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Cell C stake sale could upend market dynamics

Paula Gilbert
By Paula Gilbert
Johannesburg, 27 Aug 2015
Orange, BT, Bharti Airtel, China Mobile and Etisalat have been listed by analysts as possible suitors for Oger Telecom's 75% stake in Cell C.
Orange, BT, Bharti Airtel, China Mobile and Etisalat have been listed by analysts as possible suitors for Oger Telecom's 75% stake in Cell C.

Analysts believe a Telkom-Cell C merger could see South Africa's mobile market gain a stronger third competitor to take on the current dominance held by MTN and Vodacom.

The idea of a merger between the two mobile operators has been common water cooler talk for months. However, in recent weeks, speculation has turned to real possibility as Telkom's leaders have indicated several times they would be interested in Cell C "at the right price".

Any deal is dependent on whether Cell C's primary shareholder, Oger Telecom, would want to sell its 75% stake in Cell C. The remaining 25% is owned by Cell C's BEE partner CellSAF.

Oger Telecom's chairman Mohammed Hariri indicated back in March that the Dubai-based company would be willing to give up its Cell C interest if it were offered a good enough price.

Fuel was added to the fire yesterday, when Oger's deputy CEO Mazen Abou Chakra told Business Day the telco had been approached by six different groups interested in the Cell C stake. Chakra maintains no decision has yet been taken.

Cunning combination

"Taking Cell C and merging it with Telkom Mobile would be an excellent strategic move for Telkom. Essentially, it would move them to the number three position with close to 30% market share. Strategically, this would change market dynamics in South Africa with three fairly evenly matched companies," says analyst and Strategy Worx CEO, Steven Ambrose.

ICT veteran Adrian Schofield says Cell C's customer base and infrastructure would be a valuable addition to Telkom's recent acquisition of Business Connexion.

"Telkom needs to achieve critical mass in the mobile market if it is to achieve the objective of being a converged services provider," says Schofield.

Ovum senior analyst Richard Hurst agrees the acquisition would also serve to help Telkom further develop its enterprise mobility offerings to compete with the other players, such as MTN and Vodacom.

"Telkom Mobile currently has a very small subscriber base compared to its competitors, as well as limited network reach. Through an acquisition of Cell C, Telkom Mobile would gain some scale, although it would still be the third operator in the market," according to Africa Analysis MD Dobek Pater.

Pater also believes Telkom could continue to be price-competitive because it owns considerable fixed infrastructure in the country.

BMI-TechKnowledge telecoms sector specialist, Tim Parle, says the combined footprint could be credible because both have strong brands and extensive installed bases but Cell C has a lot of coverage beyond that of Telkom Mobile.

"Cell C continues to battle profitability but the combination might just work really well as it would help them achieve critical mass in the mobile space quicker."

Ambrose says he is not convinced there is any real urgency from Oger to sell.

"I am sure Oger receive interest all the time; the key is how serious are they to sell. My opinion is that they are not strategically keen to sell at this point. It is not a financial issue for them to continue holding onto Cell C."

He says Africa's mobile industry is still highly fluid, with mergers, deals and changes happening monthly.

"Africa is one of the few growth regions left so interest in African operators is always high, despite South Africa being considered a mature market."

Telkom previously stated it would be open to acquiring Cell C. The company confirmed to ITWeb today that it would certainly consider buying Cell C at the right price "as it would any other synergistic partnerships either locally or internationally".

Managing executive for group communication, Jacqui O'Sullivan, would not be drawn on whether Telkom is one of the six different groups that expressed interest in the Cell C stake.

"As a listed company, Telkom would inform the market and shareholders of pertinent business developments, as required," she says.

"Telkom's growth will be predicated on both organic and inorganic growth, so acquisitions, such as the recently acquired Business Connexion, certainly remain an option. While much improved, our mobile business remains small and to achieve scalability, an option such as Cell C could be part of the approach," according to O'Sullivan.

Brand battle

Analysts are split on what a new Telkom-Cell C would look like.

Ambrose says Cell C is the bigger brand and it would make sense to remain with that name and rebrand Telkom Mobile to Cell C. Schofield agrees that moving the Telkom Mobile and Telkom Retail customers into the Cell C brand would make the most sense, "leaving room for the Telkom brand to focus on the wholesale network".

However, Pater thinks migrating out of the Cell C brand "sooner rather than later" would be a better plan. Hurst agrees that an eventual integration into the Telkom Mobile brand will make more sense.

Parle believes Cell C's brand has shown traction and for the short term it would be better to preserve the Cell C brand but over time he expects that "some new super brand may emerge".

Authority approval

If this deal is really an option for either company, it would first need to be approved by the South African Competition Commission.

Most analyst agree the commission would likely approve the deal as it would see two smaller players consolidate into a stronger, more competitive player, which according to Parle, would be "good for competition and the consumer".

"As there would be little market disruption in such a merger I don't see the Competition Commission turning down the deal," adds Parle.

"It would be better for the sector to have three strong players than two strong ones and two weak ones - the weak ones will ultimately fail to provide effective competition," according to Schofield. However, he says based on recent decisions by the commission, "you could toss a coin to answer this question".

This after the Competition Commission blocked a proposed bilateral roaming deal between Telkom and MTN this month.

Pater believes the MTN-Telkom deal should have been allowed to go ahead, especially after the commission sanctioned Vodacom's acquisition of Neotel. However, he says that due to the small size of Telkom Mobile's operation, the commission may allow a Cell C acquisition if it became a reality.

"On the other hand, it may object on the basis of Telkom's extensive fixed infrastructure or the fact that Telkom and Cell C have been at the forefront of price competition in the mobile space. If these two MNOs consolidate into one larger one, the concern could be that there would be less willingness to engage in price competition by Telkom Mobile," says Pater.

Other prospects

Who would be the new owner if Oger does choose to sell its stake is pure speculation but analysts say there are a number of possible companies that could be chomping at the bit.

Schofield says it is difficult to see the attraction of Cell C for international players at this stage, because they would inherit the current problems of being a small player in the South African market. However, he says Orange could be a possible suitor because "they have started their entry into the country as a brand and may see Cell C as a stepping stone to a bigger presence".

Hurst agrees that despite Orange saying recently it has no desire to enter the South African market, his gut feel is that Orange "would be the best fit for the current market environment and would probably have access to the funding required for such a deal".

Pater also mentioned Orange's name but says mobile giant BT could also be a suitor as it has been moving back into mobile operations in the UK.

"In SA, it has decided to play more actively in the local market through investment in infrastructure. Perhaps it also wants to move into mobility and the converged space locally."

Pater also says Dimension Data's Japanese parent NTT could be a possibility as it would be a good strategy for Dimension Data in SA to compete on par with the large operators in the market, Telkom, Vodacom and MTN.

India's Bharti Airtel and China Mobile could also be possibilities, according to Pater, while Ambrose also tossed the UAE's Etisalat into the mix.

* Cell C could not comment by the time of publication.