In acquiring Warid Telecom Uganda, Bharti Airtel beat off competition from South Africa's Vodacom and set the stage to reshape competition in the region
Negotiations between the Abu Dhabi-based owners of Warid Group and the two rivals have been ongoing for some time but the fact that Airtel has already done a transaction like this with Warid Group when buying their Bangladesh operation most likely tipped the scales in their favor.
Airtel was not looking at Warid from a Ugandan or Africann perspective but on a global scale, said Tom Makau, an independent telecoms analyst based in Nairobi.
"Warid is a very worthy player in the telecom sector," Makau said. "There are many factors other than subscriber base that Airtel is looking at in this buyout; key among them is Warid's existing infrastructure and channel network that Airtel can leverage on to grow in Uganda."
With the acquisition, Airtel will consolidate its position as the second largest mobile operator in Uganda with a combined customer base of over 7.4 million and a market share of over 39 percent.
Airtel currently has 4.6 million customers in Uganda and Warid has 2.8 million while market leader MTN Uganda has 7.7 million subscribers.
Manoj Kohli, the Managing Director and CEO (international) Bharti Airtel said the buyout of Warid "happens to be the first in-market acquisition in Bharti Airtel's history."
Warid, which entered the Ugandan telecommunications market five years ago, has been the country's third largest player after MTN, which is the leading player, with Airtel in the second position.
Makau said consolidation of telecom operators in small markets like Uganda is inevitable and this will not be the last time a merger of this kind happens.
He said the takeover will enhance Airtel's appeal to both potential investors and customers as it will now own a bigger operation in Uganda.
While Warid has not come out to give reasons why sold, analysts say that the only way African telcos will survive and become profitable is by lowering their operating costs and at the same time extending their networks to reach more people.
"The easiest way to lower costs from a total market perspective is to merge similar roles/duties and any duplication of resources," Makau said. "This can only be achieved by merging companies. At the moment there is a lot of duplication especially in marketing and infrastructure."
Warid came into the African market with a pricing model that won them market share, but never anticipated that profitability would be elusive with such an approach, said James Wire Lunghabo, a Uganda-based telecom analyst.
"The target market that likes cheap calls also usually has lower average revenue per user and this does not augur well for a telecom that is here to do business and return value to its shareholders in terms of dividends," Wire said.
Warid Telecom will be remembered for igniting a price war in the Uganda telecom industry in the last quarter of 2010 that run through 2011 to 2012 as competition for subscribers and market share heated up.
This resulted in a huge drop in call rates for both within and off-network calls for all five major network service providers, a development that was welcomed by mobile phone subscribers who are now not happy with Warid's decision to sell.
Warid Telecom slashed voice tariffs, in some cases offering almost free calls.
Some players criticized the price wars, saying they were distorting the market, were unsustainable and unhealthy to the industry and the economy as they resulted in low tax revenues.
The Uganda Revenue Authority reported a US$33.6 million shortfall in its domestic revenue collections target in the 2010/11 financial year, partly due to price wars in the telecommunications sector, which dented revenue collections.
According to the revenue collecting body, price wars in the telecommunication sector led to a shortfall of $9.2 million due to the decline in average call rates.
The telecom market in Uganda will re-aligned now that Airtel has a subscriber base as big as MTN's. According to Makau, from a user perspective, with one less option to choose from, a monopolistic or duopolistic market could develop. This he said can easily lead to poor service levels and stagnation for the rollout of innovative products onto the market.
"If the regulatory authority in Uganda is not careful, this might negatively impact the telecom sector," Makau said.
No information has been provided on the amount of money involved but the deal is pending regulatory approvals.
Today, there are seven players in Uganda's telecommunication market including MTN, Airtel, Warid, Uganda Telecom, Orange, Smile and K2 -- the latest entrant.
Airtel entered the Ugandan market in 2009 after buying Zain Africa's operations, resulting in a rebrand in 2010.
Airtel has a presence across 17 African countries with over 62 million customers at the end of quarter ended Dec. 31. Globally, Airtel is ranked the fourth largest mobile services provider in terms of customer base.