Vodacom and Telkom’s rocky relationship may be at an end
Vodacom, South Africa's biggest cellular company in terms of local subscribers, is 50 percent owned by Telkom. The other half is held by Vodafone, the UK-based cellular group. Last week Telkom said it was reviewing its cellular strategy, fuelling speculation that it would sell its 50 percent shareholding in Vodacom to Vodafone.
According to sources, this would pave the way for Telkom to buy into MTN – a move that was likely since the two companies started intensive talks six months ago. Talks of Telkom flirting with Africa's biggest cellular network provider have apparently been backed by the government, which owns a 38 percent stake in Telkom, as Telkom will then get a major footprint on the back of MTN's operations stretching to 21 countries.
Vodacom operates in only four countries outside South Africa: Mozambique, Lesotho, the Democratic Republic of Congo and Tanzania.
It has yet to make a major cellular acquisition. Analysts have said it lost out on lucrative deals because of a shareholder agreement clause that prevented it from operating in some parts of Africa where Vodafone was present.
Telkom's stake in Vodacom is estimated to be worth R75 billion. Telkom has a market cap of R97 billion, compared with MTN's R184 billion.
Vodacom contributed about 28 percent of Telkom's net profit of R8.8 billion for the year to March. It is a market leader in South Africa with about 23 million subscribers, compared with MTN's 13 million.
Fixed-line operators globally are expanding their offerings beyond fixed-line telephony by partnering with cellular operators and internet service providers to offer bundled services. But this has been a difficult task for Telkom because the tensions between itself, Vodafone and Vodacom have prevented the expected exploitation of converged services between Telkom and Vodacom from materialising.
Some years ago, when Sizwe Nxasana was still at the helm, Telkom's strategy was to offer bundled cellular and fixed-line services in partnership with Vodacom, but that never took off. Instead, there has been an influx of Vodafone's products in the market.
Vodacom is even promoting products from high speed internet provider iBurst, in which it owns 10 percent, despite the fact that Telkom has similar offerings.
In 2005 when Papi Molotsane took over from Nxasana, Telkom said it would partner with Vodacom to seek fixed-cellular opportunities. It did that in 2005 when it made a bid for Nigeria's state-owned Nitel and its cellular arm, MTel. But later Telkom apparently ditched Vodacom because of Vodacom's past dealings in Nigeria, when it tried to acquire Vmobile. Telkom pulled out of the Nitel bid and now Vodacom is in talks with MTel.
The final straw came last week when Vodacom announced a R7 billion investment into a fibreoptic cable to help it venture into the fixed-line market to reduce its dependency on Telkom, meet high internet demand and seek new growth opportunities as the local cellular market was reaching saturation.
By entering the fixed-cellular space, Vodacom will compete with Telkom, Neotel and other value-added network service providers.
The announcement came hot on the heels of Vodacom's exclusive agreement with pay television provider MultiChoice to sell its DStv products.
This was done with the full knowledge that Telkom, through its 66 percent stake in Telkom Media, had applied for a pay TV license. This made it clear that Vodacom was not interested in entering into partnership with Telkom.
Telkom's review on the Vodacom shareholding has also put the brakes on the cellular operator's long-awaited R7.5 billion black empowerment transaction, which is now expected to be finalised at the end of March next year. It is unclear how the transaction will be structured.
The relationship between Vodacom and Telkom has always been difficult and Telkom has been unable to influence Vodacom's affairs.
Now the damage might be irreparable. This will be good news for Vodafone, which might get the full control of Vodacom that it has been longing for.
Indications are that Vodafone may rebrand Vodacom as into Vodafone Africa, which would house Vodafone's other African assets. It has started to move in this direction with the appointment of three executive directors. It already has four members on Vodacom's board, as opposed to Telkom's three members.
If the split happened, Telkom would part ways with massive profits from what has been the jewel in its crown. However, if it then buys into MTN, it would be guaranteed major benefits as well as exposure to major markets, which, at this stage, it is unable to get from Vodacom.
However, if the deal with MTN did not materialise, Telkom might decide to sell a portion of its stake in Vodacom to give Vodafone a majority shareholding.
Vodacom and Vodafone seem to be working well together, and they would compensate for profit losses through new acquisitions, such as Nigeria's MultiLinks and Africa Online.
Telkom and Vodacom have come a long way, and having Vodacom as a joint venture was a good strategic fit at the time, as the two companies needed each other to grow market share. But now the relationship has broken down and perhaps it is time for the companies to go their separate ways.
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