Inside the Vodacom deal to buy Vumatel and DFA
Vodacom has recently inked a deal to buy a 30% stake in Community Investment Ventures Holdings (CIVH), which owns Vumatel and DFA.
CIVH will be restructured to form a new fibre company, currently dubbed FibreCo. It should be noted that FibreCo is a placeholder name and that a permanent name will be announced later.
Vumatel CEO Dietlof Mare, a former Vodacom executive, is currently the frontrunner to head up the new company.
The assets of Vumatel and DFA will be transferred into this new entity. Vodacom will also transfer its own fibre assets to FibreCo. It includes its fibre-to-the-home (FTTH), fibre-to-the-business, and business-to-business fibre network infrastructure.
Vodacom will own a 30% stake in the new fibre entity if the deal is approved, while CIVH will hold a 70% co-controlling interest.
Vodacom has the option to acquire an additional 10% stake in FibreCo to increase its shareholding to 40%.
The total value of the deal, which is expected to take between 12 and 18 months to conclude, is set to be around R13.2 billion.
The deal includes an initial cash consideration of R6 billion, Vodacom’s fibre assets worth R4.2 billion, and a secondary purchase estimated to be approximately R3 billion.
The R3 billion is based on FibreCo’s growth in valuation from the date Vodacom and CIVH signed the agreement, to the deal’s closing date.
Vumatel and DFA’s combined EBITDA, on which FibreCo’s valuation is based, is currently around R3 billion. This EBITDA is set to increase by the time the deal is closed, and Vodacom will have to pay for the increase in valuation.
Shameel Joosub, Vodacom CEO
What is interesting about this deal is that Vodacom previously tried to buy Vumatel.
Vodacom CEO Shameel Joosub previously said they wanted to become a bigger player in the fibre-to-the-home market, making Vumatel a logical target.
Vodacom entered into discussions with Vumatel, but it is understood that the deal failed because Vodacom could not buy a majority stake or the entire share capital of Vumatel.
Following the failed Vodacom discussions, Vumatel considered listing on the JSE. At the same time, CIVH started talks with the company.
Vumatel’s situation has changed, and CIVH could strike a deal where it could buy the fibre provider outright.
In June 2018, CIVH acquired 34.9% of Vumatel for an undisclosed amount. It acquired the remaining 65.1% the following year.
Since then, CIVH has done a lot of work to strengthen DFA and Vumatel to create a fibre powerhouse. It has also successfully raised R3.72 billion earlier this year.
Thanks to the CIVH leadership’s work, the company’s valuation increased by leaps and bound. By July 2021, CIVH’s valuation hit R27 billion.
This raises the question of whether Vodacom felt it missed an opportunity to buy Vumatel at a much lower valuation a few years back.
Vodacom spokesperson Byron Kennedy told MyBroadand that, with the benefit of hindsight, it might look like not buying Vumatel earlier was a missed opportunity.
However, significant investments have subsequently gone into Vumatel, so it has become a very different business relatively quickly.
“It is also a more compelling proposition with DFA in the mix, which naturally wasn’t on the table back then,” said Kennedy.
“We believe the deal which Vodacom has negotiated with CIVH, subject to regulatory approvals, presents us with the opportunity to positively impact both Vodacom’s and the country’s network quality and resilience, which in turn will help fast track South Africa’s connectivity rate.”
Commenting on whether it would not have been better to acquire a smaller fibre player, like Metrofibre, and invest heavily in fibre rollout, Kennedy said they always target scale.
“We always target scale, and that’s what makes the CIVH transaction attractive. Vumatel passes 1.2 million households in South Africa. When combined with our FTTH assets and our cash injection, we will accelerate the scale of this business into something that can really benefit South Africa,” he said.
“The open-access business model is a key part of this, and as Vumatel rolls out into an expanding fibre demographic, including lower-income households, we will help close the digital divide.”
He said the scale and a shared cost model combine particularly well for their DFA investment.
“As we move into a 5G world, the fibre rollout of DFA and Vumatel will help us optimise our costs as we benefit from sharing, especially in areas like fibre to the base station,” said Kennedy.
“This asset optimisation is great news for reducing the cost of producing data, again supportive of bridging the digital divide. Vumatel and DFA are both uniquely positioned to capture this opportunity.”
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