Africa's maturing telecoms industry can expect to see more mergers and acquisitions in the near future.

Credit ratings agency Moody's released a report, which noted that M&A activity on the continent will take place as the telecoms sector continues to consolidate and mature.

The Moody's report, titled M&A Activity to Reshape Competitive Environment As Markets Mature and Consolidate, further notes that consolidation should be between smaller third or fourth tier companies.

According to the report smaller existing operators are looking for ways to cut costs and expand their market share, which will result in M&A activity.

The reports also notes that African countries with four or more operators or with telecom companies that have a market share of less than 15% are likely to see more consolidation.

The average number of operators in each African country is three, although some countries - such as Uganda, Côte d'Ivoire and Tanzania - have six operators.

"Not all countries are able to support a large number of operators, and smaller wireless operators are finding it increasingly difficult to compete and increase their market share profitably," said Dion Bate, vice president and senior analyst at Moody's and co-author of the report.

Bate added, "Companies considering potential mergers or acquisitions will be hoping for cost savings through improved economies of scale and the opportunity to apply uniform and improved branding, service and product offerings."

Dobek Pater, managing director of Africa Analysis and telecoms analyst, told ITWeb Africa that M&A activity on the continent will happen because in many of the markets there are still large and small telco players.

"As competition intensifies and large capex is required to advance technologically to remain competitive, the smaller players will begin to falter. They will either go bankrupt or, if they have something attractive to offer to the large telcos (e.g. a data sub base) will be bought out," he said.

Pater added, "As telcos (mobile and fixed line) move more strongly into the provision of IT services, they will acquire companies that provide them with those capabilities and customer bases."

According to Pater M&A will be good for the markets and customers as it will result in stronger players, able to sustain their operations and offer good quality services.

Although M&A may seem to be the inevitable solution for the smaller telcos on the continent, in some markets there may be a danger of moving towards a duopoly (or even monopoly) situation, Pater explained.

This may not be healthy for competition. Regulators must ensure that market competitiveness remains, he said.

"In the wholesale long-haul market the opportunity for sustainable operations may only be there for 1 or 2 players. However, a regulator can ensure that even with only 1 or 2 long-haul wholesale providers negative impact on the retail market is prevented," Pater said.

Frost & Sullivan's Alistair Petersen also told ITWeb Africa that the telecoms industry is changing all over the world.

However, high growth areas like East Africa are the primary areas to look for M&A activity as well as established markets like South Africa and Nigeria, he said.

"The core focus is shifting in terms of the required infrastructure and the value added services (VAS) that the industry players are hoping to target. The M&A activity in this industry is therefore not just an African phenomenon," said Petersen.

As to whether or not M&A activity would be good for Africa's telecoms sector, Petersen noted that with consolidation, mobile network operators can acquire new customers; have greater economies of scale and opportunities to create high growth for their businesses.

Petersen explained, "M&A typically drives up the price / value of shares in the industry. Poorly structured deals or incorrect expectations can, however, hurt the parties rather than create synergies through the M&A deal.

"The underlying trend at the moment at creating larger infrastructure coverage in Africa and a larger customer base are solid business principles."

Mobile operator boss agrees

Last year MTN Group chief executive officer, Sifiso Dabengwa expressed similar sentiments.

Speaking at the GSMA Mobile 360 Africa conference he stated that consolidation of mobile operators in some markets would need to take place to ensure the sustainability of the telecoms industry.

Dabengwa explained that consolidation in markets with five, six, seven or eight operators would have to be a reality because of the difficulty to sustain so many operators in one market.

The MTN Group CEO said that in most countries operators ranked number one and two are the ones usually making money (securing a meaningful return for shareholders), while number three, four and five are not making money.

"We think that instead of allowing such companies to fail – the regulators should allow them either to team up with others so they become bigger and able to survive or allow them to be acquired," said Dabengwa.

Most recently M&A activity seen in Africa has been the sale of yuMobile to Safaricom and Airtel in Kenya, and in Uganda struggling operator Warid Telecom was acquired by Airtel.

Meanwhile, in South Africa fixed line operator Telkom is in the process of merging with ICT services provider, BCX, to create a broader professional service offering.