File photo: Nadine Hutton.
File photo: Nadine Hutton.

Vodacom acquires Neotel for R7bn

By Ayanda Mdluli Time of article published May 20, 2014

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Johannesburg - Vodacom went one up on its competitors yesterday when it announced the outright purchase of Neotel, one of the country’s biggest internet service providers, for more than R7 billion.

In Vodacom’s results presentation for the year to March, chief executive Shameel Joosub also announced that Vodacom would offer a prepaid tariff of 55c a minute.

The move may be seen as a counter to Cell C’s offering of a 66c-a-minute headline tariff. But analysts said the move was not directly comparable with Cell C when minutes offered by Cell C’s Supacharge product were included.

Overall group revenue grew 8.3 percent year on year. It had an additional 7 million customers, taking the active customer base to about 57 million.

Vodacom said it would increase capital investment by 20 percent to R13 billion in the new financial year.

Commenting on the Neotel acquisition, which is still subject to approval by competition authorities, Joosub said the deal was to ensure a credible alternative to Telkom.

He said both parties would now have a much bigger and more cost-effective footprint and there would be a massive infrastructure rollout.

The R7bn transaction would be funded through cash and existing credit facilities.

Sunil Joshi, the managing director and chief executive of Neotel, said it was business as usual for Neotel.

“Change is always good… and the new focus will provide an efficient service for our customers. We see this as a move to help leverage our infrastructure to the achievement of the 2020 vision,” Joshi, who will stay on as chief executive, said.

Strategically, the country’s largest cellular provider is acquiring the second-largest fixed-line player, which will put the merged firm in a strong position to offer converged services.

According to Greg Cort, a telecoms analyst at Old Mutual Investment Group South Africa’s Electus boutique, Neotel may be able to compete more effectively with Telkom on its fixed-line offering. However, one result of the move was that the market was becoming more consolidated.

Neotel, which started operating in South Africa in 2007, was created to compete with Telkom, which had held a monopoly over the fixed-line telecommunications market.

The deal may raise questions with competition authorities as to how it will ensure effective competition when the market is controlled by two powerhouses.

Cort said the two companies would be able to offer converged services, use spectrum more effectively and become more cost efficient.

“Vodacom’s current mobile network is constrained by spectrum. With increased competition and slower growth, the focus is therefore on cost savings.

“In addition, there is a move internationally to converged fixed and mobile services… While Vodacom is not applying for the transfer of Neotel’s spectrum, a similar network share agreement to the one between MTN and Telkom may be concluded,” he said.

Lakshmi Narayanan, the information and communication technologies programme manager at Frost & Sullivan, said the acquisition would help Vodacom gain access to Neotel’s fixed-line infrastructure.

He said Vodacom should look forward to creating more converged solutions for its small and medium-sized enterprise clients, with the ability to tailor and offer connectivity through more channels.

“The acquisition of Neotel will help Vodacom to innovate and integrate new solutions to a variety of customer segments,” he explained.

He said telecoms service providers were looking forward to increasing market share and revenue through data-based services via advanced mobile technologies and fibre.

“Vodacom will continue to focus on emerging trends to increase their market share and revenues through data.”

Vodacom shares lost 1.88 percent to close at R126.52 on the JSE yesterday. - Business Report

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