ALL EYES NOW ON AFRICA
Vodacom Group CEO Alan Knott-Craig told the FM this week that Vodacom has been interested in Vodafone’s Kenyan and Egyptian businesses for some time, and that the VenFin deal has added new impetus to discussions. Previously, Vodafone had been reluctant to sell its interests in the two operators. Knott-Craig says this might now change, particularly for Kenya.
Vodafone owns 40% of Kenya’s Safaricom, which has 3m customers. Telkom Kenya (no relation) holds the remaining 60%. The UK group also holds two-thirds of Vodafone Egypt, which has 5,9m customers. Both companies are the leading operators in their markets and are financially strong.
Vodafone Egypt reported revenues in the second quarter, to September 30, of the equivalent of R1,8bn and Ebitda of R987m. In its 2005 financial year, Safaricom clocked up an operating profit equivalent to R815m on revenues of R2,4bn.
"We have started discussing Egypt and Kenya more positively [with Vodafone] than before, but it is still very early days and the deal between VenFin and Vodafone would first have to be completed," Knott-Craig says. "Egypt and Kenya are the third- and fourth-biggest markets in Africa after SA and Nigeria in terms of customer numbers and market sizes."
If Vodacom is able to purchase Vodafone’s stake in Safaricom and Vodafone Egypt it would bolster its customer numbers by at least 9m, from an estimated 19m now to more than 28m. That would put it comfortably ahead of MTN, its principal rival, in the race to sew up the fast-growing African cellphone market. The group is also still hoping it will succeed in taking control of Vmobile, Nigeria’s second-largest cellular operator, a deal that would add several million more customers.
Meanwhile, analysts say the biggest loser in the deal between Vodafone and VenFin is Telkom. The fixed-line operator has for years coveted a controlling interest in Vodacom but has been unable to convince VenFin or Vodafone to sell. Even Vodacom management is known to have resisted approaches from Telkom – relations between the two companies have historically been rocky.
Telkom’s failure to secure VenFin’s 15% stake in Vodacom comes at a time when it is compelled to find new sources of revenue. Sales and profits in its fixed-line business are likely to come under pressure in the next few years as government steps up the pace of market liberalisation in an effort to drive down high telecom prices. A source close to Telkom says the company may have taken its eye off the ball as a result of recent changes at senior management level. "If there’s one big deal Telkom should have got, then this was it."
Vodacom is critical to Telkom’s future. Almost 70% of Telkom’s market capitalisation is derived from its stake in Vodacom. Its fixed-line assets are valued at R24,5bn, or less than 25% of Vodafone’s R107bn valuation of Vodacom.
Another source, this one close to the Vodafone deal, says Telkom actively participated in the bidding for the VenFin stake. An auction-style bidding process was held, which lasted several weeks and which drove up the value of the deal significantly – in June VenFin had valued Vodacom at R82bn. Vodafone’s final bid was higher than Telkom’s, securing it the deal.
By agreeing to go this route, there was a "tacit understanding" between Vodafone and Telkom that they were "circumventing" each other’s pre-emptive rights, the source says. These rights state that a decision by one of the three shareholders – VenFin, Vodafone or Telkom – to sell would have automatically required that the other shareholders be given the first right to bid for the stake. Neither Vodacom nor Telkom was prepared to comment.
Did Vodafone pay too much? Franca Di Silvestro, founder of investment firm Titanium Capital, says the price reflects the strategic value of the Vodacom asset, particularly given expansion opportunities the group has in the rest of Africa.
The deal has some analysts wondering about the degree of control Vodafone now has over Vodacom. Speculation is rife that Vodafone has taken management control. Not so, says Knott-Craig. The VenFin deal has given Vodafone the right to appoint only one additional director to Vodacom’s eight-person board. Telkom and Vodafone, as 50% shareholders, are each entitled to appoint four directors. "The balance of power doesn’t change," Knott-Craig says.
(c) Financial Mail, Reproduced with permission
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