Network Operator Consolidation in Emerging Markets

Following a recent conference in London on financing telecoms in emerging markets, Developing Telecoms Publisher Alec Barton reflects on the recent spate of mergers and acquisitions amongst mobile network operators in emerging markets, particularly in Africa. He looks at some of the causes and considers whether the trend towards consolidation will continue.

One of the most hotly debated topics at a recent CTO conference* in London was the growing trend towards mobile network operator consolidation in emerging markets and the impact it is having on services. Two panels of speakers addressed the market, legal, regulatory, financial, HR and technical issues and much of the event was taken up with discussion of the current wave of mergers and acquisitions.

It is not hard to see where consolidation is taking place: a quick glance through the Industry News section on Developing Telecoms offers updates on many of the deals that are at various stages along the merger and acquisition process. This usually starts with speculation, followed by active consideration and negotiation through to completion and implementation. This is taking place in all areas of emerging markets, with the greatest concentration of deals currently in Africa and the Middle East. Many names in the frame are well known service providers and include in the last month alone Zain, Etisalat, Bharti, QTel, VimpelCom, Telia Sonera, Telecom Italia, Telenor and Orascom.

This level of activity clearly suggests that major structural changes are taking place in the network operator sector. To gain a better understanding of what the business will look like in the next few years and how restructuring will affect services in future it is important to look at the underlying causes of the process. As in any business process there are immediate drivers which put a specific company in ‘play’ and not entirely unrelated longer term underlying issues which are driving market change.

The underlying issues driving the present wave of consolidation are principally financial. Emerging markets have witnessed spectacular growth in communications during the last 10 years. This attracted many investors and businesses seeking a share of what was viewed as a highly lucrative and rapidly growing market. However, as markets develop and grow a number of factors are now coming together to make conditions less attractive for operators and their investors:

  • the easiest to reach, richer urban customers have now mainly been covered;
  • the next 10 years will involve greater levels of investment as poorer, more remote and expensive to serve areas are covered;
  • existing operators are faced with the competitive need to upgrade their existing and new networks both to meet competitive pressure and also to meet rising customer expectations for more bandwidth, more services and better service levels;
  • competition is intensifying as regulators respond to pressure to free up bandwidth to make more services available and drive down consumer prices;
  • new licence holders are launching their networks resulting in an increase in the level of competition as they battle to establish brands and gain market share;
  • as a result of competition, already low ARPU is declining further.

With this combination of factors it is easy to see how pressure on operators builds up. Too many operators are competing for too little business and in many areas the number of network operators is simply not sustainable.

Add into this already toxic mix the fact that some operators and investors have borrowed at high rates of interest to finance their initial market entry on the hope or expectation of winning market leading positions and it is easy to appreciate how unstable the situation can become. Investors are not making the level of returns needed to justify remaining in the market. Issues are coming to a head and operators and investors are both looking for solutions.

Africa provides a good example of the problems faced by many mobile operators. Africa’s population is now approaching 1 billion people, distributed across over 50+ countries. Average monthly income is around US$500.00 and an estimated 36% (c. 360m) of Africans are living on less than US1.00 per day. There are an estimated 500 million mobile handsets in Africa - equivalent to half the population and as a result of these factors ARPU is among the lowest in the world.

The market is currently served by over 200 network operators. Compared to the number of operators in the larger markets in both China and India, it is easy to appreciate why consolidation is a rapidly growing feature of the African communications landscape.

Moreover, it is a trend which is unlikely to be short term. The market in India has lower costs and more intense competition than Africa and it should not be a surprise therefore that Indian operators see Africa as a major potential growth area. By 2015 emerging markets will represent over 40% of global communications markets by value.

Valuations of operators in emerging markets are relatively low when compared with valuations of developed market companies. As telecoms in emerging markets becomes bigger and more established as an investment area, valuations will inevitably rise meaning that the leading players will have even better access to capital. It is therefore highly likely that operators which started and grow from emerging markets will be the ones which drive the consolidation forward at the expense of smaller independents and developed market operators.

The final question which one might therefore speculate on is how long will it be before an emerging market operator buys one in a developed market? Leave your comment below.

This is the first of a series of articles looking at the process of operator consolidation in emerging markets. The next article will consider some of the sources of finance that might be available for project development.

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