Vodacom pulls further ahead of troubled MTN
Flush with profits from data sales, the company could buy target Neotel outright in cash
VODACOM’S latest numbers must be deeply worrying for its principal rival, MTN.
While the latter is facing immense turmoil — a fine by Nigeria which, thanks to the weakening rand, has risen to R75billion, the departure of its longserving group CEO and a collapsing share price — the former is managing to grow its market-leading position in South Africa while increasing its profit margins.
Vodacom’s report card for the six months to September 30 shows that the telecommunications group, which is active in five markets in Southern Africa — South Africa is by far the largest — is firing on all cylinders despite the fragile economy.
Its earnings growth accelerated ahead of the revenue line as cost-containment exercises continued to bear fruit and it began to overcome the impact of enforced cuts to wholesale internetwork call fees — better known as mobile termination rates.
Voice revenues continued to fall, as expected, but growth in data sales, up by a third, coupled with a healthy performance outside South Africa, helped lift total revenue by 6.4%.
Profit margins, when measured using earnings before interest, tax, depreciation and amortisation, expanded by 2.1 percentage points to 36.7%, taking Vodacom firmly ahead of the 35.6% margin reported by MTN’s South African operation in the six months to end-June.
And Vodacom is printing money, despite investing R6.2billion in its network in the past six months. Free cash flow surged by 78.2% to R2.2-billion, while operating cash flow expanded by 30.7% to R5.8-billion.
It had just enough money in the bank at the end of September to be able to buy acquisition target Neotel in cash.
However, the Neotel deal is still facing significant obstacles. Telkom, MTN, Cell C and Dimension Data were all in court this week challenging the deal’s approval by the communications regulator, Icasa, while Competition Tribunal hearings, due to start on November 23, are likely to hear strong arguments by many of the same companies as to why the deal should not be allowed to proceed.
Opponents of the deal say Icasa broke its own rules and even went against its own legal advice in approving the deal. If the court agrees, it will not be the first time the authority, crippled for years by weak leadership, has bungled in this way.
But Vodacom CEO Shameel
BOOM TIMES: Vodacom continues to make large profits despite South Africa’s fragile economy Joosub claims not to be worried, even if his rivals win their court challenge. “Icasa has already done a lot of the work, so I’m not sure they’ll have to redo everything. The big one is the tribunal. We have to get it through the tribunal.”
Vodacom’s rivals worry that allowing the operator access to Neotel’s radio frequency spectrum assets, even with conditions attached, will put it in an unassailable position, allowing it to deploy next-generation 4G/LTE mobile infrastructure ahead of them, thereby entrenching its dominance in the South African telecoms sector to the detriment of competition and ultimately of consumers.
The government is yet to publish a policy on how spectrum bands crucial for delivering mobile broadband will be allocated, although the telecoms minister, Siyabonga Cwele, has promised it will be published before the end of the first quarter of 2016.
Once it is published, Icasa has said it intends auctioning spectrum off to the highest bidders. Joosub says Vodacom will participate in that process, even if the company’s attempt to acquire Neotel is successful.
The acquisition of Neotel, with other looming corporate actions, would transform the local telecoms sector.
Telkom this week confirmed it is conducting a due diligence survey of Cell C. Joosub says he would not necessarily object to Telkom buying Cell C. “We’d like to see the structure and what they are planning to do with all the spectrum, but the principle of consolidation between Telkom and Cell C is fine. We are comfortable with that.”
The recent acquisition by Multisource of iBurst parent Wireless Business Solutions could also have an impact, Joosub believes. Multisource, backed by former top bankers Paul Harris and Michael Jordaan, intends using WBS’s spectrum to build a 4G/LTE mobile broadband network.
But Joosub says WBS is a “clear target for either Cell C or MTN, or even Telkom”. At the very least, WBS’s new shareholders will have to seek a roaming agreement of some kind with one of the established mobile operators, he says.
While consolidation accelerates, Vodacom is not sitting still with its strategic growth plans. Although most of its capital expenditure in the past year has been to expand its mobile broadband infrastructure, it intends ramping up spending on fibre broadband into homes and businesses in the coming year as it challenges Telkom’s dominance over fixed lines.
Part of its strategy to become a converged fixed and mobile player involves a push into video-on-demand services. Joosub says Vodacom will launch its own video-on-demand product in the new year to challenge Naspers’s ShowMax and PCCW’s ONTAPtv.com.
Vodacom is also talking to Netflix and other local and international video-on-demand players in hopes of providing them with access to its billing platform, allowing them to provide content to end users without them incurring extra data charges. Under the plan, consumers will be able to access their favourite video-on-demand service and pay for it by deducting the money from their airtime (for prepaid users) or having it added to their invoice (for those on contract).
The principle of consolidation between Telkom and Cell C is fine
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