Regional telcos become target for global giants as market grows

Saturday June 15 2013

Workers lay Access Kenya cables in Nairobi. FILE

Workers lay Access Kenya cables in Nairobi. FILE 

By DAVID MUGWE, The EastAfrican

Telecommunication companies have become takeover targets by global giants, which are seeking a foothold in the fast growing data and voice markets in the region.
Over the past three months, international brands — India’s Bharti Airtel and South Africa’s Dimension Data — have announced plans to acquire Uganda’s Warid Telecom and Kenya’s AccessKenya respectively.

Another South Africa-based firm, Liquid Telecom, which in January acquired the assets of Altech Group (which has stakes in Kenya Data Networks and SwiftGlobal), this month disclosed that it has taken over RwandaTel.

The buyouts reveal a trend global brands implementing a pan-African expansion strategy, with the risk attachment of creating a market that is dominated by a few players.

Experts in the information and communications technology industry say the multinationals are eyeing the expected growth of the industry in the coming years, but consumer advocacy groups argue that this could stifle the growth of local entrepreneurs, leading to high charges.

“If you look at the trend globally, there have been many mergers and acquisitions; and I think for the multinationals, it could be rosy because there will be fewer companies,” said Alex Gakuru, founder and chair of the ICT Consumers Association of Kenya.

“They may be able to dictate prices. These acquisitions and mergers may become the thing that kills competition,” he said.

In Kenya, for instance, Airtel set off a price war by slashing calling rates by 75 per cent in August 2010 in its bid to get subscribers from market leader Safaricom, but more than two years later, prices have been revised upwards.

Muriuki Mureithi, an ICT consultant based in Nairobi said mergers and acquisitions present limited growth opportunities for local professionals.

“It is cheaper for multinationals to buy an existing enterprise and leverage it to expand their pan-African strategy than to set up from scratch.

These companies bring in resources but locals are being squeezed out. It will be more difficult for local entrepreneurs to get into the market and build enterprises,” Mr Mureithi said.
He said the acquisitions would test whether regulators are bold enough to stand up to the multinationals in the future for the benefit of consumers.

The companies being sold out may also end up becoming liabilities that are not improving in performance but always requiring cash investments as has been the case with Telkom Kenya, which was bought out by French firm Orange, and is also partially owned by the government.

According to the African Economic Outlook, Kenya’s economy is expected to grow by 4.5 per cent this year, Uganda’s by 4.9 per cent, Tanzania’s by 6.9 per cent and Rwanda’s by 7.1 per cent while the economic growth in developed economies is expected to remain below 3 per cent.

Economic growth

This slow economic growth in the developed economies has seen a host of multinationals set up shop in East Africa, where growth and returns are expected to be higher in many sectors, including ICT.

“There is a general explosion in the ICT sector.

“There is a lot of prospective growth and under-penetration in this sector and many are looking at 10 years down the road,” said Andre De Simone, chief executive officer of Kestrel Capital, an investment bank that is advising AccessKenya on the proposed takeover by Dimension Data.

Dimension Data, based in Johannesburg, is 100 per cent owned by Nipon Telegraph and Telephone Corporation (NTT), a Japanese company, which is one of the world’s largest global telecommunications service providers.

NTT’s buyout of Dimension Data resulted in its delisting from the London and Johannesburg stock exchanges in December 2010.

At the beginning of May this year, the South Africa-based firm offered to buy AccessKenya for Ksh3.05 billion ($36.4 million) or Ksh14 ($0.17) per share in a deal that will also see AccessKenya delist from the Nairobi bourse.

The price constitutes a premium of 42 per cent when compared with the closing price on May 3 at the Nairobi Securities Exchange of Ksh9.85 ($0.12), the last trading day before the notice of intention was made, after which AccessKenya’s shares were suspended from trading at the NSE.

Regulators are yet to approve the deal and some shareholders have been pushing for a higher price for the takeover to go through, although Dimension Data has already received irrevocable undertakings from directors of the data company — Jonathan Somen, David Somen and Micheal Somen, who collectively own 30.28 per cent of the firm.

“They are seeing a lot of opportunity in the region and growing consumer needs.

“There are the East African integration, projects such as LAPPSET, ” said John Kamau, general manager at Jamii Telecom Ltd, the sixth largest fixed terrestrial wireless data provider in Kenya.

Definitive agreement

Two weeks prior to the AccessKenya takeover, Bharti Airtel announced that it had entered into a definitive agreement with the Warid Group to fully acquire Warid Telecom Uganda; an acquisition, that will put Airtel Uganda at par with MTN, the country’s largest telecommunications company.

If approved, Airtel Uganda will have a market share of over 39 per cent and a combined customer base of over 7.4 million, and the deal will leave the country with only four players.

Manoj Kohli, managing director and chief executive officer Bharti Airtel, said the company believes the market consolidation offers synergies for the India-based firm.

“This development will translate into a healthier telecoms sector in Uganda, which will be ready to invest and grow in wireless broadband and m-commerce services,” he said.

The latest takeover announcement has come from Liquid Telecom, another South Africa-based firm, which at the beginning of this month disclosed that it had acquired Rwandatel to grow its broadband footprint in East and Southern Africa.

The deal also saw the Johannesburg Stock Exchange listed Altech transfer its 61 per cent stake in Kenya Data Networks and the ownership of Africa Data Networks, which operates in the DR Congo, to Liquid Telecom.

Another deal

Altech also gave up its stake in Swift Global, which provides services in Kenya, Uganda, and Rwanda and Stream, which operates in Rwanda as well as InfoCom, an Internet service provider in Uganda.

Rwanda has signed a shareholders’ agreement with South Korea’s largest telecommunications provider, KT Corporation, to establish a joint venture company to set up a high-speed 4G-LTE broadband network to cover 95 per cent of the population in three years. 

The move could help Internet service providers such as Liquid Telecom provide cheaper Internet access to consumers and open the doors for more players in the sector by reducing some entry barriers such as the infrastructure backbone.

KT, who are the principal shareholders, will bring in expertise and make staged cash injections of around $140 million, while the government’s equity investment in JV includes the assignment of over 3,000 kilometres of national fibre optic network assets, spectrum and a wholesale-only operator licence.

Rwanda’s current mobile network operators and other Internet service providers will be expected to invest in the project and provide retail access to broadband services.

Latest data from the Communications Commission of Kenya show that the total number of broadband subscribers as at the end of December last year stood at 1.002 million, down from 1.006 million as the end of September the same year, representing a decline of 0.3 per cent.

CCK said the marginal decline was attributed to a corresponding decline in fixed terrestrial broadband subscriptions but that this was an increase of more than seven times compared with the same period in 2011.