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Vodacom-Neotel deal is all about spectrum

Bonnie Tubbs
By Bonnie Tubbs, ITWeb telecoms editor.
Johannesburg, 16 Jan 2015

Thanks to regulator hearings this week, the telecoms market spotlight is on the proposed R7 billion buyout of Neotel by SA's most dominant mobile player Vodacom, and the star of the show: the contested issue of spectrum.

Yesterday, during the first of two days of oral submissions on the Vodacom-Neotel deal hosted by the Independent Communications Authority of SA (ICASA), the issue of spectrum headlined discussions.

On the one side, Neotel and Vodacom (represented by legal counsel Paul Kennedy and Steven Budlender) insisted Vodacom would not control Neotel's much sought-after spectrum. Opponents, including Cell C (which presented yesterday), feel the deal would essentially allow Vodacom to pocket the spectrum, which competitors would like to see withdrawn from Neotel and reassigned.

Neotel currently has licences in three lucrative spectrum bands: 800MHz (used for broadcasting analogue TV), 1 800MHz (which it is using for its long-term evolution - LTE - pilot), and 3.5GHz (which is being used for WiMax services). Vodacom is currently refarming the 1 800MHz spectrum it has to offer limited LTE services - a stop-gap move it says is basically "robbing Peter to pay Paul" as it diminishes the ability to use it for 2G services.

Bun fight

Kennedy yesterday stressed the proposed transaction did not constitute a transfer of licences, but rather ownership of Neotel through the purchase of 100% of its shares.

Budlender, who fielded the barrage of questions that came from interested parties after Kennedy's presentation, said Vodacom would essentially control the direction of Neotel. "Vodacom can't tell Neotel what to do with its spectrum. We accept we ultimately control the strategy of Neotel but only Neotel and its board can determine what to do with that spectrum."

He said, should the transaction be given the green light, it would "not give Vodacom the right to use Neotel's spectrum as if it was their own".

In his opening address, Vodacom CEO Shameel Joosub made no bones about the fact that spectrum was vitally important to the company, and conceded the deal would "also enable the spectrum assets of Neotel to be used to enhance mobile data services". Budlender pointed out that, even though it is true Vodacom will own Neotel if the deal goes through, there would be regulatory limitations to that control.

Cell C yesterday slammed Vodacom and Neotel's argument, saying it was fraught with contradictions. The struggling third operator accused Vodacom of being manipulative in putting its application together, to hide an ulterior motive.

Legal loophole?

ICT expert Adrian Schofield says Neotel/Vodacom lawyers appear to be trying to work around a loophole involving the Electronic Communications Act (ECA), which was amended last year. "The ECA made the differentiation of control of licences and ownership of an enterprise."

However, he says, Vodacom will effectively have control of Neotel's spectrum. "If you buy the majority shareholding of a company, you appoint the board and decide what happens in the company. So, effectively [Vodacom] is taking the spectrum and the technicality that they have to enter an agreement with Neotel to use that spectrum is just semantics."

He says Vodacom needs to grow and an acquisition of Neotel would be a logical way forward, but "if you were to take [Neotel's] licences away, Vodacom would presumably not be interested in the fibre network and just a handful of customers".

Ovum analyst Richard Hurst says spectrum is one of the key drivers for the Vodacom-Neotel deal. "While the opposition to the deal are concerned about spectrum, they may have something of a case. It seems Vodacom has been prompted in this direction to access spectrum, due to the delays in the allocation of spectrum for 4G services - which is forcing the operators to refarm existing spectrum.

"In essence, this is a symptom of the government delay in the allocation of spectrum for wireless broadband services."

Sympathising with Cell C, Schofield says SA's telecoms landscape is simply not conducive to new competitors. "If Cell C could have upped their game, they would have done so by now. From the outset, government allowed the big two to dominate, instead of bringing others in at the time. They created the situation. [Would-be] competitors needed a decent share of the cake up-front."

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