Vodacom veto power over Vumatel and DFA

Vumatel and Dark Fibre Africa (DFA) owner Remgro has rejected arguments from the Competition Commission that Vodacom will get undue control over the companies if a deal that has been in the making since 2021 is approved.

In its closing arguments to the Competition Tribunal, the Commission said that Vodacom would gain substantial veto power over Maziv — the entity that would house the fibre assets of Vumatel, DFA, and Vodacom.

These veto powers include appointing or dismissing Maziv’s CEO and CFO, issuing new shares, financing debt, and the adoption or amendment of a dividend policy.

“This is not the kind of power that is ordinarily associated with a minority shareholder,” the Competition Commission stated.

However, Remgro disagreed, saying it was advised that such minority protection rights are standard in a transaction of this nature.

The transaction would see Vodacom acquiring 30% of Maziv for a combination of assets and cash of at least R13.2 billion. Vodacom has the option to increase its stake in Maziv to 40%.

The R13.2 billion price 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 secondary purchase amount is based on the valuation of Vumatel and DFA’s holding company when the deal goes through.

That holding company is Community Investment Ventures Holdings (CIVH). Remgro owns an effective 57% interest in CIVH.

Maziv was established specifically for the transaction to hold CIVH and Vodacom’s fibre assets.

Remgro explained that they negotiated a set of conditions that gives Vodacom certain co-controlling powers over Maziv to protect its rights as a minority shareholder.

“Given the size of their proposed total investment exceeding R10 billion and a shareholding of at least 30%, the parties agreed on a set of minority shareholder protection rights,” Remgro told MyBroadband.

Remgro previously explained this was to ensure that CIVH or other future Maziv shareholders couldn’t make sweeping changes, such as switching from building fibre to another type of business, without Vodacom’s say-so.

“The parties aimed at structuring all shareholder rights to focus on the protection of their respective investment in Maziv at a high level and not to interfere with the operational management of the business,” it said.

Remgro confirmed that Vodacom has the right to veto certain matters, including the items the Competition Commission raised, as well as budgets and business plans.

“These rights do not confer positive control to Vodacom at the shareholder level, and Vodacom has no positive control at the board level either,” Remgro stated.

Positive control refers to being able to direct significant decisions at the company, such as selling its assets or changing fundamental business operations.

However, while Vodacom might not have positive control, the Competition Commission argued that the veto powers would give it significant negative control.

“One can easily see a scenario where Vodacom wants something to happen through Maziv, or something not to happen, and vetoes or threatens to veto the issuing of shares, the financing of debt, or the dividend policy,” it told the Competition Tribunal.

“That is quite some power that Vodacom wields at shareholder level.”

The Commission emphasised that giving Vodacom a veto over issuing new shares means it can overrule Maziv raising further capital.

However, it did not explain that the veto also safeguards Vodacom as a minority shareholder from being diluted without its input.

Dilution occurs when a company issues new shares to raise capital, and an existing shareholder can’t or chooses not to buy any of the new shares.

While dilution can be a natural consequence of a company raising additional capital, without proper controls in place it can also be weaponised against minority shareholders.

Regarding Vodacom’s potential negative control over Maziv, Remgro previously argued that it was not reasonable to assume the mobile operator would invest over R10 billion, including contributing its own fibre assets, only to undermine the company.

Rather, Vodacom would want its investment to generate returns.

Vodacom and Maziv’s senior council also countered claims that Vodacom would use its influence to ensure it gets preferential treatment from DFA or Vumatel.

He argued that Maziv has no incentive to favour Vodacom at the expense of itself and its majority shareholder, CIVH, as CIVH does not share in any benefit from Vodacom’s other operations, like its mobile business.