How Voda­fone made the right con­nec­tions in Africa

Vo­da­com is a ma­jor global ven­ture for the mo­bile gi­ant, but it op­er­ates in a dif­fi­cult and shift­ing po­lit­i­cal land­scape, re­ports Christo­pher Wil­liams

The Sunday Telegraph - Money & Business - - Front page -

At Nel­son Man­dela’s for­mer res­i­dence in Vi­lakazi Street, Soweto, South Africa’s fu­ture meets its dark past. Hordes of school­child­ren, too young to have suf­fered the in­jus­tice they have come to study, pack nois­ily into the mod­est sin­gle-storey home. Most seem more ex­cited to be out of the class­room than by the arte­facts of the strug­gle against apartheid on dis­play.

Signs of change are all around out­side too. The ex­te­rior walls dis­play the Molo­tov cock­tail scorch marks and bul­let scars of raids on Man­dela prior to his im­pris­on­ment. Yards away street per­form­ers and hawk­ers pay no mind to such grim his­tory as they cheer­fully work the groups of wealthy tourists.

The nearby Or­lando Tow­ers were once grey sen­tinels to a belch­ing coal power sta­tion that lit up down­town Jo­han­nes­burg but left Soweto in lamp­light. They were de­com­mis­sioned in 1998 and are now em­bla­zoned with colour and com­merce.

One serves as an ad­ver­tise­ment for Vo­da­com, the key­stone of Voda­fone’s £9bn-a-year busi­ness out­side Europe since a deal this year to merge its In­dian op­er­a­tion with a ri­val. The tower is a 330ft re­minder to the cit­i­zens of Soweto that in 21st cen­tury South Africa, con­nect­ing is cru­cial.

Vo­da­com, val­ued at £15.4bn on the Jo­han­nes­burg stock ex­change and 65pc owned by its Bri­tish par­ent, is a per­va­sive pres­ence in the town­ship. As well as loom­ing over the land­scape, the com­pany is shirt spon­sor to both the ma­jor foot­ball clubs, the Or­lando Pi­rates and the Kaiser Chiefs. It sells pay-as-you-go air­time via dozens of re­tail kiosks and fights a street-level bat­tle for cus­tomers with ri­val MTN.

“We’re the num­ber one brand in telco but also gen­er­ally come just af­ter Coca-cola in peo­ple’s minds,” says Shameel Joosub, chief ex­ec­u­tive. “That’s the bench­mark.”

Its head­quar­ters is on the far side of the city, in the bur­geon­ing busi­ness dis­trict of Midrand. Here in­creas­ingly up­scale lo­cal cus­tomers are more likely to wield the lat­est smart­phones and sub­scribe to monthly pack­ages, in ex­change for the fastest 4G net­work tech­nol­ogy. There are still two sides to South Africa and Vo­da­com must serve both.

“What res­onates with high value cus­tomers is very dif­fer­ent to what res­onates with cus­tomers that are liv­ing more hand to mouth,” says Joosub, a 46-year-old mem­ber of South Africa’s In­dian mi­nor­ity.

“In South Africa the sta­ple food is maize. Peo­ple buy a big bag for the month. But if you can’t af­ford it you buy smaller pack­ets through the month. We’ve in­tro­duced that con­cept to cel­lu­lar, so you can buy your air­time just for the hour or the day.”

Vo­da­com has proved able to pat its head while rub­bing its tummy. Last year core rev­enues in­creased 5.6pc to around £4.7bn. Such growth is a dis­tant me­mory for Voda­fone in Europe, which is only now be­gin­ning to re­verse a de­cline caused mainly by price cuts im­posed by reg­u­la­tors.

Vo­da­com’s un­der­ly­ing earn­ings mean­while leapt more than 7pc as it con­trolled costs and ben­e­fited from ris­ing de­mand, com­fort­ably out­pac­ing the over­all group. Profit mar­gins were al­ready the high­est of any of Voda­fone’s ma­jor units. Hav­ing proven it­self up to the chal­lenge of South Africa, Vo­da­com is be­ing lined up to tackle swathes more of the con­ti­nent.

Post apartheid

Vo­da­com oc­cu­pies a clus­ter of mod­ern build­ings that – ex­cept for an un­ex­plained rooster pa­trolling the grounds – would ap­pear per­fectly at home on any UK busi­ness park, in­clud­ing Voda­fone UK’S New­bury site. Ef­forts have been spent to make the cam­pus more sym­pa­thetic to its nat­u­ral and po­lit­i­cal en­vi­ron­ment. Thirsty Euro­pean roses cho­sen by Alan Knott-craig, the for­mer chief ex­ec­u­tive, have been re­placed with in­dige­nous species more at home with the arid winters of the Highveld. Land once oc­cu­pied by a nine-hole pitch and putt course has been put to more in­clu­sive use as car park­ing.

The Bri­tish con­nec­tion nev­er­the­less runs deep. Vo­da­com was founded as a joint ven­ture be­tween Voda­fone and South Africa’s for­mer state mo­nop­oly Telekom as part of postapartheid eco­nomic re­forms in 1994. Ven­fin, a fund con­trolled by Jo­hann Ru­pert, the lux­ury goods bil­lion­aire, owned a 15pc stake un­til sell­ing up to Voda­fone in 2006. He is high on the agenda of the South African press again as the tar­get of the racially di­vi­sive lob­by­ing cam­paign that brought down PR firm Bell Pot­tinger.

Vo­da­com made its stock mar­ket de­but three years af­ter Ru­pert’s exit, al­low­ing Telekom to cash in and set up a ri­val net­work of its own.

Voda­fone’s en­try into South Africa was part of a light­ning­fast in­ter­na­tional ex­pan­sion as the op­er­a­tor raced to plant flags in as many ter­ri­to­ries as pos­si­ble. The launch of 2G net­work tech­nol­ogy had trig­gered a spurt of growth and con­sol­i­da­tion for the mo­bile in­dus­try. Un­der for­mer chief Sir Chris Gent the com­pany was de­ter­mined to emerge as a global win­ner.

It was a strat­egy that would even­tu­ally lead to Voda­fone’s dis­as­trous £112bn hos­tile takeover of Man­nes­mann in 2000. Vo­da­com was a bet­ter gam­ble and South Africa be­came a launch pad into less de­vel­oped African na­tions. Be­gin­ning with Le­sotho, the com­pany ex­panded into Tan­za­nia and Mozambique.

It also has a joint ven­ture in war-torn Demo­cratic Repub­lic of Congo, where its of­fices have been at­tacked with rocket pro­pelled grenades, and it has clashed with its part­ner. Till Stre­ichert, Vo­da­com chief fi­nan­cial of­fi­cer, says de­spite the chal­lenges, the com­pany wants to in­crease its stake in a long-term bet on the de­vel­op­ment of the coun­try.

Un­til last month South Africa ac­counted for three quar­ters of core rev­enue. Its in­ter­na­tional am­bi­tions have re­ceived a ma­jor lift, how­ever, from Voda­fone’s de­ci­sion to trans­fer a 35pc stake in the Kenyan op­er­a­tor Sa­fari­com to Vo­da­com. The £2bn deal, paid for in shares that Voda­fone then sold to com­ply with free float rules, re­duces South Africa to two thirds of core rev­enues. Sa­fari­com is also a pi­o­neer in M-pesa, a lo-fi mo­bile pay­ments tech­nol­ogy that has re­placed cash for many trans­ac­tions in Kenya – four fifths of its 28m cus­tomers are users. Vo­da­com tried to pop­u­larise M-pesa in South Africa to a cool re­cep­tion, but is mak­ing more progress in Tan­za­nia and Mozambique where bank­ing ser­vices are less widely avail­able. “We think there’s an op­por­tu­nity for us and Sa­fari­com to learn from each other,” says Joosub. “It gives us ex­po­sure to more mar­kets. And from a profit per­spec­tive Sa­fari­com on its own is more than the rest of our in­ter­na­tional mar­kets. And it’s a high-growth mar­ket.”

For Voda­fone the deal was partly a vote of con­fi­dence in Vo­da­com to act as a ve­hi­cle for African ex­pan­sion and partly the lat­est means of tidy­ing up its sprawl­ing port­fo­lio of as­sets. Vit­to­rio Co­lao, the chief ex­ec­u­tive, has in­di­cated more op­er­a­tions could be folded into its South African list­ing, such as Voda­fone Ghana if gov­ern­ment ap­proval can be se­cured.

Such ma­noeu­vres have prompted City spec­u­la­tion that Vo­da­com could one day be spun off en­tirely. Both com­pa­nies in­sist their re­la­tion­ship is

‘Tell them to let us have us more money. We know how to make a good re­turn on it’

mu­tu­ally ben­e­fi­cial, de­liv­er­ing cost sav­ings in pro­cure­ment and se­cur­ing tech­ni­cal ad­van­tages over ri­vals. It cuts both ways. Vo­da­com is act­ing as a test bed for ar­ti­fi­cial in­tel­li­gence. The buy­ing pat­terns of its “hand to mouth” pay-as-you-go cus­tomers are crunched by an al­go­rithm that re­turns per­son­alised air­time of­fers, for in­stance. For wealth­ier cus­tomers, it is work­ing on adapt­ing the tech­nol­ogy to sug­gest videos to watch and so con­sume more data.

In its pur­suit of growth it is also look­ing at ac­qui­si­tions of un­re­lated play­ers as the African tele­coms scene shakes out those lack­ing ei­ther the stom­ach or the cap­i­tal to in­vest.

“It’s no se­cret that there are a lot of as­sets up for sale to­day,” says Joosub.

“There are a few play­ers ex­it­ing where as be­fore guys like Eti­salat were just pump­ing money in.”

Stre­ichert adds that Vo­da­com has plenty of fi­nan­cial fire­power to de­ploy if re­quired. Any such moves would need Voda­fone ap­proval.

In­clu­sion agenda

Jan Del­port, a live wire Afrikaner who serves as Vo­da­com’s chief tech­nol­ogy of­fi­cer, seems frus­trated that the com­pany’s purse-strings are held by Voda­fone in Lon­don.

“Tell them to let us have us more money,” he jokes. “We know how to make a re­turn on it.”

Del­port is in a daily bat­tle with MTN to main­tain Vo­da­com’s lead­er­ship as South Africa’s fastest and most re­li­able mo­bile net­work. He used the com­pany’s share of Voda­fone’s £19bn Pro­ject Spring in­vest­ment to take a big lead, with 4G now avail­able to 76pc of the pop­u­la­tion. Now the in­vest­ment is com­plete. There is less of a step back down in South Africa than in other mar­kets, but pres­sure has in­creased.

“We’re very com­pet­i­tive,” says Del­port. “We have to keep our noses ahead. We are fa­nat­i­cal about it. It is a strug­gle when your com­peti­tor out-in­vests you. So we are su­per fo­cused in en­sur­ing we get the best bang for our buck.” The con­cern is in­ten­si­fied by the South African gov­ern­ment’s in­clu­sion agenda, which cov­ers ev­ery­thing from ru­ral cov­er­age to ra­dio spec­trum li­cences and black own­er­ship. Op­er­a­tors suf­fered a fright last year when min­is­ters pro­posed to ef­fec­tively na­tion­alise the air­waves and forced them all to rent ca­pac­ity from a cen­tral agency. The threat has re­ceded, but it is an ex­am­ple of the chal­lenge of build­ing on shift­ing po­lit­i­cal sands.

The po­ten­tial exit of Ja­cob Zuma as ANC leader long be­fore his term as pres­i­dent ends has fu­elled con­cern. His sud­den sack­ing of South Africa’s fi­nance min­is­ter ear­lier this year, caus­ing shock waves in the mar­kets, un­der­mined con­fi­dence. Un­pre­dictable gov­ern­ment ac­tion is viewed by an­a­lysts as the great­est threat to Vo­da­com’s growth.

Ex­ter­nal chal­lenges are plen­ti­ful. In just the last week Vo­da­com and its fat profit mar­gins have been among the tar­gets of a protests call­ing for cuts to the cost of mo­bile data.

As a re­sult Vo­da­com sets great store by its so­cial con­tri­bu­tion. The costs of fail­ing to fund ed­u­ca­tion pro­grammes and sup­port­ing health­care can be high. It has in­vested in low-cost mo­bile masts that can be fit­ted to the ship­ping con­tain­ers that serve as re­tail units in town­ships. “I don’t think in emerg­ing mar­kets the gov­ern­ment ever has enough money to do what it should,” says Joosub. “You have huge in­equal­ity and resid­ual is­sues be­cause of apartheid or so­cial­ism and these things. So I think as a big cor­po­rate it is al­ways in­cum­bent on us to play a role and give back.”

Giv­ing back can hap­pen in un­ex­pected ways in South Africa. Above Joosub’s desk is a pic­ture of him with Man­dela, who vis­ited the Vo­da­com head­quar­ters as pres­i­dent.

“The way he did it was he would in­tro­duce you to some­one and say ‘this man is go­ing to build you a school’. Then you had to do it.”

South African peo­ple hold plac­ards as they protest about curbs on data us­age, left. Soweto’s Or­lando Tow­ers are now em­bla­zoned with colour and com­merce, right. A Vo­da­com base sta­tion in Alexan­dre Town­ship, be­low right

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