Vodacom CEO Shameel Joosub. Picture: MARTIN RHODES
CONNECTED: Vodacom CEO Shameel Joosub says infrastructure development is key. Picture: MARTIN RHODES

AFTER Tata spent about R10bn to create a worthy opponent for state-owned Telkom and it became clear far more money was needed, the Indian group decided to cut its losses and began approaching possible buyers.

The largest telecoms operators — MTN, Vodacom, Didata and Cell C — were approached, but in the end only Vodacom stayed the course. This week, Vodacom announced its intention to bid for the country’s second-largest fixed-line operator.

The sale would draw a line under the efforts to construct a rival for Telkom. Since it was launched, Neotel tried for seven years to take on a highly monopolised market controlled by Telkom. According to HSBC, the local fixed-line market is worth R44bn — of which Telkom accounts for 75%.

But the bid by mobile operator Vodacom to enter the fixed-line fray will blur the lines between the two markets.

The question that now remains is how much Vodacom will end up paying for Neotel, and whether the cellular operator’s shareholders will get a good deal from this.

HSBC values Neotel at between R5.6bn to R7.9bn, which includes about R5bn debt which sits on its balance sheet. Insiders put a potential price-tag on Neotel of between R8bn and R11bn (insiders suggest it would be more on the valuation range).

But this means Tata could walk away having taken a bath: it invested R10bn, never took a dividend and, depending on the price, might not recover its initial investment. Neotel turned a profit for the first time earlier this year.

If Vodacom buys the company, its shareholders would also be on the line for more cash. Vodacom would then have to inject more cash into Neotel to bring it up to a proper fighting weight.

Already Vodacom invests about R7bn a year in its assets, compared to Neotel, which invests about R500m a year in its network.

Vodacom CEO Shameel Joosub said this week that a number of crucial steps still need to be completed before the transaction concludes. “If the deal is implemented, Vodacom intends to put significant investment into the combined entity to provide high-speed fixed connectivity to many more businesses and consumers.”

Analysts believe it could be positive for Vodacom and Neotel — and, by extension, the market.

Noah Capital said in a research note this week that Vodacom would make far better use of Neotel’s existing infrastructure, and could become a formidable competitor to the likes of Telkom, MTN Business and Internet Solutions on the fixed-line side.

Mr Joosub said that Neotel — which became South Africa’s second fixed-line operator in 2006 — has access to more than 15,000km of fibreoptic cable, including 8,000km of metro fibre in Johannesburg, Cape Town and Durban.

But it is far from being a done deal, as spectrum is not easily transferred from one operator to another. In addition, the deal will have to come under the eyes of the Competition Commission and Icasa, which could stall it.

One of the real prizes for Vodacom is that it would catapult it into the front of the data queue.

South Africa is trying to shift into the much-faster 4G data space, and the highly-prized 800MHz spectrum is ideal for 4G. However, analogue TV uses much of this spectrum in this country.

A Neotel deal would give Vodacom twice the 800Mhz spectrum of the remaining operators, being Cell C, MTN and Telkom. (Currently there is no legal precedent for the transfer of spectrum.)

This would give Vodacom access to the highest-quality data network while the rest of the market waits for spectrum to be allotted to them.

While South Africa has some of the most advanced mobile broadband in the world, it is lagging terribly when it comes to fixed broadband. Vodacom alone has about 12-million data users, as opposed to a total of 850,000 fixed lines in the country.

The potential obstacles to the deal include not only the Competition Commission, but also Icasa, the regulator. Icasa has the discretion to allow the acquisition, which could also result in yet another battle of the regulatory wills between the competition authorities and the telecoms regulator.

MTN withdrew from the bidding process in August, and has not commented as to its reasons.

But insiders suggest the mobile operator could be in negotiations with Telkom to access each other’s services.

Pundits are expecting a number of telecoms deals in South Africa, partly because the players jostle for more spectrum to give themselves a head-start in the race to provide data.

• This article was first published in Sunday Times: Business Times