An ode to techie year 2005

On the eve of the changes, the Minister did a flip-flop on the right of VANS to build their own networks. But, nonetheless, February still marked a watershed in the country’s deregulation.

Despite some rejoicing over the changes, the year has been characterised by a backlash against high telecoms prices. One influential study was the Genesis report commissioned by the South Africa Foundation, which found the country’s pricing was up to 400% higher than a basket of comparable countries.

In February, President Thabo Mbeki identified the high pricing as a problem for the country, while in July; deputy minister of communications Roy Padayachie acknowledged that the failure to extend fixed-line services to most of the population and the high cost of telecoms has had an “adverse effect on the economy”.

The latter comment was made at a colloquium set up by the Department of Communications (DoC) to determine if prices were too high. Once that fact had been established, another round of the colloquium was held later in the year, to agree on what to do about this. The result was an action plan, which Padayachie promised to turn into regulatory and, if need-be legislative changes. To date, nothing has come of this, although according to his own deadline, Padayachie promised the market the department would start to take first steps towards implementing the working group’s proposals by round about now.

The year was also significant for the regulatory and legislative landscape in the ICT sector. The Convergence Bill, renamed the Electronic Communications Act, and the Icasa Amendment Bill, made their way through Parliament.

Both should have a significant impact on the way the sector is regulated; the former because it changes the licensing regime and the latter because its supposed to give more power to the regulator Icasa (but, it is feared the outcome might be the opposite effect).

Yesterday, the National Assembly debated the changes made to both bills by the National Council of Provinces. The last step would be for the president to sign the bills into law and this seems likely to happen early next year.

On the regulatory front, the VANS were relicensed in line with their right to provide voice services, as well as the release of regulations for number portability. Operators must enable consumers to switch operators, but keep their number, by the middle of next year.

The regulator also reviewed broadband pricing and recommended Telkom be prevented from charging a monthly rental on ADSL. But, there’s another round of feedback and oral hearings to come on that score next year. Icasa also held hearings into the mobile handset subsidisation, and issued a discussion document on mobile pricing. But after several errors in the latter document were pointed out to it by the industry we’ve heard no more on that score.

Most important though, the second national operator (SNO) was finally awarded its licence by Icasa last week – four years after the process of seeking shareholders began. The company said it would launch in the second half of 2006.

Corporate action

The deal of the year has unquestionably been Vodafone’s R16bn price tag for an extra 15% of Vodacom. The group cleverly did the deal by buying Venfin and then selling the other assets to the Rembrandt Trust. The deal led to a rerating of the telecoms sector and fired up the rumour mill that MTN could also be a takeover target at similar multiples.

Another interesting development is the possible buy-out of Business Connexion. A number of parties are interested, consensus is that Telkom would have the biggest chequebook. Although the deal has yet to been done, the industry has expressed fairly widespread unhappiness at the prospect. Most players said they would either oppose the deal at the Competition Commission, or demand concessions that lessened Telkom’s dominant position and opportunities for cross-subsidising its value added services with its telecoms infrastructure offerings.

Other deals this year included the Saab buy-out of Grintek, the purchase by JD Group of computer retailer Connection Group and the proposed buy-out and subsequent delisting of Frontrange.

It had hoped to list on Nasdaq and take SA shareholders along in a similar way to what Aplitec did very successfully this year, but failed to get Reserve Bank approval. When a private equity player came along offering what it considers to be a fair price, the board recommended shareholders go along with the deal.

Another tie-up this year has been that of Cell C and Virgin. After much speculation, the deal was finally concluded this month; to set up a Virgin Mobile-branded service provider on Cell C’s network, and the company said it would launch in the first half of next year.

On less friendly terms, however, were Altech and Econet after their joint venture ended in acrimonious divorce earlier this year and Econet bought back Altech’s half of the company. But, both were pleased to have moved on; Altech made a $17,5m profit on the sale and plans to use the cash for other acquisitions, while Econet plans a listing in London next year.

Leadership changes

Other noteworthy events this year included the departure of Sizwe Nxasana, the former CEO of Telkomto become CEO of FirstRand Bank. Nxasana’s replacement, Papi Molotsane, had a baptism of fire when he first joined, which included a decision to place three executive committee members on leave of absence. Molotsane’s proper debut at the interim results went pretty well, however, and he seemed to have assimilated a relatively good idea of the company and its environment. The market will be satisfied as long as he delivers.

Other changes at the top included the replacement of Mandla Langa as the chairman of Icasa with engineer Paris Mashile. And, if the allegations being levelled against its CEO Jackie Manche prove to be correct, it could also be on the lookout for a new CEO in the new year.

Expansion

The year would not be complete either without a mention of MTN’s expanding empire. After losing out in the opportunity to buy 13-country sub-Saharan operator Celtel to a higher bidder, MTN went on an acquisition spree of its own, clocking up operations in Zambia, Botswana, Cote d’Ivoire, Congo Brazzaville and Iran.

Telkom is bidding with Nitel as part of the privatisation of the Nigerian parastatal fixed and mobile operator, while 50% subsidiary Vodacom is still hoping to get its hands on V-Mobile – once the shareholder litigation matters have been sorted out.

Best and worst performers

The top performer for the year to date has been small cap PC maker Pinnacle, which has clocked up gains of 180%. Another small cap, Faritec is in second position, while perhaps the most pleasantly surprising of all the big gainers has been Datatec. The latter ran up strongly once it became clear the company was delivering on its margin improvement promises.

On the downside though, Spescom, Datapro and Idion, had disappointing years.

The year ahead

The 2006-year should be another one of continued deregulation measures, and hopefully the SNO will launch successfully and start having some impact on the market.

Commentators continue to see long-term value in shares like MTN, while others believe there’s been too much negative news factored into Telkom’s share price. Of the two, my money’s on MTN being the better performer, particularly if it continues to make new acquisitions and the outlook for Iran becomes more apparent.

The new year will also no doubt see the resolution of the Business Connexion deal, which should introduce an interesting market dynamic whichever way it goes.