MTN’s warning about Vodacom, Vumatel deal
MTN Group CEO Ralph Mupita has warned that if South Africa’s competition authorities don’t start allowing consolidation in the telecommunication industry, the country will begin suffering from underinvestment in digital infrastructure.
This comes after the Competition Commission recommended against a proposed deal between Vodacom and Vumatel-owner Maziv.
The deal involves Vodacom taking a 30% stake in Maziv in exchange for about R13.2 billion.
This includes R6 billion cash up-front, another roughly R3 billion based on Maziv’s valuation when the deal closes, and some of Vodacom’s fibre assets.
It is understood Maziv would mainly get Vodacom’s residential fibre network, valued at R4.2 billion, as part of the deal.
While the Competition Commission has rejected the deal, the proposed transaction must still go to the Competition Tribunal for final adjudication.
Mupita said the Tribunal’s ruling on the transaction would be a landmark decision, explaining that it would signal whether South Africa would more strongly favour infrastructure investment or the veneer consumer choice.
He said that in MTN’s view, competition regimes tend to favour consumer choice or investment.
“It’s a philosophical position about: ‘What does competition do for you?’” he said.
While markets like the US and China favour telco investment, Europe and South Africa are favouring consumer choice.
Essentially, South Africa’s philosophy is to maintain as many market participants in any industry to give customers more choices.
“There’s nothing wrong with that, but when it comes to an industry that’s capital intensive, something’s got to give,” Mupita said.
He also said a distinction must be made between superficial and effective competition.
“When we look at our markets… effective competition is: which operators are able to provide their own infrastructure and services.”
Mupita listed several markets in Africa and around the world where there is the appearance of competition, but one or two players actually dominate.
Although he didn’t mention South Africa, by his metrics we would be a three-player (or 2.5-player) cellular market.
Looking at revenues, Vodacom and MTN control between two-thirds and 70% market share. Cell C, Telkom, and Rain make up the remainder.
However, the “third player” companies can’t compete with Vodacom and MTN’s level of infrastructure investment.
Cell C has given up entirely, decommissioning its mobile network and striking separate deals with MTN and Vodacom to supply its customers with coverage.
Telkom and Rain still put up their own towers, but also rely on roaming agreements with Vodacom and MTN for coverage.
Therefore, South Africa could arguably be seen as a 2.5-player market, as the “third player” relies heavily on the dominant two.
However, Mupita said the answer isn’t to hurt the growth of the major players in the market either.
“It doesn’t help to stymie number one and number two in the market. Instead, regulators must accept that consolidation is a trend,” he said.
He also said they aren’t opposed to South Africa’s anti-monopoly watchdog placing strict requirements on large mergers and acquisitions.
MTN advocated for stipulations on the Vodacom-Maziv deal, like ensuring the fibre network is open access, preventing margin squeeze, and disallowing self-preferential behaviour.
Mupita explained that one of the reasons the telecoms industry is seeing increased consolidation globally is that companies struggled to make enough money to keep investing in their networks.
“The industry has done very poorly over the past 10–15 years to deliver returns to shareholders above the cost of capital. Therefore, we’ve seen the waves of consolidation,” he said.
“Look at the US: four-player market, now a three-player market. T-Mobile and Sprint had to merge. Sprint was keeling over.
“Go to the UK and see the discussions Vodafone UK is having.”
Mupita said that telcos have become like mining and oil — incredibly capital-intensive businesses where there can only be a few “majors”.
Telcos specifically require enormous capital investment just to sustain their networks.
“Consolidation will be driven by the demands of the investment cycle over the next 5–10 years, which are going to be material,” Mupita stated.
MTN believes businesses like theirs must invest around 18% of the revenue they generate per year towards the following year’s capital expenditure (Capex).
“If you’re not generating enough margin [profits], you can’t fund the Capex. If you can’t fund the Capex, you then have to go and borrow debt. If you borrow debt, you get geared, then you cut your pricing to stay competitive, and then you hit a free cash flow wall,” Mupita said.
“Slowly, slowly and then suddenly. That’s what happened to Sprint.”
Mupita said it isn’t possible to have four fully-funded and invested operators in a market anymore.
When telecommunications was less capital intensive and mostly about voice calls, this wasn’t a problem, but the world has moved on.
Mupita said MTN and Vodacom would continue to invest in their networks regardless of where South Africa lands on allowing large mergers.
However, allowing some level of market consolidation could enable them to spend more.
“We’ll put in our R10 billion. Our friends across the way in Midrand [Vodacom] will put in their R10–R11 billion. But that’s all you’re going to get,” he said.
“But maybe there’s an opportunity to be putting in R30 billion at scale, ensuring there is sufficient competition at the services layer.”
The phrase “competition at the services layer” is industry short-hand for allowing service providers like Afrihost, Axxess, First National Bank, and others to offer products on top of an infrastructure provider’s network.
MTN and Vodacom would effectively sell wholesale to these third parties, and they would compete with one another on price and customer service to provide consumers with the best product.
However, this raises the sticky issue that Vodacom and MTN are also the biggest “services layer” players in the market, and how regulators like the Competition Commission should tackle that if they allow consolidation.
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