African Rainbow Capital (ARC) has dismissed concerns that its R12.2-billion valuation for mobile operator Rain is too high.
ARC’s financial results for the year ended 30 June 2019 showed that its investment in Rain increased from R2.144 billion on 30 June 2018 to R2.508 billion on 30 June 2019.
The increase in Rain’s valuation, ARC said in its financial report, was mainly the result of a fair value write-up of R364 million.
ARC holds a 20.6% shareholding in Rain, which puts the mobile operator’s valuation at R12.17 billion.
High valuation for Rain
Some industry players told MyBroadband that the valuation for Rain looks high, especially considering that it is a newcomer to the saturated mobile market.
Cell C’s financial struggles have shown that it is not easy to compete against Vodacom and MTN.
There is, however, a big difference between Rain and Cell C – Rain has a very lucrative roaming agreement with Vodacom.
While Rain has two other revenue streams apart from its roaming agreement – its mobile data products and its fixed-LTE service – it is Vodacom which is the key to its prospects.
Without additional spectrum, Vodacom will continue to pay Rain for the privilege of using its spectrum in the form of roaming fees.
If Vodacom gets additional spectrum, however, it will hurt Rain’s negotiation power and its financial prospects.
Lack of information about Rain’s performance
Many people who questioned Rain’s valuation said ARC’s decision not to share the operator’s financial and other competitive information creates uncertainty.
Without this information, it is difficult to judge Rain’s performance and see if it is making inroads into the South African mobile market.
ARC explained that Rain is a privately-held company, which means that the financial and most other competitive information is not publicly shared.
“ARC Investments has a shareholding of 20.6% in Rain. We are thus a minority shareholder. As we are not a majority shareholder, it is not our prerogative to share this information with the market,” ARC said.
How Rain is valued
ARC explained that it used a discounted cash flow model with a discount rate of 16.4% to value Rain.
Discounted cash flow is a valuation method used to estimate the value of an investment based on its future cash flows.
The gross value of ARC’s investment in Rain is valued at R3.276 billion, but it then applied a 12.5% minority discount (R410 million) and a further 12.5% marketability discount (R358 million).
This brought the valuation of ARC’s 20.6% shareholding in Rain to R2.508 billion which translates into a valuation of R12.17 billion of the company.
“In our view, this is a very conservative approach to valuing our investment in Rain and we are comfortable with this approach,” ARC told MyBroadband.
ARC added that, as with all of its investments, the valuation in Rain is scrutinised by its auditors who follow a thorough process to confirm or amend the valuation.