The Competition Commission has recommended the Competition Tribunal give the go-ahead for Telkom to buy Business Connexion (BCX), but has set conditions to its approval.
Telkom offered R2.67 billion to buy out BCX and delist it from the JSE last year. The deal will extend Telkom's ICT capabilities and aid BCX to grow into Africa. Once the tribunal has ruled on the matter, the only outstanding condition is that the Independent Communications Authority of SA give its approval as far as is required.
Conditions were imposed on the takeover because the commission found Telkom, being the largest provider of wholesale leased lines to downstream customers, has the ability to foreclose its downstream rivals from access to these wholesale leased lines which are essential inputs for the provision of downstream services including managed network services, value-added network services, hosting and information technology services.
The commission also found the merger will result in the combined company having the ability and incentives to engage in bundling strategies that may result in anti-competitive effects.
As a result, the commission said Telkom's pricing programme - which was the result of a settlement agreement between it and the commission - must include fibre and will be extended from July 2018 to December 2020.
In 2013, Telkom and the Competition Commission reached a settlement, whereby the company would pay a penalty of R200 million and institute a functional separation of its retail and wholesale divisions. It also included monitoring arrangements of its future conduct, and wholesale and retail pricing commitments for the following five years, estimated to yield R875 million in savings to customers.
Several conditions
Telkom also has to make sure prices for wholesale leased lines are based on actual lines used and priced at the non-discriminatory transfer price for common components. The commission also said Telkom must make sure the prices for other services and/or components included in the bundle are based on the actual costs incurred.
In addition, Telkom must ensure it does not set prices for its bundled offerings using wholesale leased lines at levels that are less than the sum of the costs of components in the bundle. "In other words, the principle is that the prices for wholesale leased lines included in the bundle must exceed the cost applied in internal pricing and the revenues generated from the bundled offering must exceed the costs associated with providing the bundle plus a positive margin."
Telkom must also make sure that, when providing any bundled offering which includes a wholesale leased line, the price for each individual service included in the bundle is clearly reflected in the overall price.
The commission also limited the number of potential job losses to a maximum of 20 over a three-year period.
Welcome move
Telkom and BCX have welcomed the commission's recommendation that the deal goes ahead. In a statement, they say: "Telkom and BCX remain committed to the proposed transaction and will engage and work with the necessary regulatory bodies as required."
CEO Sipho Maseko adds: "We believe the proposed acquisition will assist Telkom with its strategy to grow beyond its core business of connectivity by expanding into ICT services. This will enable our business to further enhance and grow its existing offerings, while at the same time providing scale in IT services. It will also help to reinforce the company's core connectivity business and enhance Telkom's convergence strategy."
Maseko said the proposed transaction will leverage Telkom's expertise to further address the technology and telecommunications requirements of all the company's clients and customers in South Africa and elsewhere in Africa.
This is Telkom's second attempt to buy BCX after a previous offer was denied by the tribunal because it would be anti-competitive.
Telkom notes the customer landscape for both Telkom and BCX has changed, with only minimal overlaps today and, as a combined entity, will offer a number of potential benefits for stakeholders and the industry at large, as well as advance the interests of South Africa and its consumers.
Maseko also affirmed Telkom intends to remain a long-term investor in BCX.
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