Why regulators should approve the Vodacom/Neotel deal

Regulators would be likely to approve a 10 billion rand deal between Vodacom and Neotel, according analyst who says that it would foster competition for Telkom in the fixed space.

The operators confirmed on Monday (30 September) that they have entered into exclusive discussions regarding a potential acquisition of 100% of the shares of Neotel by Vodacom SA.

Bloomberg reported that Vodacom’s proposed takeover of Tata Communications’ South Africa unit would include up to $500 million (R5 billion) of debt, citing two people familiar with the negotiations.

“The deal could be valued as high as 10 billion rand ($994 million),” Bloomberg said, citing a source.

An analyst at PSG Konsult said the proposed deal is an exciting one, and depending on the price of the deal, he recommends it a buy for clients. He said that quite a large premium would be justified given Neotel’s infrastructure and access to spectrum.

“Its strange, Vodacom unbundled from Telkom only a few years ago, and if this deal goes through, it will be in direct competition.”

Regulatory approval

He said that regulators should approve the deal as it brings more competition into the fixed line space. “If anything, regulators should encourage the deal,” the analyst said.

“The purchase could result in innovative new solutions available in the market and Vodacom could benefit in a number of ways,” said Ian Duvenage, ICT Business Unit Leader at Frost & Sullivan.

“Firstly, Neotel already has fixed infrastructure in the ground, fibre to various business locations, as well as routes between Johannesburg, Durban and Cape Town.

“Secondly, the call rate interconnect charges, and a potential focus on rates between the two, could be an interesting space to watch as they have the ability to do more with the shared infrastructure.”

“And lastly, Neotel already have a Fixed-Mobile-Converged solution in place, which Vodacom could look to build and improve on,” Duvenage said.

Opposition to the deal

The Wireless Access Providers’ Association (WAPA) however, registered strong opposition to Vodacom’s planned acquisition of Neotel and said it was watching developments carefully before formulating a formal response.

WAPA said that the acquisition would stifle competition, lead to job cuts, and do little to reduce the digital divide that it believes should be the country’s top priority with regard to broadband.

WAPA said it was seeing an increase in membership exceeding 25% per year, as smaller operators seize the gap created in the broadband market, particularly with respect to last-mile access. This is in line with international trends, where considerably more data is now carried on so-called WiFi-based technologies than on 3G and LTE.

“WAPA’s concern is that Vodacom’s influence will dampen these gains achieved, severely limit open wholesale access and set back  rather than increase competition and consumer choice,” said Christopher Geerdts, Chairperson of WAPA.

Fibre the the home

Vodacom Group CEO Shameel Joosub said: “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.”

“By further building on the capabilities within Neotel, we would also aim to develop entirely new services such as fibre to the home and business. Neotel has access to over 15,000km of fibre-optic cable, including 8,000km of metro fibre in Johannesburg, Cape Town and Durban,” he said.

“Spectrum is also an important consideration as the combined entity could use this resource more efficiently, and in doing this we can keep pace with South Africa’s rapidly growing demand for mobile data. This transaction is all about providing greater choice and better infrastructure for South Africa’s businesses and consumers,” the CEO said.

Shares in Vodacom have climbed from an intraday worst level of R123.11 on the JSE on Monday, to R127.71 in the afternoon session on Thursday (3 October), giving it a market valuation of R190.03 billion.

Shares in Tata Communications meanwhile, climbed more than 4% on Thursday, adding to Wednesday’s gains of 7.65%.

Neotel’s current shareholders are Tata Communications (68.5%), Nexus Connection (19%) and Communitel (12.5%).

More on Neotel and Vodacom

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Vodacom, Neotel confirm talks

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Vodacom, Neotel deal pegged at R5 billion: report

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Why regulators should approve the Vodacom/Neotel deal