Understanding how companies are valued – A look into the MainOne acquisition

The Story

On the 7^th of December 2021, news filtered into the Nigerian tech space that West African data center & connectivity solutions provider, MainOne has been acquired by Equinix, an American company that specializes in internet connectivity and data centers. The acquisition was priced at $320million. The acquisition price raised a lot of eyebrows as to whether the valuation was right, seeing that MainOne is perceived as one of the biggest internet connectivity companies in Africa.

How Big is MainOne?

MainOne is West Africa’s leading provider of wholesale & enterprise internet connectivity and data center (a large group of networked computer servers typically used by organizations for the remote storage, processing, or distribution of large amounts of data) services. It is a leading provider of innovative telecom services and network solutions for businesses in West Africa. The company in its over 10 years of existence has been able to cover 10 African countries with its internet connectivity services, 50 Point of Presence (PoPs) in West Africa, and 1,000 enterprise customers.

The company operates the only Tier III certified data center in West Africa, certified as an SAP Infrastructure Hosting Partner, in addition to ISO 27001, ISO 9001, and PCI DSS certifications. MainOne owns the region’s first private submarine cable, a 7000km submarine cable system from Portugal running down the coast of West Africa and has invested in infrastructure across West Africa which includes a next-generation IP NGN network and growing regional and metro terrestrial fiber optics network. This establishes the fact that the company has one of the biggest infrastructures in terms of internet connectivity in Africa. But what do its financial numbers look like?

There is hardly any public information about MainOne’s financial statement. The only time the company’s financial statement was made public was in 2014.  The company’s 2014 financial statement showed a 29% growth in profit before tax to N189.6million and a 54% rise in revenue to N1.7million. At the tail end of 2020, the Nigerian Communications Commission mandated 6 telecommunications operators including MainOne to submit their financial statements within 7 months after the end of the financial year.

We may not be able to assess the company’s financials, we can however see how much funds it has raised over the years. At inception, the company raised $240million to fund the construction of its submarine cables. Half of this amount was debt the other half was equity. In 2015, the company raised another $300million debt to fund expansion into the West African subregion.

The company has almost every player in the telecommunication and internet connectivity space as its client.

So how does a company that has invested over $500million in building infrastructure get acquired for $320million?

Valuing a startup is totally different from valuing an established company. While startups are valued based on expected future earnings/profits growth, established companies are valued based on the industry they operate in, market conditions, financial performance, market share, etc. There are 3 main valuation methods for established companies, they are Earning-based methods, Market-based method, and Asset-based method.

The earning-based method values companies using their earnings or cash flow. The market-based method values companies using valuation multiples based on Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). While the asset-based method values companies using the book value of the company’s assets. The asset-based method of valuation is used mostly for companies whose value is asset-related like real estate or companies not generating enough returns from the use of their assets.

In the case of MainOne, the CEO, Ms. Funke Opeke noted that the shareholders are satisfied with the acquisition price. She mentioned that the company’s financial statements (revenue and profit generated over the years) and earnings multiples were key to determining the acquisition price of the company.

Some of the valuation methods used in valuing startups include future valuation multiple approach and market multiple approaches both of which have nothing to do with the company’s generated earnings. These approaches of valuation are most suitable for startups as most startups are not profitable in their early years.

After raising $400million in a funding round, Softbank valued Opay at $2billion making the startup a Unicorn. To put things in perspective, let see some of the metrics Softbank used in its valuation of Opay. Opay was valued based on the number of transactions done. Opay’s monthly transactions grew 4.5x to over $2billion in December 2020 and as of August 2021, the company had monthly transactions of up to $3billion. Opay claims to process 80% of bank transfers among mobile money operators in Nigeria, all of these were put into consideration when the company was being valued.

What investors should note about company valuation

While it is important to know the value or worth of a company, it is also important to understand that the value placed on a company depends on how it is valued and the purpose for which it is valued. Valuation for the purpose of buying a company’s stock will give a different value from the valuation of the same company for the purpose of acquisition.

Valuation sometimes is based on perceived value. If investors perceive a company has great prospects, its valuation increases and if investors have a negative perception about a company, its valuation decreases. This explains why some companies are valued above their true value and why others are valued below their liquidation price.

Valuation is said to be a combination of art and science and it is often based on the mindset of the person valuing or the reason for the valuation.