Mobile operators in Pakistan are hardly making money for their shareholders in the real sense; consolidation is imminent.
None of the shareholders are ready to pump in more money owing to a host of reasons, including steep rupee depreciation in the last couple of years and threats of further weakening, high inflation, and poor law and order situation; lacklustre response on PTAs 3G seminar conducted a few weeks back also supports this notion.
Mergers, therefore, is the only viable option.
But unlike buyouts, where one pays money to the other and the deal is over, a merger is like a marriage of two people and a union of two families. People must like each other, or are forced to do so, and have to tackle their respective ego problems.
In the telecom sector these days, everyone is talking to everyone else either to seek a potential marriage or create rifts to ensure that other suitors don even come close to a pre-nuptial agreement. In other words, its the mergers game, which makes perfect sense given current market dynamics.
For instance, if Telenor with 25 percent market share (by revenues) initiates merger talks with Ufone, which has a 20 percent share, Mobilink would never let this happen for obvious reasons. This is because Mobilink, which currently has a share of 38 percent, will lose its market dominance, in case Telenor and Ufone unite.
Now Mobilink has a number of options to play; it could strike a deal with Telenor or Ufone, and in case it fails, it will try to dissuade any potential merger between the latter two. Mobilink could also try initiating talks with Warid, which has 14 percent market share, to ensure its market dominance.
A similar set of options can be employed by Warid and the late entrant Zong (4% share). Yes, this circular game of wooing reminds one the famed Prisoners Dilemma game conceived by Nobel laureate economist John Nash.
Strategic thinkers of five mobile operators seem to be busy in permutations and computations to see through a complex tree with a number of branches formed to look at all possible solutions.
The game has been underway for over a year now. Initially there were strong rumours that China Mobile is buying Telenor Pakistan, which was eventually denied by the latters former head. Lately, the market is abuzz with talk of a Telenor-Warid deal, whereas more recently Mobilink executives are reportedly busy negotiating with Warids management.
The economics of mergers is simple; its economies of scale.
In the hypothetical case of a Telenor-Ufone merger, both have around 5,000 cellular sites. Post merger they will need around 6,000 sites. Hence, by reducing 4,000 sites of the merged entity might save $50-60 million per annum in operating costs (assuming Rs100k per month operating cost of a tower).
Similarly both spent $20-25 million each on television commercials during 2009, and a merger between the two could help save the new entity about $20-25 million per annum on advertisements. Also, the merged entity will not require two licenses, two head offices, two CEOs so and so on.
Ideally, one or two mergers should have happened already. But the egos and nose poking in each others issues is reportedly resulting in suboptimal outcomes i.e. status quo.
Apart from Warid, all players have international telco brand names behind them. Warid has 30 percent shareholding of Singtlel, albeit not its brand name. No one would like to lose its international brand equity for a market like Pakistan. Maybe Orascom Telecom, which does not have as strong a brand name as China Mobile and Telenor, will eventually shed its ego.
Nonetheless, sooner or later a tough decision ought to be taken. Practically, one merger is viable - unless, cash rich China Mobile takes some money out of its kitty to buy a company for its first international venture in Pakistan or Telenor buys another company for its local venture.