Competition Commission denies approval for Vodacom-Vumatel deal

The Competition Commission has recommended against Vodacom and Vumatel-owner CIVH merging their fibre networks.

This comes after the companies submitted their R13.2-billion deal to the regulator at the end of 2021.

Such deals usually take between 12 and 18 to conclude. This deal has been on the Competition Commission’s desk for 20 months.

Industry regulator Icasa gave its conditional approval around a year after the deal was announced.

“The Commission is of the view that the proposed transaction is likely to substantially prevent or lessen competition in several markets and that the conditions offered do not fully address the resultant harm to competition,” South Africa’s anti-monopoly watchdog stated.

“Further, the public interest commitments provided by the merger parties do not outweigh the competition concerns.”

Under the terms of the deal, Vodacom and Community Investment Ventures Holdings (CIVH) would merge their networks into a new entity, initially referred to as “Newco” or “Fibreco”.

CIVH later announced that the new company would be called Maziv.

Maziv’s fibre assets include Vumatel, Dark Fibre Africa (DFA), and their various holdings in companies like Herotel and SADV.

If the deal closed, Vodacom would own a 30% stake in Maziv for a total purchase consideration of around R13.2 billion.

Although Vodacom will have a minority stake, it will co-control the company.

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 Maziv’s growth in valuation from the date Vodacom and CIVH signed the agreement to the deal’s closing date.

Vodacom has the option to acquire an additional 10% stake in Maziv to increase its shareholding to 40%.

“The proposed merger combines one of South Africa’s largest fibre infrastructure players, Maziv, and South Africa’s largest mobile operator, Vodacom,” the Competition Commission said.

It’s worth noting that this statement is inaccurate. Vodacom’s mobile network was not part of the deal.

The Commission concluded that the transaction raises several vertical and horizontal competition concerns.

“From a horizontal perspective, the Commission’s investigation shows that 5G Fixed Wireless Access (FWA) and fibre compete in the same relevant market and that consumers stand to benefit from increasing competitive rivalry between FWA and fibre,” the Commission said.

“The proposed merger will result in the loss of direct competition between Vodacom and Maziv in the areas where both Vodacom and Maziv have deployed fibre.”

Its investigation also showed that fibre players tend to reduce prices in areas where more than one fibre network provider has deployed fibre.

“This price competition is lost with the merger,” it said.

“Importantly, the proposed merger is also likely to result in the prevention or lessening of future competition in relation to fibre and 5G FWA.”

The Competition Commission said Maziv and Vodacom have significant pre-merger plans to expand coverage, particularly in underserved low-income areas.

“Vodacom, through its spectrum allocation obligations, and Maziv, through its planned Vumatel rollout plans, are both investing in infrastructure rollout to target underserved low-income and more rural consumers,” it said.

“These expansion plans would bring benefits of price competition and consumer choice to underserved or unserved consumers.”

It concluded that the proposed merger would likely prevent or lessen this competitive rivalry and deprive low-income consumers of the benefits that fixed competition exerts on mobile products as currently enjoyed by wealthier and urban consumers in South Africa.

This is curious conclusion to draw, as the Competition Commission did not clarify how it believes Vodacom would be able to shirk its spectrum allocation obligations.

“In addition, the evidence shows that fibre exerts a constraint on the extent to which mobile operators can set prices for mobile data more generally,” the Commission stated.

“The merger will reduce this constraint.”

From a vertical competition perspective, the Commission said its investigation identified several concerns about incentives for “self-preferencing” and foreclosure of competitors post-merger.

“One concern arises from the fact that [mobile network operators] rely on Maziv, and DFA specifically, to a varying but significant degree for fibre backhaul and metropolitan connectivity services to provide mobile retail services,” it stated.

“The merger creates the ability and (increased) incentive to partially foreclose or otherwise disadvantage rival MNOs.”

Similarly, the Competition Commission believes providers of lit fibre-to-the-business services rely on the merger parties, and particularly DFA, to a significant but varying degree for dark fibre.

It said the merger amplifies the merged entity’s incentive to “preference” their own retail businesses over those of competitors.

“Importantly, there are no significant benefits arising from the proposed merger that are not already independently planned prior to the merger or not already in place,” the Competition Commission said.

“Moreover, the supposed benefits of Maziv’s open access regime have not been universally confirmed by the investigation; instead, evidence and allegations of self-preferencing behaviour and discriminatory pricing have arisen.”

According to the Commission, the merger is likely to further reinforce the incentives for self-preferencing and discriminatory behaviour.

“The Commission conducted an extensive investigation consulting with several market participants including mobile network operators (MNOs), fibre network operators, Internet service providers and others and the majority of these market participants have expressed opposition to the merger,” it said.

“The efficiencies submitted to arise from the proposed merger have not been found to be merger specific or substantial enough to outweigh the likely anticompetitive effects of the transaction.”

The Commission said that although the merging parties have proposed open-access remedies to address the competition concerns arising, the remedies are complex, incapable of being effectively monitored, and do not address the full extent of the competition concerns likely to arise from the proposed transaction.

“The merging parties have submitted that the merger will contribute to the public interest through 5G and fibre rollout commitments, the establishment of a supplier development fund, the implementation of a notional employee benefit scheme, a moratorium on retrenchments, the creation of additional employment opportunities, and maintaining the use of suppliers owned/controlled by Historically Disadvantaged Persons,” it continued.

“The Commission found that most of these public interest commitments would occur absent the merger either as a result of existing spectrum obligations or existing rollout plans. Therefore, these commitments do not outweigh the competition harm that has been identified.”

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Competition Commission denies approval for Vodacom-Vumatel deal