The real reason behind Vumatel’s high fibre prices

Vumatel’s fibre-to-the-home prices are far higher than other large fibre network operators in South Africa, including Openserve, Octotel, and Frogfoot.

The gap became even bigger after Openserve implemented free speed upgrades and price cuts on its wholesale fibre products in March.

Many consumers expected Vumatel to respond with its own price cuts, but this has not happened. In fact, it may increase prices.

Vumatel was planning to hike prices at the beginning of 2020 but suspended this plan following the state of disaster and national lockdown.

This price freeze will remain in effect until the Disaster Management Act is halted. After that Vumatel is free to implement its previously planned price increases.

This strange situation – where a company is considering price increases when its main competitor offers more value – raises the question of what is really happening.

A well-placed industry expert, who spoke to MyBroadband on the condition of anonymity, said the seemingly strange decision is explained by Vumatel’s financial situation.

He said Community Investment Venture Holdings (CIVH), which owns Dark Fibre Africa and Vumatel, has crippling debt.

When DFA and Vumatel launched operations, it was a landgrab. They took on a lot of debt to roll out fibre networks as fast as they could.

There was no sense in containing costs. They knew if they could reach critical mass quickly, a large company like Remgro or Vodacom will buy them at a high valuation.

This is exactly what happened. Remgro, through CIVH, paid billions to gain control over Vumatel and DFA.

The debt, however, remains. According to the source, Vumatel’s debt to EBIDTA (earnings before interest, taxes, depreciation, and amortization) ratio is much higher than other players.

He said Vumatel and DFA cannot take on much more debt and have to find other ways to sustainably fund the business.

Remgro, which holds a 54.7% stake in CIVH, may also look to improve the financial performance of Vumatel and DFA.

Over the last financial year, CIVH added a loss of R649 million to Remgro’s bottom line, an increase of 218% from the previous years’ loss of R204 million. This does not look good for Remgro.

Raymond Ndlovu
CIVH CEO Raymond Ndlovu

There are two ways to improve CIVH’s (Vumatel and DFA) financial situation – charge higher prices to improve EBITDA and convert debt into equity.

The last option is already in the pipeline. Remgro is looking to offload a stake in CIVH and appointed advisors in November 2019 to help with the new capital raise.

The COVID-19 pandemic slowed down the process, but late last year CIVH management has reignited the search for new investors.

The biggest hurdle is finding an investor whose pockets are deep enough. With an equity valuation of R19.353 billion, it is too rich for most investors’ taste.

To put it in context, Liquid Telecom acquired Neotel for R6.55 billion in 2016.

Like CIVH, Neotel also had extensive national and metropolitan fibre networks. In addition, it had valuable broadband spectrum, data centres, and lucrative corporate and enterprise clients.

Many industry players question why CIVH, which only has fibre assets, is valued at three times what Liquid Telecom paid for Neotel.

Vodacom, which is keen to expand its presence in the fibre market, has been linked to a deal with Remgro. Whether it will pass Competition Commission scrutiny is, however, questionable.

In the absence of a deal to sell equity to reduce debt, Vumatel now has no other option but to raise prices – or at least keep it high – at a time when its main competitor Openserve cut prices.

Vumatel responds

Dietlof Mare
Dietlof Mare

MyBroadband asked Remgro for feedback regarding the issue, but it did not respond by the time of publication.

Vumatel, in turn, did not answer questions about its decision to keep prices high.

Instead, Vumatel CEO Dietlof Mare provided an overview of its current operations. His feedback is provided in full below.

Part of being a successful company means having access to capital that supports an ambitious and aggressive business strategy. We have the full backing of our shareholders, and access to capital, that in this financial year will assist with funding a continued infrastructure rollout to between 350,000 and 400,000 homes passed.

In a country where fibre to the home penetration is only at 20%, we believe the focus should be on driving investment in infrastructure, in such a way as to close the digital divide and make a meaningful socio-economic impact on the country.

If we have learnt anything over the last 12 months, it is that the demand for high speed, reliable connectivity will continue to grow – locally and globally, and fibre is best suited to match this need, at a competitive price – gig for gig.

Creating a connected South Africa takes capital – which in turn requires committed shareholders – and strong desire to deliver both value and an end-to-end customer experience, at a price that delivers data abundance to all communities.

We have more than doubled our network, and as of today, have passed more than one million homes across both metropolitan and previously underserved markets, the first fibre network operator to do so, unlike other FNOs, who have invested very little in network expansion over the last two years.

We welcome competition – it is healthy for the industry and will be critical if we want to reach 80 – 90 percent fibre penetration. Higher penetration means that costs naturally start coming down, without compromising the customer experience and overbuilding in areas where fibre is readily available.

Competition means the industry drives innovation forward and it is almost inconceivable to think that only five years since the first fibre rollout was deployed in Parkhurst that a 1Gbps line would cost less than R1,500 per month, or that a prepaid model for uncapped fibre would be available to communities that might otherwise not have access to abundant internet connectivity.

Now read: Vumatel’s high fibre prices under fire

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The real reason behind Vumatel’s high fibre prices