72 Vo­da­com’s east­ern pivot The South African mo­bile op­er­a­tor is look­ing to Kenya and Tan­za­nia in its quest to cap­ture new mar­kets

The Africa Report - - CONTENTS - By Erin Con­way-smith in Johannesburg

Vo­da­com, ma­jor­ity owned by the UK'S Voda­fone, is look­ing to Kenya and Tan­za­nia in its quest to cap­ture new mar­kets out­side of South Africa, where it leads the sec­tor

Faced with a heav­ily sat­u­rated do­mes­tic mar­ket, ham­strung by an anaemic econ­omy, Vo­da­com is turn­ing its at­ten­tion to busi­ness out­side South Africa’s bor­ders. Its glow­ing red logo has long shone like a bea­con over down­town Johannesburg from a gi­ant ad­ver­tise­ment atop Ponte City, the tallest res­i­den­tial build­ing in sub-sa­ha­ran Africa. With more sub­scribers than any other mo­bile op­er­a­tor in South Africa, the firm is dom­i­nant on its home turf – per­haps too dom­i­nant, ac­cord­ing to the coun­try’s com­pe­ti­tion com­mis­sion, which on 4 Oc­to­ber an­nounced an in­ves­ti­ga­tion into Vo­da­com’s ex­clu­sive con­tract to pro­vide ser­vices to the gov­ern­ment (see box). The com­pany sees dy­namic, fast-grow­ing East Africa as a lynch­pin of its growth strat­egy. In Au­gust, Vo­da­com Group wrapped up its R34.6bn ($2.6bn) ac­qui­si­tion of a 35% stake in Sa­fari­com, the lead­ing

com­mu­ni­ca­tions firm and mo­bile op­er­a­tor in Kenya, from par­ent com­pany Voda­fone. The deal took the form of an eq­uity swap, with Vo­da­com is­su­ing 226.8m new shares to Uk-based Voda­fone, which is seek­ing to di­vest from African com­pa­nies in or­der to look for a tie-up in Europe. Un­der the terms of the deal, Voda­fone will re­tain a 5% hold­ing in Sa­fari­com, while the Kenyan gov­ern­ment will keep a 35% stake.

A FOR­MI­DA­BLE PLAYER

The trans­ac­tion, de­scribed by Vo­da­com as “trans­for­ma­tional,” was the largest in the com­pany’s his­tor y. “It pro­vides us with a unique op­por­tu­nity to di­ver­sify [Vo­da­com’s] fi­nan­cial pro­file in a sin­gle trans­ac­tion,” Vo­da­com chief ex­ec­u­tive Shameel Joosub tells The Africa Re­port. Joosub points to Sa­fari­com’s suc­cesses in Kenya, where it has a mar­ket share of 71%. “This is an ex­cit­ing deal,” he says. “It pro­vides our share­hold­ers with ac­cess to a high growth, high mar­gin and high cash-gen­er­at­ing busi­ness in the at­trac­tive Kenyan mar­ket.” He adds: “It will also in­crease our pres­ence in East Africa and make Vo­da­com a for­mi­da­ble player in fi­nan­cial ser­vices on the con­ti­nent.” Kenya also of­fers room for ex­pan­sion, Joosub says, not­ing that the coun­try has a mo­bile pen­e­tra­tion rate of 88% – well be­low that of South Africa, at 146%. Dobek Pater, a tele­coms ex­pert and man­ag­ing di­rec­tor of the Africa Anal­y­sis con­sul­tancy, says Vo­da­com is look­ing to so­lid­ify its po­si­tion in Africa against com­peti­tors such as MTN Group. While Vo­da­com is South Africa’s big­gest mo­bile car­rier with 39.4 mil­lion sub­scribers, it lags far be­hind South Africa-based MTN in terms of sub­scriber num­bers across the con­ti­nent. MTN has 231.8 mil­lion African sub­scribers, far more than Vo­da­com’s 69.3 mil­lion (see chart). The Kenyan mar­ket is ex­pand­ing, and is suf­fer­ing grow­ing pains. “Sa­fari­com is a very suc­cess­ful en­tity with good rev­enue gen­er­a­tion, prof­itabil­ity and cash flow. Vo­da­com stands to ben­e­fit from that,” Africa Anal­y­sis’s Pater says. But just as Vo­da­com is in the reg­u­la­tor’s spot­light for its dom­i­nance in South Africa, the Com­mu­ni­ca­tions Au­thor­ity of Kenya com­mis­sioned a re­port this year that sug­gested Sa­fari­com should be bro­ken up be­cause it has too much con­trol of the mar­ket. The gov­ern­ment has come to Sa­fari­com’s de­fence, but the com­pany has be­come a tar­get of op­po­si­tion crit­i­cisms af­ter the con­tested Au­gust pres­i­den­tial elec­tion.

‘PLAY­ING CATCH-UP’

Un­like ri­val MTN, which has ag­gres­sively pur­sued new mar­kets – notably, Nige­ria – Vo­da­com has taken a more cau­tious ap­proach. Joosub cites Vo­da­com’s “dis­ci­pline” in eval­u­at­ing new mar­kets when asked where the com­pany might be look­ing to ex­pand next. He has pre­vi­ously stated that Vo­da­com is only in­ter­ested in ac­quir­ing sig­nif­i­cant play­ers in mar­kets of scale on the con­ti­nent. Der­rick Chikanga, a tele­coms an­a­lyst at re­search group IDC, says: “They are re­ally play­ing catchup in terms of ex­pand­ing their op­er­a­tions out­side South Africa.”

Vo­da­com also hopes its Kenyan ac­qui­si­tion will help drive growth of M-pesa, Sa­fari­com’s sig­na­ture mo­bile-money ser­vice that launched a decade ago and now has 19 mil­lion ac­tive users across the con­ti­nent. The ma­jor ex­cep­tion to this suc­cess is South Africa, where M-pesa was shut­tered last year af­ter poor up­take from con­sumers. “The con­di­tions in the lo­cal [South African] mar­ket are dif­fer­ent, from a reg­u­la­tory and mar­ket devel­op­ment per­spec­tive – both in the fi­nan­cial sec­tor and the mo­bile sec­tor,” Pater ex­plains. Pater says Vo­da­com will likely tr y to repli­cate the suc­cess of Sa­fari­com’s mo­bile-money plat­form in new mar­kets as mo­bile money and fi­nan­cial ser vices be­come in­creas­ingly im­por­tant for African wire­less op­er­a­tors to have in their port­fo­lio.

TAN­ZA­NIAN IPO

Vo­da­com’s pivot to East Africa also bol­sters the com­pany’s po­si­tion in Tan­za­nia, where it owns a 65% stake in Vo­da­com Tan­za­nia and has 12 mil­lion cus­tomers. Vo­da­com Tan­za­nia had its ini­tial public of­fer­ing (IPO) in Au­gust af­ter the Tan­za­nian gov­ern­ment or­dered all tele­coms com­pa­nies op­er­at­ing in the coun­try to sell at least a 25% stake on the Dar es Salaam Stock Ex­change in a bid to boost do­mes­tic own­er­ship in the fast-grow­ing sec­tor. Ini­tially un­der­sub­scribed, the IPO was ex­tended to al­low prospec­tive in­vestors more time to par­tic­i­pate. Vo­da­com Tan­za­nia was the first tele­coms op­er­a­tor to list on the ex­change and be­came its largest IPO to date, draw­ing some 40,000 lo­cal in­vestors. Many of them were first-time par­tic­i­pants in the coun­try’s stock mar­ket. Pater says the fact that the tele­coms IPOS were forced, not vol­un­tary, may have led to ret­i­cence on the part of in­vestors. “I think in gen­eral there is a cau­tious ap­proach to­wards those in­for­ma­tion and com­mu­ni­ca­tion tech­nol­ogy stocks, per­haps in jux­ta­po­si­tion to min­ing stocks that prob­a­bly present a bet­ter op­tion at this time for in­vest­ment,” he says. Back home in South Africa, there are con­cerns that tele­coms com­pa­nies will be in­creas­ingly af­fected by the coun­try’s grind­ing eco­nomic woes un­der Pres­i­dent Ja­cob Zuma’s gov­ern­ment. Vo­da­com, as with other South African firms, has been hurt by the volatile cur­rency, and there are con­cerns that should lo­cal debt be down­graded to junk sta­tus, bor­row­ing costs will rise. Con­sumer spend­ing is also ex­pected to take a hit. Tele­coms firms in­clud­ing Vo­da­com have faced de­clines in rev­enue from mo­bile voice ser­vices. While data ser­vices have been prof­itable, grow­ing public pres­sure to re­duce prices have added to their woes.

RE­PLAC­ING LOST REV­ENUE

Vo­da­com says it has low­ered prices through bet­ter-value data bun­dles but ad­mits that more needs to be done to lower voice and data costs. “We em­barked on a pric­ing trans­for­ma­tion strat­egy three years ago and as a re­sult, our cus­tomers have ben­e­fited from a 44% re­duc­tion in data prices and a 42% de­cline in the cost of voice calls over that pe­riod,” Joosub says. “We need to ex­pand 4G cov­er­age still fur­ther and keep pace with an in­crease of more than 45% in sus­tained data traf­fic de­mand,” he adds. “Both of th­ese come at a cost, and we have in­vested some R32.7bn over the last four years. How­ever, lack of ac­cess to spec­trum is ham­per­ing our abil­ity to drive down in­fras­truc­ture costs and in turn, en­able us to pass sav­ings to the con­sumer.” Africa Anal­y­sis’s Pater says wire­less op­er­a­tors want to en­sure that data rev­enue re­places lost rev­enue from voice ser­vices. “From an op­er­a­tor per­spec­tive, you would want to sus­tain data prices higher rather than lower in or­der to re­alise a quick re­turn on in­vest­ment and main­tain higher rev­enues,” he says. “It’s not cheap to pro­vide data ser­vices,” Pater adds. “Sig­nif­i­cant funds and cap­i­tal ex­pen­di­ture are com­mit­ted to build in­fras­truc­ture.” IDC’S Chikanga adds : “The telecom­mu­ni­ca­tions in­dus­try is be­com­ing very, very com­pet­i­tive [...] A lot of the op­er­a­tors are un­der pres­sure in terms of mar­gins due to the de­cline in rev­enues from voice. They see that data is the only area that’s go­ing to gen­er­ate rev­enue for them. Re­duc­ing that would be sui­cide for their op­er­a­tions.” He con­cludes: “It’s all about broad­en­ing your op­er­a­tions [..] It’s in [Vo­da­com’s] in­ter­est that they ex­pand, es­pe­cially within the East Africa re­gion.”

Vo­da­com is ex­pand­ing its in­ter­net of­fer­ing to off­set a de­cline in rev­enue from mo­bile voice ser­vices

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