinder this natural process. To achieve accurate pricing, there should be no limitations on participants, allowing both institutions and foreign investors to engage freely.

Regulators often impose restrictions, mistakenly believing that excluding institutions and foreigners will benefit retail investors. In reality, this approach has the opposite effect. Retail investors thrive in a robust market where all forms of demand are present, not in a restricted one.

By reducing demand through these restrictions, regulators unintentionally distort the market. With key participants removed, the share price is likely to drop as advisors fail to account for the suppressed demand, resulting in an inaccurate and less successful pricing outcome.

Post-IPO shareholding structures must be appropriate for the market

It is vital that a broad mix of shareholders are in place after the IPO. If not distortions in share pricing and liquidity will occur

There must be no false market or distortions in the company’s shares price or the demand for shares in the pre-IPO or post-IPO period

The minimum share application value in the Ethipion Telecoms IPO is about USD85

The maximum value of share applications is about USD8,300

Having these restrictions on an inaugural IPO is extraordinary, particularly when demand is restricted to this extent.

Earnings forecasts must be provided in the Ethiopian Telecoms prospectus

The Company must disclose a forecast in the prospectus and deliver on subsequent earnings forecasts (assuming there are forecasts) that are higher than the current year’s earnings

Ethiopian Telecoms' image and reputation must be enhanced during the IPO listing and continues

Ethiopian Telecoms's reputation must be well protected from misinformation and fake news and the company should have the ability to immediately clarify any issues that may arise.

The share price must rise after the IPO and continue to rise thereafter

This is the acid test of a successful IPO. Recent high profile failed IPOs in Uganda have been lauded as successes on account of "market development" when inappropriate IPO structures and over supply of shares have removed any chance of liquidity.

Ethiopian Telecoms must apply progressive corporate and investor communications

This IPO is a unique opportunity for the company to connect with the world directly. The hype of the IPO and its results will enable the company to be the central source of truth.

My Analysis as 17 October

The Link to the Prospectus and investor section does not work

At a time when interest in the company is at its peak, the investor relations (IR) section of the website is not functioning. I notified the company 12 hours ago, yet the page remains inaccessible. The announcement has attracted considerable global attention, but without access to the prospectus, I am unable to offer any detailed insights into the IPO structure.

Super App Link Not Working

The link provided by the company to the super app where shares can be applied for does not work at the end of the first day of the announcement.

The need for a centralised investor relations engagement platform

In the absence of a centralised investor relations support centre, where all investor and IPO queries are centralised and answered by qualified professionals, engagement with the general public will be fragmented and widespread across multiple channels, and responses provided by marketing staff who are not qualifed to answer investor related queries.

Conclusion and Disclaimer

The significance of this IPO cannot be overstated, as emerging markets like the Ethiopian Stock Exchange require a substantial injection of momentum to thrive.

Based on what I have observed so far, regulatory hurdles or inadequate advisory support could lead to an underwhelming outcome for the IPO.

Looking at the broader context, African markets need stimulation and increased efficiency to meet the challenge of raising capital in a sustainable manner, which aligns with the objectives of the Capital Markets Union [Africa].

I have not yet reviewed the prospectus, as I haven't had access to the investor relations section of Ethiopian Telecom's website. I will revise this report as necessary once more information becomes available.

It is my intention to update this commentary as further details emerge, with a particular focus on how the IPO is marketed to retail investors.

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