Report forecasts ‘further M&A activity for Africa’s maturing telecoms sector’

African nations with four or more operators, or with telecoms companies that have a market share of less than 15%, are likely to see more consolidation, according to the report by Moody’s Investors Service (MIS).

“Weaker third and fourth-tier operators will seek partners to benefit from scale or an outright exit, while operators based outside the region will seek to rationalise their portfolios in response to their own strategic initiatives,” the report said. “We expect more in-market consolidation, especially in markets where there are four or more operators and/or where operators have a low market share.”

Cross-market consolidation “will make more sense for more dominant operators and where greater geographic diversification and sizeable market shares can be achieved”, the report said.

Telecoms regulation expert Diane Mullenex of Pinsent Masons, the law firm behind Out-Law.com, said: “Africa is following Europe’s record wave of telecoms merger activity. It is clear that the Africa Market needs consolidation as operators are requested to invest record sums into their broadband networks to meet the exploding demand for data traffic. These mergers are therefore the next logical step to maintain level of profitability and create some synergies across neighbouring countries. It remains to be seen if the customers are going to benefit from these transactions as the challenges to be met are important and experience shows that both customer churn and revenue synergy dilution in the first years is usually the rule rather than the exception.”

The average number of operators in each African country is three, with some countries, such as Uganda, Cote d'Ivoire and Tanzania, having six operators, the MIS report said.

According to the report, regionally diverse telecom operators will be “best placed” to pursue African growth. Operators with “leading exposures” across Africa including MTN Group Limited, Bharti Airtel Ltd, Emirates Telecommunications Corporation Ltd and Vodafone Group Plc “continue to have better access to capital, putting them in a stronger position than smaller rivals to pursue growth opportunities in the region”.

Some small regional players “may face weaker access to capital as a result of concentrated exposure to mostly sub investment-grade South, East and West African countries where capital markets are less developed”, the report said.

Report co-author Dion Bate, vice-president and senior analyst at MIS’ Corporate Finance Group in South Africa, said: "Not all countries are able to support a large number of operators, and smaller wireless operators are finding it increasingly difficult to compete and increase their market share profitably.”

Bate said: "Companies considering potential mergers or acquisitions will be hoping for cost savings through improved economies of scale and the opportunity to apply uniform and improved branding, service and product offerings."

A survey published last year by Swedish company Ericsson (8-page / 224 KB PDF) said sub-Saharan Africa is “rapidly closing in” on the global penetration rate of mobile communications usage. The survey said mobile financial services are increasingly popular as the use of information and communications technology (ICT) grows.

However, the survey said: “Mobile operators and relevant ICT stakeholders, including governments, must drive the development of appropriate infrastructure to handle the growing traffic demand on networks.”

The African Union’s ‘action plan’ for Africa for 2010-2015 (104-page / 1.53 MB PDF) said access to advanced ICT is critical to the long-term economic and social development” of the continent.

“It has increasingly become essential that appropriate ICT infrastructure, applications and skills are in place and accessible to the population to close the development gap between Africa and the rest of the world,” the plan said.