Johannesburg - Econet’s R6.55 billion offer for Neotel, through its Liquid Telecom subsidiary, may spell the end of Neotel’s role as a direct competitor to Telkom, but it is also likely to drive broader competition as well as further consolidation in the local telecoms sector.
The combination of Liquid Telecom and Neotel, the parties claim, is set to create the largest pan-African broadband network. “Through a single access point, businesses across Africa will be able to access 40 000km of cross-border, metro and access fibre networks. These currently span 12 countries from South Africa to Kenya, with further expansion planned,” Liquid Telecom said.
Breaking monopoly
Investment group Royal Bafokeng Holdings has committed to take a 30 percent equity stake in Neotel, as it expands its holdings into telecoms.
Neotel was established as South Africa’s second national operator in 2006 as a way of breaking Telkom’s monopoly. However, analysts have previously pointed out that it failed to gain much traction in the consumer market and has been burdened by debt.
The deal is a discount to the R7bn Vodacom put on the table for Neotel almost two years ago as it sought to expand its fibre ambitions. Econet’s unit is buying all of Neotel, including its fibre network, which spans more than 10 500km of fibre, and its spectrum licences. Liquid Telecom was founded in 2004 and has 40 000km of fibre across Botswana, the DRC, Kenya, Rwanda, South Africa, Tanzania, Uganda, Zambia and Zimbabwe.
Ovum analyst Richard Hurst said Econet had been dying to get into South Africa for “many many years”.
The company, which has done well in Zimbabwe, is seeking to expand geographically, he added.
He noted that the deal, if approved, would end Neotel’s role as a competitor to Telkom in its own right, but it did need to push to the next phase as it carried a large amount of debt and was facing large capital expenses as it rolled out its network. “Neotel has found it tough going in South Africa,” Hurst said.
Steven Ambrose, the chief executive of Strategy Worx Consulting, described the offer as, “a shrewd move from a canny operator that has been growing from strength to strength in Africa”.
He said Liquid Telecom and Neotel were an excellent fit. “The deal gives Neotel’s majority shareholder, Tata, the exit it’s been seeking for several years. For Liquid Telecom, it offers the footprint in South Africa it has long wanted, without the time-consuming and costly process of building its own fibre network.”
Tata has previously said it was keen to sell its stake. Neotel is majority held by Tata, with its empowerment partner Nexus and Communitel holding the balance.
Ambrose predicted Liquid Telecom’s arrival in South Africa would have little immediate impact, although the deal could help spur further telecoms industry consolidation. “In the medium to long term, however, they could make some waves. Neotel has never been a dominant player, but with some fresh funding from investors who are keen to shake things up, rather than cash out, things could get interesting.”
He expected Neotel’s new owners to put its “considerable mobile spectrum assets” including a portfolio of valuable global interconnect agreements, to good use. “I’m sure they will continue to grow Neotel’s fibre footprint, but I would not be surprised to see them also roll out a mobile wireless network,” Ambrose said.
Liquid Telecom chief executive Nic Rudnick said that the deal would offer a fibre network that provided international connectivity for telecom operators and enterprises across sub-Saharan Africa.
“For the first time, African companies will be able to connect with each other in a cost effective and reliable way, all on a single fibre network. We will also be increasing investments into Neotel to cater for rapidly accelerating mobile and enterprise traffic, enabling us to launch exciting new products and services,” he said.
Vodacom said in May 2014 that it would spend R7bn to buy out the second national operator as it sought to get its hands on many more kilometres of fibre to boost its own fibre ambitions and Neotel’s spectrum. Neotel has spectrum in the high-demand areas, which mobile operators want because it will allow them to roll out long-term evolution – or 4G – services faster.
Much criticism
Vodacom experienced much criticism of its bid from other mobile operators, which argued that it was getting handed on a platter the spectrum cellular providers had been waiting years for the Independent Communications Authority of South Africa (Icasa) to assign.
The mobile operator, South Africa’s largest with about 50 percent of all active SIM cards in the country, dropped its bid in March after it lapsed, almost a year after the Competition Commission gave it provisional approval to buy the operator.
Last December, the two companies amended the terms of the deal so that it excluded permits for spectrum and electronic-communications network services and was more limited to the fixed-line assets.
Neotel said it expected a far smoother ride for this deal through the customary clearance process as there was no overlap in competitive areas.
Neotel non-executive director Kennedy Memani said the next step would be to submit the transaction to Icasa, the Competition Commission and then the Competition Tribunal for approval.
“We expect this process to be concluded by the end of the current financial year,” which for Neotel was the end of March 2017, Memani said.
Telkom shares yesterday rose by 5.31 percent to close at R64.40 on the JSE yesterday.
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