S. Africa: Telecoms quagmire

Tuesday, August 26

Following the promulgation in 2006 of the liberalising Electronic Communications Act (ECA), South Africa's telecoms sector has been in a state of suspended animation. For most of the past year, the three main network operators, Telkom, MTN and Vodacom, have all been involved in (hitherto unconsummated) merger or buyout negotiations with potential domestic and foreign partners.

1. Telkom. Telkom is the dominant fixed-line operator, 39%-owned by the government. Telkom also has a non-controlling 50% share in the mobile operator, Vodacom, with the remaining 50% held by UK-based Vodafone in an uneasy relationship. Late last year, the proposed purchase by MTN -- the South African-based multinational mobile operator -- of Telkom's fixed-line business fell through on price grounds. Dubai-based Oger Telecom -- which controls South Africa's third mobile company, Cell-C -- subsequently expressed interest in acquiring Telkom's assets and remains an interested party.

More recently, a consortium including the resources and black-empowerment Mvelaphanda conglomerate (Mvela) and the New York-listed Och-Ziff private equity group offered to purchase Telkom for 90 billion rand (11.7 billion dollars), provided Telkom agreed to unbundle its stake in Vodacom. This followed an offer from Vodafone to purchase 12.5% of Telkom's holding in Vodacom for 19.7 billion rand, subject to Telkom unbundling the balance of its stake.

To date, neither proposal has come to fruition. However, Telkom urgently needs new business areas as some of its core activities are under growing competitive pressure. It also needs to resolve the fractious relationship with Vodacom, although its investment attraction without Vodacom is questionable.

2. MTN. MTN, which has seen spectacular growth in 21 countries in recent years, has ambitions to create a global top-ten telecom business, concentrated in emerging markets. Following its failed bid for Telkom, MTN entered merger talks with India's Bharti Airtel, but these also proved unsuccessful. Bharti's interest spurred Vodafone to give serious consideration to a 40 billion dollar bid for MTN -- probably part-financed by the sale of its Vodacom stake -- but it subsequently chose not to pursue this option. In May, MTN began negotiations with Bharti's Indian rival, Reliance Communications, reportedly with a view to a reverse takeover by MTN. However, the talks -- which would have led to an entity with a subscriber base approaching 120 million -- foundered last month as a result of a family dispute within Reliance.

3. Vodacom. Vodacom is still South Africa's largest mobile operator, and remains impressively profitable. The Vodacom brand also has exceptionally high national recognition value. Despite this, Vodafone has felt increasingly frustrated by its relationship with Telkom, which has become a joint venture in name only. Vodacom and Telkom are competitors in a growing number of areas. More importantly, Vodacom -- like MTN -- is growing rapidly in Africa, but the terms of the deal with Telkom preclude Vodafone from competing directly in this market.