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Econet’s proposed acquisition of Neotel - a game changer?

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Anthea Paelo and Ulungile Magubane

In June this year, Liquid Telecom announced its intentions to purchase Neotel, a network operator in South Africa. The deal is in partnership with Royal Bafokeng Holdings and is worth a reported R6.5 billion (US$ 430 million).1 The acquisition has the potential to disrupt the concentrated telecommunications sector in South Africa by significantly increasing the presence of Liquid Telecom which is a multinational player already operating in several African countries. It is worth considering the current competitive environment in South Africa and key considerations for the authorities in light of the failed Vodacom/Neotel transaction in 2016.

Liquid Telecom forms part of the Econet Wireless Group that includes; Econet Wireless International, Econet Wireless Africa (which includes Econet Zimbabwe), Econet Wireless Global, Econet Enterprises and the Liquid Telecom Group. Econet Zimbabwe is currently the largest mobile service provider in Zimbabwe holding a market share of 52.5% in terms of mobile subscribers, but as much as 70.2% of the market share in terms of revenues as of the fourth quarter of 2015.2 Through its various subsidiaries and associated firms, the Econet group has operations, and business interests in more than 17 countries around the world and is one of Africa’s largest multinational companies.

Neotel is a network operator in South Africa providing fixed voice, data and IP services with majority ownership by Tata Communications Ltd of India. The company has an extensive fibre optic network stretching across major cities in South Africa spanning about 15000 km. Neotel is the second largest fixed-line operator by revenue after state-owned Telkom and a significant competitor in the segment (Table 1).3 Since its entry in 2006, Neotel has made some progress in taking market share from the country’s largest fixed line operator, Telkom. In 2014, Neotel had a market share of 10% in revenues in the fixedline market4 and was on target to have a share of between 14% and 16% by 2017 (Table 1).5

Neotel’s sluggish growth

Despite Neotel’s apparent growth in the sector, the process has been slow largely due to significant barriers including a lack of access to capital to speed up the rollout of fibre, lack of access to wayleaves or right of ways, and the slow pace of regulatory processes.7 Furthermore, Telkom has a history of anti-competitive conduct having been fined R449 million in 2013 for abuse of dominance between 1999 and 2004.8 Telkom was found to have used its upstream monopoly position in the market to advantage its own subsidiary and cause harm to competitors and consumers. Telkom has for instance denied Neotel access to its ducts and the infrastructure necessary to roll out its fibre.

Neotel has also found difficulty in accessing rights of way or wayleave approvals. Different municipalities have varying processes for obtaining these approvals increasing the complexity and uncertainty of the procedure. The process of obtaining approvals is also a lengthy one with some fixed line operators waiting up to eight years from the date of their application.9

In addition, regulation appears to be responding slowly to the needs in the industry. For instance Local Loop Unbundling (LLU) regulation which would provide multiple providers with access to the last mile infrastructure has been on the table since 2007 but is yet to be enacted. As the last mile is the most expensive network layer, lack of access is restricting growth, innovation and competition in the provision of broadband services.

Proposed Vodacom/Neotel merger

Rolling out fibre requires a significant amount of capital. Neotel’s move to merge with another service provider follows its need to access more resources to speed up its rollout of fibre and improve the quality of its services. Neotel’s previous attempt at a merger involved Vodacom. The deal however fell through in March 2016 following what the parties described as a complicated approval process.

Vodacom and Neotel’s main arguments for the merger were that it would give Vodacom the ability to provide a strong rival to Telkom in the fixed-line market. Vodacom’s access to NeNeotel’s spectrum would also enable the company to accelerate its plans to roll-out its long-term evolution mobile network which would provide significant consumer benefits.10

While there were many reasons for and against the merger, the main point of contention was the distribution of spectrum. The Competition Commission found that spectrum is an essential input for the production of mobile services and possession of extra spectrum would give a network operator significant advantage over its rivals.11 Vodacom’s purchase of Neotel would have given Vodacom access to double the amount of spectrum holdings in the 1800MHz band held by other network operators. In addition Vodacom would have possessed spectrum in both the 800MHz and 3500MHz bands. Due to current spectrum constraints in the industry, the other network operators would only be able to achieve the same level of capacity by adding new sites which would have been more costly and time consuming than accessing additional spectrum. Vodacom’s access to this spectrum would entrench its already dominant position in the retail markets. Vodacom and MTN jointly held 86% market share in retail services in terms of revenue between 2010 and 2013.12

The Competition Commission approved the merger with a number of conditions including a restriction on Vodacom’s use of Neotel’s additional spectrum for a period of two years. The decision, however, was still met with resistance from the other network operators and was due to be heard before the Competition Tribunal although Vodacom and Neotel ultimately abandoned the deal due to regulatory issues.13

The proposed merger

Econet’s potential acquisition of Neotel promises a lot in terms of injecting much needed investment into the Neotel business. In contrast with the Vodacom/Neotel transaction, the proposed acquisition could grant spectrum assets to a ‘new’ player (instead of concentrating access to spectrum) that appears to have the financial capital and experience in other markets in the region to use them to become an effective rival in SA. To the extent that Econet is able to bring in new investment and rivalry to existing mobile and fixed-line players, the transaction may be considered favourably by the competition authorities although limited information is available publically on the specific strategies envisaged by the merger entities. It is clear however that the acquisition would result in the formation of the largest, cross-border and independent fibre network and business telecoms provider on the African continent with its connectivity spanning 12 African countries including South Africa, Burundi, the Democratic Republic of Congo, Kenya, Rwanda, Tanzania, Uganda, Zambia and Zimbabwe.14

A PDF copy of this article is available here.

NOTES

  1. Creamer Media. ‘Liquid Telecom, Royal Bafokeng Holdings to buy Neotel in R6.55bn deal’ (28 June 2016). Creamer Media.
  2. POTRAZ. Postal and Telecommunications Sector Performance Report, Fourth Quarter 2015.
  3. See Mwanza, K. ‘M&A Africa: Liquid-Neotel deal to create Africa’s largest broadband company’ (30 June 2016). AFKInsider.
  4. Hawthorne, R., Mondliwa, P., Paremoer, T. and Robb, G. (2016). Competition, barriers to entry and inclusive growth: Telecommunications sector study. CCRED Working Paper, No. 2/2016.
  5. Tubbs, B. ‘Neotel hits profitability milestone’ (29 May 2013). Web Telecoms.
  6. Telkom. ‘Integrated Report 2015’.
  7. See note 4.
  8. Gedye, L. ‘Telkom the 'bully' fined R449-million’ (7 August 2012). Mail & Guardian and The Competition Commission vs Telkom SA Ltd, Case No. 11/CR/Feb04 (003855).
  9. See note 4.
  10. Competition Commission, Mergers and Acquisitions Report, Case No. 2014Jul0382.
  11. See note 9.
  12. See note 9.
  13. See note 9.
  14. See note 1.