Cell giants jostle for Neotel
SA’S second fixed-line group is said to be buyout target as MTN, Vodacom seek to expand
NEOTEL, which has failed to match its high expectations since it was launched to rival Telkom in 2006, is understood to be on the block.
Formal bids to buy the fixed-line operator were due in this week, according to well-placed market sources, despite watertight non-disclosure clauses keeping a tight lid on the process.
Neotel denies it is for sale, but speculation is rife that interested parties include cellular giants MTN and Vodacom as well as Dimension Data’s Internet Solutions.
Neotel’s launch was expected to bring much-needed competition to the fixed-line telecoms market at a time when the cellphone operators were booming.
Now Vodacom and MTN are both worth far more than Telkom, and are looking beyond the saturated local cellular market for growth — including in fixed line.
Though Neotel has not released detailed financials, it claimed last month that it had turned a pre-tax profit for the first time as its earnings before interest and tax soared 531%.
Analysts said, however, that the company still had a bottom-line loss.
CEO Sunil Joshi claimed the company was growing faster than 11% — eight times quicker than the sluggish 1.4% growth expected for the local fixed-line market. Corporate customers rose 29% last year, while consumer clients grew 52%.
Still, Neotel has only 152 000 consumer clients, which shows it has not lived up to the hype that it would be the rival to Telkom needed to ensure prices were finally hacked.
But it has had a marked effect in the business sector, cutting wholesale data prices and improving corporate connectivity. Government remains one of its biggest clients.
This is not the first time that it’s been said Neotel will to be sold. In May, rumours of a sale surfaced on mybroadband.co.za with Dimension Data, MTN and Vodacom mentioned as possible buyers.
People close to the process said that this week was the deadline for final bids to be lodged.
Analysts said companies seeking to buy Neotel would be interested in its customer base and also its valuable spectrum.
Research company Frost & Sullivan said Neotel invested R5-billion over the past five years, while Strategy Worx put Neotel’s total investment since it started at R10-billion.
Gareth Mellon, Frost & Sullivan ICT senior industry analyst, said various companies were interested in Neotel because of its fixed infrastructure and the fixed-mobile convergence opportunity it offered.
“Neotel has invested heavily in building its own infrastructure, which presents an attractive proposition, especially for those companies competing in the enterprise market.”
Neotel’s shareholders are Tata Communications (68.5%), Nexus Connection (19%) and Communitel (12.5%).
The company said that it continued to be backed by its shareholders, implying they are not in the market to sell their shares.
Nonetheless, Frost & Sullivan research analyst Masego Mbaakanyi said MTN, Vodacom and Didata were all “potential buyers for Neotel”.
“Dimension Data wants to position itself as an integrated service provider, so they may be tempted to buy out Neotel in order to offer end-to-end solutions, including fixed-line services.
“However, Vodacom and MTN will be better candidates for Neotel because they are all telecom operators. They have robust expertise in telecommunications services,” said Mbaakanyi.
Those companies remained mum, however, despite people close to the process saying bids had come in.
Nik Kershaw, investor relations executive at the MTN Group, said MTN did not comment on market speculation.
Vodacom and Didata declined to comment.
Arthur Goldstuck, who runs research company World Wide Worx, said the fact that Neotel moved out of the red financially placed it in a better bargaining position.
But he said Neotel never really gained the traction needed to compete with the likes of Telkom. “And it needs additional scale.”
This new bout of speculation comes amid widespread talk of consolidation in the telecoms industry. Telkom is understood to be considering options for its own mobile arm 8ta, while Cell C told this newspaper recently that it
It is unlikely that Tata would give up the strategic nature of their investment in undersea cables
was also considering options to scale up. MTN, Vodacom and Telkom produced relatively disappointing results last year, with average subscriber revenue falling.
Steven Ambrose, CEO of consultancy Strategy Worx, said: “This is a scale business. The only way to make any significant return is to have massive scale in subscribers.
“Neotel has rolled out a significant amount of terrestrial fibre, and they have been very successful in offering services to government and large business in South Africa.
“Neotel’s focus on fibre connectivity and services around these types of networks proved successful, with all significant business looking for alternatives to Telkom.”
But analysts say it was unlikely Neotel’s shareholders would sell now.
Ambrose said: “It is unlikely that Tata would give up the strategic nature of their investment in the various undersea cables linking Africa to the rest of the world, and Neotel is key to the delivery of these services to Southern Africa.”
Neotel also has new products up its sleeve. The company said it would launch the high-speed long-term evolution network soon.