MTN and Tata Communications Set Sights on Business Segment

MTN has announced the acquisition of Verizon Business South Africa, which incorporates operations in Botswana, Kenya, Namibia, South Africa, and Zambia. Neither MTN nor Verizon have disclosed the value of the deal, which is pending regulatory and competition commission approval. Concurrently, Tata Communications, the telecoms arm of the Indian conglomerate, has announced that it has reached agreement with Eskom and Transet to acquire their combined 30% stake in Neotel, South Africa’s second national operator. Following the completion of the deal, Tata Communications and Tata Africa, which has operations in eight African markets will collectively control 56% of Neotel. Nexus, Communitel and the Two Telecom Consortium are the other stakeholders in Neotel. Certain conditions have to be fulfilled for the acquisition to go through in the stipulated 180 days.

For both MTN and Tata Communications the acquisitions will give them greater geographical reach and penetration of the business segments. Verizon Business South Africa offers a range of services, including voice/VoIP, data and IP services, internet, mobility and related services to the business and wholesale segments. Neotel focuses on the South African market with services aimed at both the business and consumer segments. In the past few months, the operator has widened its service portfolio with CDMA NeoConnect, a voice and internet access service aimed at the business segment (see South Africa: 27 May 2008: Neotel Launches NeoConnect CDMA Service) as well as a MetroMAN service, a point-to-point or point-to-multipoint services in the main metropolitan areas of South Africa, where it has also been deploying fibre extensively. Neotel also offers a range of IP-based services as well as offerings to the wholesale and consumer and SME segments including voice and xDSL. Neotel has also become the latest South African provider to start deploying a WiMAX network, which will expedite its efforts to bring greater voice and broadband access to South Africa (see South Africa: 17 June 2008: Neotel Awards WiMAX Contract to Telsima).

Both acquisitions come coincidentally soon after the announcement that Telkom South Africa, the country’s fixed-line incumbent, won an appeal against a proposed 3.7-billion-rand (US$459.8 million) fine related to allegedly anti-competitive behaviour. According to Business Day, last week the Pretoria High Court ruled that the evidence against Telkom was provided by a research organisation with links to the complainants, two ISPs, and was therefore not admissible. The court also ruled that the country’s competition commission, which had levied the fine, should have referred the fine to a tribunal within a year. The country’s competition commissioner Shan Ramburuth has said that he will appeal the decision and is supported by the Internet Service Providers’ Association of South Africa. They may take succour from the fact that the court did not rule on whether Telkom South Africa’s practices were anti-competitive or not. The complainants had claimed in 2002 that Telkom had charged them more for bandwidth than its own retail internet division.

Outlook and Implications

• Time for Business: Although there has been much focus of late on acquisitions in the mobile space, there have been a series of deals in the data and internet segments (see Sub-Saharan Africa: 5 March 2008: Altech Expands Footprint into East Africa through Acquisition and Uganda: 22 February 2008:Reliance Acquires Anupam Global Soft) as well as the reaffirming of Telkom South Africa’s ambitions in the international fixed and data/internet segments (see South Africa: 10 June 2008: Telkom Reports 9% Revenue Increase to US$7.16 bil.) following its acquisition of Africa Online in 2007. In the 12 months to 31 March, Telkom reported that it generated 8.3 billion rand in data revenues, up 10.3% year-on-year (y/y). Of this, data connectivity revenue rose 4.5% to 4.5 billion rand, mobile leased line revenue rose 11% to 1.8 billion rand, internet access revenues increased by 29.1% to 1.2 billion rand, managed network service revenues were up by 36.2% to 0.8 billion rand and VPN services were up 46.6% to 0.5 billion rand. As a whole, the contribution of data to Telkom’s overall revenues was 15% in the year. Both deals will put further pressure on Telkom as Neotel gains a controlling shareholder and MTN strengthens its position to provide end-to-end solutions to the business sector.