Vodacom’s monster growth problem
Pieter Uys, the new CEO at Vodacom, hit the nail on the head during Vodacom’s results conference call on Monday. In closing, he summed up Vodacom’s predicament clearly: “The company is … at a crossroads in its strategy.”
He elaborated: “We’ve had 15 years of very good traditional mobile growth. If you look into what we’re planning for the future, you’ll see a lot more activity happening horizontally around the markets we’ve traditionally operated in.”
Vodacom’s at a defining moment in its history. Mobile penetration (at least from a SIM point of view) is at 100%. But therein lies the problem. It’s very difficult for any mobile operator to grow revenue (and earnings) at double-digits when there are about 50m active SIM cards in the country. Also, Vodacom has over 50% of the local market, so it won’t be easy to grow its share.
That said, it’s not panic stations just yet – Uys sees 18 to 24 months of “good growth” left, regardless of the market reaching 100% penetration in terms of SIM cards. There’s still “20-25% people penetration to go”. But these customers come at a price, plus they don’t spend that much on telecommunication.
Uys has swept clean. The company has defined a new strategy and it seems to know what it wants to become. He described Vodacom Business as the main example of how the company sees itself changing: “That is really our entry into becoming a total communications company in South Africa … and using that as a springboard into Africa.”
The underlying problem is that the South African mobile market has reached maturity and Vodacom has relied heavily on this market for growth and revenue.
Uys can preach about focusing on what Vodacom does well in South Africa and “making it better”, but that will only help eke out another few percentage points of growth.
He’s sketched three areas (beyond the traditional mobile business) where Vodacom sees growth opportunities: broadband data/connectivity, horizontal and Africa expansion.
More (and more) broadband
This is the obvious solution to adding revenues. Vodacom’s already the leader in this space through its vast 3G/HSDPA/HSUPA network, plus it’s added WiMax (via iBurst) to its suite of services. With international bandwidth availability set to soar next year (and prices coming down), Vodacom won’t have a problem in growing this base, but this market will also almost certainly be the most competitive in the space (in the short-to-medium term). MTN’s not lying down (it has over 200 000 mobile broadband users), iBurst is nearing 100 000 subscribers and Telkom has 500 000 DSL clients. Reports this week indicate that Vodacom’s mobile broadband subscriber base has eclipsed that of Telkom’s.
Getting horizontal
Uys cites Vodacom Business as the manifestation of how Vodacom is going to pursue horizontal opportunities. These don’t come cheap, however. Vodacom Business’s start-up costs came to just shy of R100m and its entering a very competitive market in South Africa. Vodacom has made a few smaller purchases (51% of StorTech a managed data services company to boost its Vodacom Business offerings, and 75% of ISGS – now Vodacom Gated Services), but these aren’t that meaningful to growth. MTN, by contrast, has shelled out R1,4bn for Verizon Business. This deal is far from done, as a number of anti-competitive concerns have been raised by Altech.
But it’s the approach by these two companies that’s so different: one is prepared to buy growth (at almost any price), the other is content to build capacity from the ground up. The market knows Vodacom was considering acquiring Vox Telecom last year. Maybe it should’ve stumped up the cash?
One bold move Vodacom has made is the purchase of Gateway Telecommunications for $675m; a clever move and one that plugs some holes in its African presence. It expects “strong double-digit growth” from this business. MTN’s shown similar bravado in Cote d’Ivoire, for example, by buying 100% of Arobase Telecom (the country’s second national operator) and 100% of ISP business Afnet. Vodacom will need to do these types of deals in Africa, especially if it can find businesses that complement Gateway.
The dark continent (for Vodacom, anyway)
Vodacom remains seriously hamstrung in Africa. Consider this: MTN Group has 80,7m subscribers (in the quarter to September). It grew its West and Central Africa and Middle East and North Africa operations by 10% each (to 35m and 22,6m, respectively). These are big numbers, especially when you consider Vodacom’s group wide subscriber base increased by 13% at the interim stage to (just) 35,7m.
Future growth is not going to come from South Africa… both MTN and Vodacom realise this (MTN understood this a good number of years ago). MTN estimates there will be 240m addressable subscribers in Africa and the Middle East by 2012. Other operators in these markets like Zain and France Telecom also get it (Zain Africa is aiming for 110m subscribers by 2011, up from 56,3m in September).
Vodacom on Monday pointed to the 26% increase in subscribers in markets other than SA as further evidence of the fact that it needs to expand into other markets on the continent. But, this is easier said than done.
Even though it is now “officially” Vodafone’s entry point into investing in sub-Saharan Africa, there are a number of messy loose ends that need tying up. Vodafone’s operation in Kenya, Safaricom (of which it and partners own 40%), should (in theory at least) be brought into the Vodacom Group fold somehow.
In the past few months, Vodafone has also completed the purchase of 70% of Ghana Telecom (GT) for $900m. Ironically, it was competing against Vodacom in the sale process. None of the twenty investors in an auction last year were willing to pay over $500m for the stake, which means that Vodafone overpaid for GT. What Vodafone’s going to do with GT remains to be seen (for now, it’s installed a foreign CEO). Ghana Telecom may end up reporting to London, another market off limits to Vodacom.
Nigeria remains frustratingly elusive. Vodacom was active in the market in the early part of this decade (by managing an operator) but then exited. Alan Knott-Craig, who retired as Vodacom CEO recently, has said that one of the “toughest things” he “faced at the company was having to exit Nigeria after … shareholders lost their appetite for investing in that country.”
Pieter Uys this week again mentioned Nigeria as being a logical place to look for opportunities. Vodafone’s CEO Vittorio Colao reiterated on Wednesday that Nigeria could be “interesting” for the group. It remains to be seen how the combined group (post the Telkom transaction) decide to approach Nigeria, and this (extra) delay will further hurt Vodacom/Vodafone’s chances at having a viable presence in the west African nation.
As a spate of transactions have shown recently, operators tend to overpay for almost every telecommunications-related asset they buy on the continent. But this too is understandable: Africa is where the growth is, companies compete against global players, and there are only a finite number of licences/operations worth buying. Companies need to be prepared to overpay for lucrative licences/operations with scale, and Vodacom’s statement about how it sees opportunities is perplexing: it says it will “cautiously seek out value-adding opportunities”.
Shareholder issues aside, Uys and the board need to realise that “caution” is one of the reasons the group is still confined to operating in five African markets (and its competitors are in triple that).
Moneyweb
Loading ...