Analysts weigh up Neotel Vodacom deal

With Vodacom rumoured to be in advanced discussions to acquire Neotel, analyst Dobek Pater weighs up the merits of such deal.

Earlier in August, MTN, which said it was part of a discussion process with Neotel, appeared to withdraw from a potential bid after its president and CEO, Sifiso Dabengwa, said the group was not currently in acquisition talks.

And while rumours of Dimension Data’s involvement in discussions with Neotel have also quietened down, sources close to Vodacom’s negotiating process claim that the group is currently performing due diligence on the fixed line operator.

According to Pater, director and analyst at Africa Analysis, the potential sale of Neotel appears rather odd.

“If it is Tata intending to sell its majority stake, the only reason I can think of would be to cut their losses, based on the initial acquisition price and subsequent investment in the network, as it does not believe that Neotel will be a net profitable operation for them any time soon and it is not as critical to them as they may have initially thought.”

Tata Communications Group, which has a 67.32% shareholding in Neotel, recently noted that, at the end of June 2013, Neotel’s net debt amounted to R4.91 billion.

The India based operator said in its most recent results presentation: “Neotel continues to show very strong performance in a tough South African market.” It cited a 17.7% lift in revenue, adding that Neotel had been ebitda positive since Q2 2012, and had turned earnings before interest and taxes positive in its most recent results.

When questioned about a potential sale of Neotel, Tata said: “It is not our company policy to comment on market rumour and speculation.”

“I would have thought that if Tata has ‘an Africa strategy’, wanting to compete in Africa with other major global carriers and pan-African service provider to provide services to multi-national corporations, it would want to use Neotel as a vehicle to achieve that,” Pater said.

“But perhaps it does not see Neotel as being ‘useful’ beyond SA and neighbouring countries, and it would rather engage with a variety of service providers to develop partnerships, rather than continue investing in infrastructure in Africa,” the analyst opined.

Ian Duvenage, ICT consulting manager at Frost & Sullivan, pointed out that the upside to Vodacom is that it would be able to offer the full range of fixed/mobile converged services, where it is 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.

Earlier this week, Neotel announced the launch of its uncapped and unshaped Long Term Evolution (LTE) service, while the group also has access to valuable spectrum.


Vodacom CEO Shameel Joosub recently shed light on why he may be looking to buy Neotel.

Speaking on CNBC Africa, he said that he sees enterprise services as one of the biggest growth opportunities in South Africa.

“There is a big opportunity [for Vodacom] to capture more of the fixed [telecoms] space,” said Joosub.

Neotel performance

In May, Neotel CEO, Sunil Joshi said that the group had trenched 8,000 kilometres of its own metro fibre, reaching 4,200 companies, having invested R500 million in capex in FY2013 – adding to its total of R5 billion in infrastructure since inception.

Joshi said that the group had achieved its first operating profit since it launched in the country in 2006.

More on Neotel and Vodacom

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Vodacom closer to Neotel purchase: sources

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Analysts weigh up Neotel Vodacom deal