Is K2 Telecom ripe for acquisition?

In Summary

Buganda Kingdom linked telecom operator K2 Telecom is finally on the verge of getting a license […]

k2Buganda Kingdom linked telecom operator K2 Telecom is finally on the verge of getting a license for data services, a development that would level the ground for the nascent operator as data becomes the key revenue driver in the industry. But as K2’s subscriber base inches towards 600,000, in an industry that is still yearning for consolidation, the Telco is a likely target for acquisition by its bigger siblings.

According to word on the grapevine, K2 and Orange’s successor in Uganda Africell, have reached an agreement for a data link and only await regulatory approval from the Uganda Communications Commission to consummate the deal.

But this development came against a backdrop of insistent pressure from market leader MTN who was also offering carriage for K2’s voice and data. Despite lingering concerns about the state of affairs at host Africell that has so far changed hands three times, K2 could not forget the struggles it went through to secure an interconnect with MTN, a factor that swung the odds in Africell’s favour .

The network is understood to be still hungry for capital though and K2 strategists believe that this might result into yet another change of guard. With revenues from rapidly getting diluted as a result of overcapacity and the reckless actions of Warid which went out of the market in May 2013, cost of income is one area the bean counters in the industry are keeping a close watch over. To that end, buying 600,000 subscribers from a smaller competitor, or atleast getting somebody to lease that capacity has become an attractive proposition to many of the Katwe-headquartered K2’s peers.

Launched two years ago, K2 Telecom or code 073 is a third tier operator that has been piggybacking on the Orange network (now Africell ) under a capacity purchase and revenue sharing arrangement. Not uncommon in the industry, these arrangements help incumbents utilize idle capacity without the need to commit additional capital to marketing development activities. On the other hand the third tier operator is able to launch services without tying capital in network development. But with the continuing dilution of revenues from voice, the telco, like its competitors now needs a data product.

Meanwhile the market has settled into a new low tariff regime for voice after MTN finally called the bluff of its competitors, dropping cross network calling charges to UGX3, late September. While it elicited an immediate response, it in the process triggered a reconfiguration of the market with value added services becoming the principal revenue generator as voice progressively becomes relegated to an add-on. But with multiple tariff bands flying about, the tariff wars don’t mean every subscriber will easily navigate their way to the lowest call rates. Still, whoever survives the new round of attrition will live to tell the tale of one of the most challenging telecom markets in the world, where 8 mainline operators slug it out in an addressable market of less than 20 million subscribers.

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