Why buy Neotel?
Amid market speculation that Vodacom and MTN are in separate discussions with Neotel to acquire the fixed line operator, analysts weigh up the pros, cons, and likelihood of a such a deal.
Earlier this month, an industry source told MyBroadband that the discussions between Neotel and MTN, and Neotel and Vodacom are at an advanced stage.
Neotel is due to present its full-year results on Wednesday (29 May).
In November, it said it was on track to hit its market share target of between 14% and 16% by 2016, having reported a 10% rise in revenue for the half year ended September 2012. It also highlighted its continued ebitda positive status since Q2 FY 2012.
Sunil Joshi, CEO at Neotel, noted that the company lifted its business customers by 18% during the reporting period, increasing to 2,400 enterprise customers.
Consumer customers improved 30% to 130,000, and free cash flow improved 49%, Neotel said.
When asked about the potential nationalisation of its rival fixed line operator, Telkom, Joshi told BusinessTech: “We still see a lot of opportunity out there. The total industry is about R140 billion, in mobile and fixed. In fixed it’s about R40 billion.”
Analyst opinion
Ian Duvenage, ICT consulting manager at Frost & Sullivan, notes that MTN has especially been looking abroad for acquisition targets over the last couple of years, “so this would be no surprise” he said of a potential deal with Neotel.
“The upside to Vodacom and MTN is that they are able to offer the full range of fixed/mobile converged services, where they are currently reliant on Telkom for the fixed portion in most cases.”
“The business and corporate offerings available to their client base would, therefore, be strengthened,” he said.
“The connection between Neotel and Tata Communications could also be leveraged and cost efficiencies explored through the undersea cables,” Duvenage said.
Benefits to Neotel would also include access to a very large client base, along with the ability to find synergies with the buyers small, medium, and large business offering, the analyst said.
“Other potential benefits are: shared infrastructure to ensure last mile access to clients, internal cost efficiencies, and routing of traffic into the PoPs (points of presence) in South Africa from the international clients,” he said.
Nadim Mohamed, investment analyst and partner at First Avenue Investment Management said that a tie up between Vodacom and Neotel would give both parties access to Neotel’s spectrum which Vodacom needs for LTE.
“There are also potentially interesting things that could be done by merging Vodacom’s fibre network Neotel.”
“Vodacom has increased its level of self-provisioning and there may be areas where they have coverage that Neotel do not cover. However, I am not sure whether competition authorities would allow such a deal,” he said.
At what price?
While analysts were unsure as to how much Neotel might sell for, parent company Tata communications pointed to a $144.91 million (R1.4 billion) loss in its 2011/12 annual report, from Neotel.
“Neotel is in its gestation phase, requiring investments to establish the required capabilities. Neotel will continue to need support for some more time before it turns profitable,” it said.
Similarly, Neotel’s net loss amounted to $123.71 million (R1.2 billion) in 2010/11 and Rs4.64 billion (R803 million) in 2009/10.
Neotel shareholding
Neotel’s current shareholders are Tata Communications (68.5%), Nexus Connection (19%) and Communitel (12.5%).
When Neotel was launched in August 2006 as South Africa’s second national operator (SNO), it had the following shareholders: Eskom Holdings (15%), Transtel (15%), Nexus Connexions (19%) and SEPCO (51%).
SEPCO was made up of the Tata Group of India, which held a 51% stake in SEPCO, and two private consortia: Communitel and Two Consortium.
Eskom Holdings, Transtel, and Two Consortium sold their stakes to Tata Communications, giving the Indian company a 68.5% stake in Neotel.
More on Neotel
Vodacom tight-lipped over Neotel rumour
Vodacom, MTN courting Neotel purchase?
What’s keeping Neotel’s CEO awake at night?
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