Increased competition across the global telecom industry has prompted a wide range of mergers and acquisitions, not least in Ghana where six mobile phonecompanies are now jostling for space. By Effah Amponsah

Multinational telecom groups are criss-crossing emerging markets with a view to extending their reach via mergers and acquisitions (M&A). In Africa, Kenya, South Africa, Nigeria and Ghana are among those attracting interest from those looking to leave deep footprints on the continent. Ghana itself has three world-class telcos, including Vodafone, the world’s biggest, Bharti Airtel, India’s main service provider, and MTN, Africa’s number one telco. Even though consolidation trends date back to the early ‘90s, recent deals reveal fresh market dynamics. Before the global financial crash of 2008, telecom operators in the Middle East and North Africa (MENA) were in the midst of a M&A frenzy. Consolidations were averaging more than $8 billion in annual transactions from 2006 through 2008. As a result of the global downturn, only a handful of small M&A deals were completed in 2009 and 2010.

At the time, the UAE-based Etisalat declared its interest in an $11.7 billion acquisition of a controlling stake in Zain Group, MENA’s leading telco. After a great amount of effort, that deal fell through in April 2011 but it communicated Etisalat’s strong intent to turn to large M&A deals to position itself as the dominant telecom player in the MENA region. Small telecoms players based in nascent markets are also merging to improve their competitive positions and gain increased bargaining muscle in the event of a takeover bid.

Vodafone’s 2008 deal with Vodacom is an instance of a small regional African player that chose to merge with a larger telecom player. The merger offered mutual benefit to both parties as it provided Vodacom with the benefits of being part of a large global group, but also enabled Vodafone to establish a presence in multiple African markets after increasing its stake by 12.5 per cent from 50 per cent to 62.5 per cent.

Experts say consolidation can happen in three major ways; the cross-market consolidation, in-market consolidation and consolidation of ownership. In cross-market consolidation or ‘megadeals’, a major telecom group acquires controlling stakes in other groups that have an imposing presence in multiple markets. This kind of consolidation can reap great benefits. Large transactions allow the buying company to complement its footprint in regions where it already has a presence, or augment its business by entering promising new markets.

Such transactions also allow operators to launch themselves into multiple markets at a single stroke, thus eliminating the complexity, cost, and time lag entailed in identifying and completing multiple transactions. Bharti Airtel’s $10.7 billion acquisition of Zain’s Africa operations in 2010 is a prime example of this trend.

The transaction offered Bharti an immediate and extended footprint across a range of emerging African markets, transforming Bharti into a key regional player and allowing it to export its low-cost operating model from India to markets abroad.

The in-market consolidation is more or less ‘intra-market’ in nature, where the transaction takes place at the market level and involves merging operations within the same market environ. In this venture, operators seek to acquire extant competitors, merge competitive organisations or their stakes within the same market jurisdiction. Although this is less prevalent than cross-market consolidation, it can still offer compelling advantages to its subscribers. In-market consolidation offers relative ease in garnering an increased subscriber base and greater market share, while getting rid of a direct challenger. Operators can also leverage on such transactions since they stand the chance of accessing specific, lucrative market segments, such as corporate or youth subscribers, gain spectrum, expand network coverage, and improve service quality while providing a better cost structure by optimising network and IT infrastructure.

In-market consolidation is very much in evidence in several markets around the world. In the UK for example, T-Mobile and Orange merged their operations in 2009 to gain scale in a fragmented but mature market. At the time, no single operator had a greater market share than 27 per cent; O2 led with a 27 per cent share followed by Vodafone with 25 per cent, Orange with 22 per cent, and T-Mobile with 15 per cent. The merger created the U.K.’s largest operator with a pooled market share of 37 per cent. In March 2011, US multinational AT&T announced the acquisition of T-Mobile USA, Deutsche Telekom’s US subsidiary, for $39 billion. This major in-market M&A deal is expected to catapult AT&T ahead of its American rival Verizon in terms of subscribers, positioning it as the leading US mobile operator. AT&T can now go ahead with the significant expansion of its robust 4G Long Term Evolution (LTE) platform, bringing this new technology to 95 per cent of the US population. Ghana has already seen a number of consolidations in the form of M&A in its telecom sector. Almost all the telcos currently operating in the country were either acquired or merged with another multinational telecom group.

For example, MTN acquired Scancom, operators of Areeba for $5.5 million. Vodafone Group controversially acquired 70 per cent stake in Ghana Telecom (GT) for $900 million in 2008 after an extensive debate in Ghana’s parliament. GT, along with its mobile subsidiary, Onetouch, was rebranded as Vodafone Ghana. Dubai-based telecom operator, Expresso, also acquired Kasapa in Ghana.

With a relatively small market size of 24 million people, six telecoms operators represent a crowded market, according to some industry watchers. This is akin to “polygamous marriage where six brides compete for the attention of one man,” said Kwaku Addo Sakyi Addo, CEO of Ghana Telecoms Chamber. The entrance of the latest and sixth operator in Ghana, Nigeria’s Glo, may have a positive spin-off, say other experts, by causing a downward pressure on prices, thus, benefitting the consumer.

Ghana telcos sector has to reckon with whether or not the multinationals will continue to have the ‘will’ to invest in the country, especially when their returns-on-investment are dwindling and they find other markets more profitable to invest in. As a natural consequence says Donald Gwira, the Corporate and External Affairs Manager for Airtel Ghana “there will be a shift when telcos decide that they are not profiting, because all telcos
are in business for profits to satisfy shareholders”. He added, “So the point in time when the telco decides that staying in Ghana is no longer profitable, they may either pull out, go to a different market, which means that their customers would then migrate to the others, or there may be acquisitions but the telco would have to assess the acquisition to find it profitable and within their strategic long term plans to do so.”

When asked whether M&As are imminent in Ghana, Gwira told GB&F, “It is very difficult to say at this point in time, because if you take the current status quo, nobody knows what is going to happen tomorrow. These telcos are not local, they are international, they may bring some resources from elsewhere, and there may be mergers and acquisitions from different markets. So it is very difficult to say who at this point in time will drop. For all you may know, the telco with the least resources could be purchase by somebody outside Ghana, and suddenly get strong and move into other markets in Ghana.”

Hisham Ayoub, the former MD for Expresso Ghana , said, ‘The market [in Ghana] is crowded and having six players is not sustainable. The reality is that, out of the five companies present today only two are profitable, so for a sixth operator to come in and gain a critical mass will be very challenging”. Philip Sowah, MD for Airtel Ghana, agreed: “Six players is clearly too much for a country the size of Ghana. All operators would toddle along for a couple of years but would eventually have to consolidate or leave the market.” He added, “As most providers are part of big international companies, each would be able to stand losses for a while, but in the end the successful companies are those that are most persistent and cost efficient.”

“I am not too sure what they really mean when they say Ghana is a ‘small market’,” remarked Gwira. “If you watch the banking industry, the boom in the banking sector came when it was liberalised, yet the new banks are in business and the old ones are still there. It depends on their marketing strategies and the aspect of services they are able to make appeal to the consumer.”

Interestingly, GB&F has information that some telcos are already discussing in-market M&As in Ghana in an attempt to unseat the market leader in the long run. If these discussions are followed through, it would cause a major shift in the telecom market dynamics. It means the all subscribers on the purchased network would, in an ideal case, migrate onto the new parent network. However, such a move may not practically possible especially in the regime of mobile number portability (MNP). If these M&A talks succeed, it would mean that the market leader would either has to control its niches well or marshal itself for a highly intense competition.

Niche control may also be one of the factors that may keep consolidation at bay, at least for the next couple of years. From purely observation point of view, some industry players seem to control certain niches. MTN, the market leader, is ensuring higher earnings on post-paid subscription as well as maintaining a relatively strong presence in corporations and major institutions in the country. Vodafone seem to be making waves with the government outfits, corporations and IDD.

Airtel attracts subscribers  who have limited call credit, while Glo is likely to  attract internet service providers due to its competitive fibreoptics. It will also seek to capitalise on its nationalist advantage, given the presence of over two million Nigerians living in Ghana.

According to industry watcher Victor Tetteh, Ghana’s telecom sector may also be heading for consolidation if the interconnectivity rate (currently GH 0.5p) drops again, call rates (GH 0.3p as the current lowest) are reduced and the average revenue per user (ARPU) also drops. At that point, consolidation may be indispensable. Such developments may put a telco in a tight corner financially, hence, its own stakeholders may decide to leave the market, merge or sell its stakes to another operator.

It is worth noting that the mobile penetration in Ghana has been rising in recent years. At the end of 2010, the rate was 74.2 per cent, up from 65.9 per cent at the end of 2009. In 2011, the National Communications Authority (NCA) announced that the penetration level had hit the 80 per cent mark as against a 78.2 per cent prediction by UK-based Business Monitoring International (BMI). The same institution has however predicted near 100 per cent by 2015.

This means that in the next three years, if not earlier, almost every adult in Ghana may be an active user or subscriber to a mobile network. This would have a downward influence on profit margins since a stiff competition created as a result of the quest to garner more subscribers would consequently lead to major price cuts.

Forecasting what may happen in the industry during that time, some of the telcos in order to stay competitive may diversify their operations and explore other telecommunication solutions like provision of data services. With the continuous dynamism in telecommunications, there is a certainty that innovative telecommunication solutions would emerge in the course of business. If this happens, then there may not be a call for consolidation of any kind. If not, some industry watchers say consolidation would be inevitable.

When GB&F contacted the NCA on whether it was prepared in terms of procedures and regulations for any M&As, Mawuko Zormelo, the head of Corporate and Consumer Affairs, said, “The NCA has not received any information on whether telcos want to merge but if it comes up we shall give it the appropriate response.” He added that the telcos “know what they are expected to do” with regard to NCA requirements.

Interestingly, there is nothing on the NCA’s website to spell out what happens in the event of an M&A. Does this mean, the national regulator does not have necessary documentation or it does not want to make it public? Whatever the answer, consolidation in the telecom sector may not happen immediately but it is likely to happen and cannot be swept under the carpet.