Why Vodacom and MTN want to buy Neotel
It seems incongruous: a mobile operator wanting to buy a fixed line one? Surely the future is mobile?
The rumours about Neotel being for sale have been swirling for years, but the noise (and detail) has increased dramatically in the past two months.
Any bid would be audacious alright. Both the Minister of Communications and Icasa would almost certainly have serious reservations about any takeover. The more competitors, the better… right?
Except, telecoms is a scale game… Just ask Telkom about its fledgling mobile business.
So what’s the lure? On the face of it, Neotel isn’t fabulously attractive as a business. At March 31, its net debt stood at R5.593bn – R600m more than a year ago.
Neotel doesn’t disclose revenue. But its parent Tata Communications (which owns 68.5%) publishes a fair amount of data quarterly. With a fair amount of calculation, forex conversions and extrapolation, you get to an annual revenue figure of around R4bn. By comparison, Telkom’s is R32.5bn.
Neotel has spent R5bn on infrastructure since inception. The number seems huge, but in context it’s hardly significant. Telkom spent more than R5bn just on its network last year. Vodacom spent R6.967bn last year, and MTN R6.416bn. There’s no surprise that Neotel’s net debt number is similar to the amount its spent on capex.
Sub-scale, remember (and its no surprise that Cell C continues to struggle).
All the media speculation centres on the attractiveness of Neotel’s fibre network. It’s added 1 500km in the past year, and now has 8 000km of metro fibre. Beyond this, it has access to a significant (12 000km+) fibre backbone linking the major centres in South Africa. Compare that to MTN, which has 8 815km of fibre and Vodacom which owns and leases over 5 000km of fibre currently. There’s no doubt Neotel’s fibre network is appealing. But the maths in a transaction just to get access to this network don’t make sense.
Obviously what Vodacom and MTN would like to get their hands on is Neotel’s customer base. It’s got well over 2 000 valuable enterprise customers, which would make an instant difference to both Vodacom Business and MTN Business. The 150 000-odd customers in the SMME and consumer space are also important. With a maturing market, Vodacom and MTN are both desperate for additional sources of revenue.
As much as fixed operators have rushed to deploy mobile networks, mobile operators are increasingly looking to the fixed-line space in order to be able to offer converged services.
There are some specific clues in Vodacom-parent Vodafone’s annual report.
In the UK, Vodafone bought Cable and Wireless last year for £1.1bn. This gives it access to 20 500km of fibre in UK, and a raft of enterprise and business customers. The group says the deal “advances its enterprise and unified communications strategies.”
In New Zealand, it bought fixed-line operator TelstraClear last year for £400m. Same story.
And Vodafone is deploying fibre in Portugal and in Spain – where it’s investing €1bn co-building a network with Orange.
Currently, 27% of Vodafone’s group service revenue comes from enterprise operations. For Vodacom, enterprise is 14% of service revenue (or R8bn). This number seems significant, but importantly includes mobile revenue from enterprise customers. There’s lots of space to grow that contribution to catch up to its parent. You can bet this is on chief executive Shameel Joosub’s mind.
But there’s a single reason that makes Neotel – at almost any valuation – incredibly attractive: its access to priceless wireless spectrum. Both Vodacom and MTN are very close to hitting the wall when it comes to refarming 1800Mhz spectrum for LTE. Both are waiting for allocations of spectrum in the 800Mhz and 2.6Ghz bands, a seemingly simple process that has ground to a halt somewhere inside Icasa.
By refarming spectrum, both operators have been forced into a sub-optimal way of providing LTE services. Vodacom is using two 5Mhz allocations at 1800Mhz, while MTN is using a pair of 10Mhz allocations at the same band.
Neotel has what everyone needs. It already has access to a chunk of 800Mhz (2 pairs of 5Mhz each) spectrum in a band currently used for analogue television broadcasts, thanks to a special allowance from Icasa. Mobile operators have been waiting for additional spectrum in this band, which itself is contingent on the migration to digital terrestrial television. Neotel also has access to spectrum at 1800Mhz (1.8Ghz) – which it is using to deploy a pilot LTE network in Gauteng – as well as at 3.5Ghz.
This is why both Vodacom and MTN want to buy Neotel. The fibre network’s a bonus. And the enterprise customers too.
Whether a deal will pass competitive muster is anyone’s guess. Judging from the past, a straightforward approval seems close to impossible.
But what if Tata Communications has been telling the truth in its statements all along? Just last month it told Techcentral it has no plans to sell the company. What if Tata is looking to sell a stake in the business? Neotel needs capital. It’s got that pile of debt and no realistic hope of rolling out a high-speed wireless network with the valuable spectrum it has.
What if it sells a stake in the business – or even a new business – that will roll out a nationwide high-speed wireless network?
But ironically (and counter-intuitively), a full takeout by either Vodacom or MTN would be the best thing to ensure a more competitive telecommunications sector in the country.
A bigger Neotel would be a better competitor to Telkom.
Isn’t that what we need?
* Hilton Tarrant contributes to ‘Broadband’, a column on Moneyweb covering the ICT sector in South Africa. There’s simply no way Neotel can compete aggressively at its current size.
Source: Moneyweb
More on Neotel’s possible sale
Neotel sale – MTN, Vodacom bids in this week: report
Neotel for sale – Vodacom, MTN looking to buy: sources
What’s keeping Neotel’s CEO awake at night?
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