Busy Being Born and Busy Dying – Taking the pulse of recent M & A in Africa’s telecoms and Internet sector

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Who remembers HITS Telecoms? It came, it saw and it didn’t conquer. The blanched bones of failed businesses in the desert of lost opportunity can act as signposts for the road to the future. Russell Southwood looks at some of the recent retreats and tries to make sense of what they mean for the future of the industry.

The good news or the bad news? The bad news. You’re all consenting adults and you’re probably sitting down so can take the shocks. Africa’s economic miracle is about to come unstuck. If China doesn’t buy as much of what it digs out of the ground and oil hovers at below US$50 a barrel, the economic good weather simply can’t continue. There are several key countries in Africa where the slide in the value of the currency marks out worse economic times ahead.

The good news. When the going gets bad, it’s time to innovate and change how things are done. Not much has changed in the telecoms and Internet industry and counter-intuitively I think change is more likely to come out of straitened circumstances.

Yesterday the only Saudi-owned mobile operator (Oger Telecom) in Africa – Cell C - announced that it had 6 potential bidders and that it had appointed Goldman Sachs to advise it on a possible sale. One of these bidders is the now much-disciplined, former bully-boy of the pack Telkom: its scheme to share network with MTN was vetoed by the regulator.

Leaving aside Telkom’s domestic bid, there are two delusions at play here. Firstly that if you operate in Africa, you need to be in as many big markets as possible. Secondly, if you’re a rough and tough international player, you’ll be able to break into a market dominated by players higher in the pecking order.

Airtel tried it with pricing strategy in Kenya and the dial barely moved on market share. Worse still, South Africa is a duopoly with a Government and regulator who are temperamentally averse to anything that shakes up this cosy situation. And when they try – see the interconnection changes – they get sandbagged by teams of expensive lawyers.

The Libyan Post Telecommunications and Information Technology Company (LPTIC) issued an almost incoherent announcement which seemed to say that it would consolidate its Lap Green Africa assets into LPTIC. Obviously it’s tough running an investment holding company when your country’s at war and the oil that used to provide the capital flow is out of commission.

The companies affected include: GreenN Cote d’Ivoire, Uganda Telecom Ltd (UTL) and South Sudan-based Gemtel. Only UTL is of any size and at some stage that will be sold off.

Meanwhile Airtel is re-arranging its deckchairs so that it can continue playing in the hope that it will succeed. It is in discussion with Orange about selling its low cards: Burkina Faso, Chad, Congo-Brazzaville and Sierra Leone. In July it felt it had to issue a denial that it was exiting the continent but its stock hit a five-year high on the news of the disposals.

Airtel arrived with all the cockiness of a new invader and its Indian management was convinced it had the formula to deliver “the lowest erlangs in the market”. The Indian managers are now largely gone and have been replaced by those who have worked for the other operators they need to beat.

Bharti Airtel’s financial returns now never break out the African operations in a way that you can judge their profitability and this is usually a sure sign that there’s no bragging rights worth having. But it’s only a matter of time before reality bites….

Its asset buyer Orange is also in a state of flux because buried in the initial Bloomburg “flying a kite” story was the news:”Orange is considering many options for its Africa and Middle East phone assets including takeovers, partnerships with other operators and an initial public offering”. Although it managed to exit Uganda it is still stuck in the quicksands of Telkom Kenya and its entire history with the company is almost a red light for any potential buyer.

If you’re not number one or number two in a market, the mobile telecoms business is not as profitable as it once was in competitive markets for players carrying international overheads who are publicly quoted.

The logic of that position is that either other players will have to re-invent themselves or work out ways of scaling back. In issue 790, I suggested that they look at creating data MVNOs with external partners and even go into partnership with other operators not in the first and second positions. They could also make more effort to share infrastructure, particularly in countries where there are no third party providers. Indeed they could encourage well-financed and trusted third party providers to operate their infrastructure.

But the really radical challenger option is to completely re-invent how voice and data are delivered. One thing you can say about most mobile operators’ data networks in Africa is if you want to go there (a data future), I wouldn’t start from here. But what if you sat down and invented the next generation carrier using the latest generation of technology designed for robust data use, capable of carrying carrier quality voice. Metaphorically, you go from million dollar packages from the established equipment vendors to buying stuff online straight out of the catalogue and putting the pieces together yourself.

Alan Knott-Craig Jr’s plan to create HeroTel, a sort of branded consortium of ISPs is a much more incremental approach to the same thing. The goal is to bring together South Africa’s small and fragmented wireless Internet providers to build a single national wireless provider by April 2016.

Instead of building a company from scratch, Knott-Craig Jr is enticing 200 small wireless Internet service providers across South Africa to join HeroTel—his new company launched Aug. 25.  As small wireless Internet providers join, HeroTel will buy in bulk to drive down costs. HeroTel will provide cohesive branding for the individual wireless Internet service providers, according to Quartz.

 “We don’t have to buy every wireless Internet provider in the country to make this work, but we will need a critical mass,” Knott-Craig Jr told Quartz. “Wireless Internet providers will join the HeroTel Alliance, which will work like a franchise, providing them with the benefits to help them generate more revenue.”

HeroTel ‘s investors include Michael Jordaan, former CEO of FNB, one of South Africa’s largest banks; and Mike Pfaff and Derek Prout-Jones, CEO and CIO of Rand Merchant Bank.

“We’re competing with fixed-line operators: the old-school connect-through-a-copper-line guys… they are at a disadvantage because they charge exorbitant out-of-bundle rates to their customers,” Knott-Craig Jr said.

Africa’s ISPs need some retail ambition because all of them seem to get stuck – with one or two exceptions – living off the healthy, premium priced corporate market. Many have raised funds on the expectation of breaking out of it but have found themselves stuck where they started.
   
South African startup Tuse, an Android app that tackles connectivity issues by allowing users to create wireless mesh networks, has been selected to take part in the renowned Founders Space accelerator programme in San Francisco in October.

Founded in July, Tuse allows people to create wireless mesh networks using their Wi-Fi-enabled mobile devices. The wireless mesh allows users to send text, transfer data and make phone calls to peers on the created network.

The app is still in public beta with a few hundred users, but the bootstrapped startup has already won a place on the Founders Space accelerator programme in San Francisco. Founders Space accelerates the usual accelerator programme into one month, providing interactive lectures and workshops, thought leadership and mentoring sessions from industry experts, and access to online instructional materials.

Wi-fi mesh has yet to make the breakthrough from interesting sounding technology to widely used roll-outs. But if it can survive at scale, then maybe, it’s one element in Africa’s new data tomorrow.

So here’s the challenge to all potential new challengers? You need to lower the cost of delivering national networks. You need to run voice services primarily off Wi-Fi hot-spots but have hand-over to cellular operators. You need to offer cheaper retail data and cheaper international calling. Step this way….


Innovation in Africa is a fortnightly e-letter that covers: start-ups and investment; energy; ICT4D; 3D printing; and innovation in Africa and its cities. We have already produced 32 issues and thesecan be viewed here:

Essential reading for those interested in new start-ups and innovation that will change Africa. If you would like to subscribe, just send an email to info@balancingact-africa.com with Innovation in Africa in the title line.
 
Some examples of past issues below:

Changing Health in Africa through Innovation competitions, accelerators and usable software – Getting to the bottom of what works

Angel Investing Events in Key Markets look set to fill some of the equity and mentoring gaps in Africa

Africa’s Innovation Agenda – Getting beyond the half-truths we tell ourselves to unfolding opportunities


Videos interviews to watch:
Daniel Asare-Kyei on how esoko's price information gets Ghanaian farmers more money for their crops

Uche Ariolu on his online food start-up Foodstantly for both meals and bulk purchases

Robin Raskin, Living in Digital Times on 3 emerging personal technologies relevant to Africa
African Entrepreneurship - Why Culture Matters with Rebecca Enonchong and Michael Ike

Katrin Macmillan on an outdoor Internet facility in Nigeria based on Sugata Mitra's ideas
 
Iono.fm's Ryan Dingley on his online audio radio start-up and its pan-African expansion plans

William Bird on using Commotion Wi-Fi mesh software to provide free Internet South African cties

Andrew Rudge, Reach Trust on expanding the mobile reach of its African ed & health service

Joel Macharia on his start-up Abacus that will allow Kenyans to trade shares online

Albert Mucunguzi, PC Tech on the Ugandan start-up scene and its future prospects

Andrew Rudge, Reach Trust on expanding the mobile reach of its African ed & health service

Ryan Yoder, ActivSpaces on the challenges faced by start-ups in Cameroon

Will Tindall on Emerging Crowd, an online platform for emerging market companies to raise equity

Sacha Poingnonnec, Africa Internet Group on the challenges of running an online business in Africa


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