Prof. Ian Giddy, New York University
Two years ago, group of local and French expatriates started leading hikes up Mount Cameroon, close to the west coast of Africa in the Bight of Benin. They had also led a number of safaris into the animal-rich game reserves of north east Cameroon. Although their initial clientele had been itinerant hikers, they found themselves increasingly catering to a more upscale group, including birdwatchers and other nature lovers, groups interested in climbing a live volcano, and people who wanted to encounter the local culture and art. Others were thrill-seekers, willing to pay for jungle walks, rock climbing and white-water rafting. They were also planning to cater to the growing number of biologists, vulcanologists and other researchers coming to this area. These visitors needed better accommodation and food, and well-informed guides. Only the more adventurous travellers would put up with the basic local accommodations.
The Mount Cameroon Ecotours group (MCE) had begun to train local Bakweri villagers to serve as guides, by setting up a Rainforest Guide School which, in conjunction with the Limbe Botanical Garden's Conservation Center, taught basic biology, trek leadership and foreign languages (French and English). The school was staffed mostly by foreign volunteers. The group also hoped to gain overseas assistance in a broader initiative, namely to teach sustainable forest exploitation that would prove more profitable, in the long run, than the logging that had eliminated most of West Africa's pristine tropical forest.
Mount Cameroon Ecotours had succeeded in gaining a reputation for quality, but to provide for larger groups and the hotel quality they needed, more funds were required. The most pressing need was for a world-standard lodge, one that would be built and maintained on sound environmental principles.
The group therefore decided to try to raise EUR5 million of equity. Unlike North America and Western Europe, Cameroon does not have an established market for private equity investments. Some creativity was required. Should the funds be sought from West Africa, or from abroad? Was subsidised funding available? Was this the kind of private-sector project that would interest the IFC (the International Finance Corporation, a division of the World Bank)? What were the possibilities of finding investors, and what would have to be provided to attract them?
The founders decided that they had to make some budget estimates and financial projections.
According to the unaudited financial statements, MCE had made a profit in the previous year of EUR150,000 on revenues of EUR455,000. That result was based on about 700 tourists, and this year they expected about 850. Once the new lodge was built and the guides trained, they expected to at least double the revenue per client and to be able to handle three times as many tourists. Tourism in Cameroon had recently been growing at about 10%, or twice the rate of growth of the economy, but the business fluctuated with global economic conditions and perceptions of regional crime, health problems and armed conflicts. Another concern was inflation and currency risk. The local currency was the CFA franc, which was fixed to the Euro at but which had suffered a severe devaluation in the mid-1990s.
The cost of building the new lodge was estimated at EUR2.2 million, spread over two years of construction. Another EUR1 million would establish the Guide School, and approximately EUR500,000 was needed for initial working capital (which would grow at the same rate as the growth in tourist revenue). The remaining funds would be kept as a reserve, in part for future expansion and in part to cover the government licensing fees and other "overhead costs" typical of getting any project established in Cameroon. They calculated the cost of running the school, lodge and business at EUR230,000 per annum, with a variable cost of EUR250 per customer on average, including the tourism tax. Although MCE did not expect to pay a dividend for several years, the French participants argued that any outside investor would need to earn at least 25% over a 5-year investment horizon. After that period growth would probably taper off and, a reasonable long-run expected return was 15% per annum.
Cameroon is one of the most geographically diverse countries in Africa, comprising three major zones: the northern savannah, the southern and eastern rainforests, and the north-western hill region near Nigeria. Rich volcanic soils near the towns of Bafoussam and Bamenda in the west have permitted much higher rural population densities than elsewhere in the country. The west is coffee and cocoa country and home to nearly a quarter of the population. The hot, dry north is home to Lake Chad, the major game reserves, rocky escarpments and the broad Bénoué River. The country's game reserves teem with elephants, lions, giant eland, bongos, chimpanzees, crocodiles and birds galore. There are a few remaining lowland gorilla families in remote pockets of the underdeveloped south-east.Mount Cameroon is the highest mountain in West Africa, with an elevation of 4,095 meters. This region is internationally recognized as a 'hotspot' for biodiversity. The elevation gradient from sea level to 4,000 meters introduces a unique mosaic of different vegetation types, from dense tropical rainforest to alpine grasslands. The seaward facing slopes of Mt. Cameroon are known for their high rainfall, making it the second wettest place on earth. Also, Mt. Cameroon is an active volcano, most recently erupting in 2000. A highlight for naturalists is the Lembe Botanical Garden, which was established over a century ago.
Facts about Cameroon:
Full country name: Republic of Cameroon
1. What alternative financing sources are available to Mount Cameroon Ecotours? What do you recommend?
2. How would foreign investors assess the risks of investing in this private venture in Cameroon? What could be done to reduce the risks to foreign investors? What kind of rate of return would overseas and domestic investors expect, in order to compensate them for the perceived risks? What might be their exit plan?
3. What is a reasonable estimate of the company's value? How much of the company's equity shares would have to be given up in order to raise the required EUR5 million?