AFRICA CALLING
That will depend on whether they are successful in capitalising on their market-leading positions in SA, and in expanding profitably into new growth markets in Africa. Both are determined not to concede ground at home and both have aggressive Africa plans – and are keeping their options open.
Let’s look at Africa first. Telkom is exploring opportunities in the Democratic Republic of Congo and Kenya. It also says it’s still interested in buying (with Vodacom) a stake in Nigeria’s fixed-line provider, NiTel, despite an announcement earlier this month by Vodacom that it would bid jointly with UK-based Virgin Mobile for a stake in Vmobile, the second-largest operator in Nigeria after MTN.
Telkom and Vodacom have submitted a joint expression of interest in NiTel, the idea being that, if successful, Telkom would operate NiTel’s fixed-line business, while Vodacom would take control of M-Tel, NiTel’s mobile arm. However, M-Tel is Nigeria’s smallest cellphone operator and Vmobile is first prize for Vodacom. Group CEO Alan Knott-Craig says Vodacom would pump R6bn-R9bn into Vmobile to upgrade the network and build the other infrastructure needed to take market share from MTN.
Telkom CEO Sizwe Nxasana says that without Vodacom at its side, Telkom might choose to bring in an outside partner to help it run M-Tel.
Telkom also wants to participate in the proposed privatisation of Telkom Kenya. The DRC seems to be a more distant prospect. There, the state-owned operator is still part of the postal system and legislation needs to be changed before it can be privatised.
For the moment, most of Vodacom’s efforts are centred on Nigeria. Its operations elsewhere in Africa are generally performing well, though they are still comparatively tiny next to SA. Vodacom SA generated earnings of R9bn before interest, tax, depreciation and amortisation (Ebitda). The group’s next biggest market, Tanzania, reported Ebitda of R345m.
One market where Vodacom is not faring as well is Mozambique, where average revenue per user (a key industry measure) has fallen 53% in a year, to just R52/month. Vodacom Mozambique registered an Ebitda loss of R111m. Knott-Craig says the group will tough it out against mCel, the powerful incumbent operator: "We are determined to get to the number one position."
Knott-Craig says Vodacom is also keen to expand into markets outside sub-Saharan Africa – particularly the Middle East and Latin America – but says an agreement with its 35% shareholder, UK-based Vodafone, stops it from doing so. "If it weren’t for this agreement, we’d be in at least 10 other markets by now," he says.
Knott-Craig’s frustration is clear. He says he discusses the issue often with Vodafone, but so far there has been no breakthrough.
Regulatory pressure is growing in Africa, and Knott-Craig says attempts by regulators to protect consumers from high prices could harm investments. Rather, he says, countries need to open their markets and allow companies to compete freely.
Vodacom is also facing regulatory pressures at home. The Independent Communications Authority of SA (Icasa) is planning a review of SA’s interconnection regime – this sets how much the operators pay each other to switch calls between their networks.
Icasa is also promising a review of the industry’s practice of subsidising cellphone handsets in return for consumers signing up for 24-month contracts. "What are they trying to do?" Knott-Craig asks. "The system [of cellphone subsidisation] has been one of the most successful in the world. Why would they want to fix something that isn’t even vaguely broken?"
Another challenge for Vodacom is the fact that it is the only telecom carrier in SA that does not have a black equity partner. And none of its shareholders – Telkom, Vodafone and Venfin – wants to sell any shares. Who can blame them, given that Vodacom returned a massive R3,4bn dividend to them in the year to March? (Telkom itself declared a R4,9bn dividend.)
Telkom faces an altogether different set of challenges in SA. The company, which has been accused of abusing its monopoly and charging excessive prices, will soon face competition for the first time. This, with further market liberalisation and increasing regulation, will put downward pressure on its tariffs.
An environment of falling prices will reduce earnings unless the company can offset this by growing its customer base, increasing the amount each customer spends, or by further cost-cutting.
"The competitive environment will put pressure on Telkom’s margins," says Nxasana. "We have already started reducing our prices . . . [but] will manage this carefully so as not to drive down margins significantly."
Unlike Vodacom’s, Telkom’s voice business has stagnated. Most of the company’s growth is from its data business – the number of broadband digital subscriber lines in service grew by 188% to almost 60 000 – and the company plans to increase its investment in new broadband infrastructure to cater for demand. Nxasana says its digital subscriber line network will be supplemented with new network technologies.
He says Telkom plans to provide fibre lines – allowing for ultra-high-speed access – to certain residential complexes. It will also build new networks based on metropolitan Ethernet technology, which will also provide users with very high-speed access.
The aim, eventually, is to offer a "triple-play" bundle of voice, broadband data and television and video-on-demand services across a range of networks
Telkom wants to be the country’s biggest Internet service provider and the largest supplier of IT services. It held talks last year (never confirmed) with a view to buying IT supplier Business Connexion. Those talks broke down.
"We are still looking around," Nxasana says. "We continue to be interested in some of the IT players that will help get us up the value chain. In applications, we are not as strong [as we could be] and could do well with an acquisition."
Reproduced with the permission of the Financial Mail
Original article: http://secure.financialmail.co.za/05/0610/companies
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