Tribunal outcome lauded
There were plenty of smiles in the executive ranks at Dimension Data last week after the competition tribunal announced it would prohibit Telkom’s proposed R2,4bn, all-cash acquisition of IT services group Business Connexion (BCX). Didata had lodged a formal objection to the transaction, saying it would undermine competition in the sector.
In fact, finding someone – anyone – in the technology sector, other than Telkom and BCX executives, who did not welcome the tribunal’s decision proved impossible this week.
Together, Telkom and BCX would have created an “uneven playing field”, says Gert Schoonbee, GM for business development and strategy at T-Systems SA. It’s the right decision, insists GijimaAST CEO Jonas Bogoshi.
Until Telkom is forced to split its wholesale and retail divisions, the company can use cross-subsidisation to compete unfairly and should be prohibited from buying any significant IT assets, Bogoshi says.
Irnest Kaplan of Kaplan Equity Analysts says some commentators have argued that if the deal had been allowed, it would have spurred convergence in the sector and forced other IT services companies to lift their game.
But, given Telkom’s past anticompetitive behaviour, Kaplan says it would be “too easy for them to bundle BCX products and services at very cheap rates to improve relations with the customers of its voice business”. This, he says, would have been anticompetitive and would have harmed the rest of SA’s IT services sector.
Kaplan adds that losing BCX is not a big deal for Telkom anyway. “The main issue at Telkom has to be protecting market share from [second fixed-line network operator] Neotel.”
Still, the tribunal’s decision undermines Telkom’s long-term outlook. In the past decade, operators such as BT Group (formerly British Telecom) and Deutsche Telekom, under competitive and regulatory pressure to reduce their prices, have come to earn a significant chunk of profits from IT services.
The same pressures are building in SA and so, to arrest an expected slide in profits from its fixed-line business, Telkom must emulate BT and Deutsche Telekom by expanding into new businesses and territories. It has already said it will expand in Africa and become a pay-TV operator at home.
With mobile operator Vodacom, in which Telkom has a 50% share, planning to compete head-on with it in the fixed-line business – and looking set to make acquisitions of its own – the tribunal has placed Telkom at a disadvantage.
Telkom is reviewing its mobile interests and talk is that it could wait until this process is concluded before decid ing what strategy to take in IT services. It is said that the group could sell its 50% stake in Vodacom in a deal that could be worth as much as R75bn.
Analysts say Telkom management will need to think laterally. Kaplan says one option for Telkom is to set up a joint venture with a global IT services group keen on the SA market – but, again, only if the competition authorities allow it.
Meanwhile, Bytes Technology Group, a subsidiary of Altron, is still interested in buying BCX, CEO David Redshaw revealed to the FM this week.
Redshaw has long coveted BCX and is good friends with Peter Watt, BCX’s former CEO. (Watt has been appointed as an adviser to BCX and will be at the group until at least year-end.)
“I have always said we were interested and nothing has really changed,” Redshaw says. “Apart from that, the guys in BCX want time to settle down, so we’ll see what happens. The industry needs some consolidation.”
Redshaw, who has said previously that he felt Telkom was paying above the odds for BCX, says he will be looking closely at the company’s annual financial results, which are due to be released in about two months’ time. “Until then it is difficult to draw any conclusions.”
In the year to February 2007, Bytes reported adjusted headline earnings of R215m on revenue of R4,1bn. The group, which has a market capitalisation of about R2,7bn (against BCX’s R1,9bn), generated cash of R386m.
Business Connexion CEO Benjamin Mophatlane says the BCX board will convene soon to chart the way forward. No options are off the table, he says. A management buy out, first mooted last year by Watt, is one possibility that will be discussed.
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