Big changes to come
Telkom’s bid for Business Connexion (BCX) could trigger the start of consolidation in the information and communications technology industry, as new laws change the competitive dynamics of the sector.
Telkom’s talks with BCX, one of SA’s largest and best-run IT companies, come just weeks before President Thabo Mbeki is expected to sign the Electronic Communications Bill (formerly known as the Convergence Bill) into law. This will accelerate the convergence of IT and telecommunications and will pry open the market to more competition. The bid for BCX must be seen in this context.
Also, Telkom knows that profits from its traditional telecom business will come under pressure as prices fall. It is therefore keen to expand into new business areas to maintain growth.
If Telkom succeeds in buying BCX – and that isn’t guaranteed, as there are other suitors – it could spell trouble for Dimension Data and other rival IT services groups, analysts say. The muscle of a large, combined telecom and IT services group cannot be underestimated, they say. BCX, with 4 500 employees, counts many of SA’s biggest companies as clients. It is the country’s largest IT outsourcing company.
With the convergence of voice and data systems – voice telephony is becoming just another application on the Internet – it makes sense for telecom operators such as Telkom to start offering the type of services traditionally made available by IT companies and for IT companies, in turn, to invest in telecom infrastructure. BCX recently acquired Bidnet, an Internet service provider, from Bidvest.
It’s not known how much Telkom will offer BCX shareholders, but it could finance a deal with free cash flow – this is even after the BCX share price ran up strongly following news of Telkom’s bid. At Monday’s closing price of R7,45, BCX has a market capitalisation of R2bn. In the six-month period to September 30, Telkom reported operating free cash flow of R2,6bn.
There are other bidders for BCX, though. The company cautioned shareholders last week that it had received "expressions of interest" and would enter into discussions with "potential bidders".
Bytes Technology Group’s name has been linked to the talks. Speculation that Bytes, an Altron company, is interested in BCX began when the company issued a cautionary notice to shareholders just four hours after BCX issued its cautionary. But IT analyst Irnest Kaplan, who heads Kaplan Equity Analysts, thinks Bytes’ cautionary might relate to something else, possibly an acquisition in the UK. Unlike Telkom, BCX would be an enormous swallow for Bytes (whose CEO David Redshaw says he is prohibited from commenting).
But other names have been linked to the talks, including those of two international companies. One is BT Group (formerly British Telecom), though Brian Armstrong, BT’s GM for the Middle East & Africa, denies speculation that the giant UK carrier is in talks with BCX.
The other is T-Systems, the IT services arm of German incumbent telecom operator Deutsche Telekom. T-Systems SA, an IT services company, is repositioning itself as a converged technology group and recently invested R100m in new telecom infrastructure.
T-Systems first made a play for BCX in 2003, when it was still known as Comparex. The FM reported at the time (Technology & Communications November 14 2003) that T-Systems had tabled an informal offer to BCX management, which was rejected. T-Systems had also held talks with AST (now GijimaAST).
All T-Systems acting CEO Mardia van der Walt-Korsten will say is: "Though there have been several discussions regarding BCX in the past, it is too early to comment on our intentions."
It’s also not the first approach to BCX by Telkom. The operator conducted a due diligence of the company in 2004 but then walked away. A change of management at Telkom – former Transnet executive Papi Molotsane recently replaced Sizwe Nxasana as CEO – and the imminent change in legislation probably led to Telkom revisiting its earlier discussions.
Assuming Telkom is successful in its bid – and analysts the FM spoke to think it will be – it would likely create further headaches for Didata SA chairman Andile Ngcaba.
Ngcaba ignited controversy earlier this year when a consortium he led acquired a sizeable minority stake in Telkom. He did this just months after concluding an equity deal with Didata SA. Ngcaba could not be reached for comment this week, but he has downplayed charges of a conflict of interest, describing his investment in Telkom as passive and noting that he does not have a seat on the company’s board.
Didata competes with Telkom mainly through its Internet Solutions subsidiary. BCX is a far more direct competitor to Didata. They operate largely in the same markets.
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