Vodacom's African expedition under threat

France Telecom's bid to enter the promising Democratic Republic of Congo (DRC) market could be the final nail in the coffin of Vodacom's tormented operation, shattering its ambitions of being a big player on the continent.

Vodacom Congo's future is already up in the air as Vodacom is still embroiled in a year-old dispute with co-owner Congolese Wireless Network. It has also battled financially, reporting an operating loss of R282 million from revenue of R1.6 billion in the year to March.

The DRC is a country of untapped potential, as only 16% of its 70 million people have cellphones. France Telecom's mobile arm, Orange, wants to take advantage of this and is bidding to buy Congo China Telecom, one of the five operators in the country.

Financially strong, Orange is a serious threat to Vodacom Congo. It will put its competitors under pressure by chipping away at their subscriber bases, and has the built-in advantage of being a French firm.

Analysts say Vodacom cannot afford to exit the DRC, because the country is vital to its African expansion plans, and a key stepping stone to the rest of Africa.

Outside of SA, Vodacom has operations in Tanzania, the DRC, Lesotho and Mozambique. It wants to expand further into Africa, but faces entrenched competition from large players such as MTN and Bhari Airtel.

Tanzania is its largest international operation, accounting for R2.1 billion of its R61.2 billion in turnover last year. However, it offers less scope for growth, as an estimated 37% of its 46 million people already have cellphones.

Last year, CEO Pieter Uys said the company wanted to generate more than the current sixth of its revenue outside of SA and was hunting for expansion opportunities. However, eight months down the line, this strategy has yet to show results as it has not made an investment.

Portia Maurice, Vodacom's chief corporate affairs officer, says it is still investigating sub-Saharan expansion opportunities, and has looked at a number of prospects, but none met its expansion criteria.

Orange is in exclusive talks with ZTE to buy out its 51% stake in Congo China Telecom (CCT) and is tendering to buy the government's share, the company says.

France Telecom has operations in 35 countries, 20 of which are in Africa, including Botswana, Uganda, Kenya, Cameroon and the Central African Republic. It turned over EUR11.2 billion - or R107 billion - in the first quarter of this year and has a global mobile subscriber base of 156.7 million.

Orange's international strategy is to grow in Africa and the Middle East. “We aim to double revenue in the region by 2015 from EUR3.2 billion at the end of 2010 to around EUR7 billion,” a spokesman says.

The DRC is an attractive investment opportunity; the fourth most populous country in Africa and a low penetration rate, giving it “considerable potential for growth,” says the spokesman.

Mervin Miemoukanda, research analyst at Frost & Sullivan, says if Orange enters the DRC, Vodacom's profit margins will be eroded and it will lose its number two position, unless it moves to counter the threat.

Most Congolese live in rural areas, where CCT does not have a network, says Miemoukanda. As a result, Orange's strategy will be to win subscribers away from the other operators, with a focus on the higher spenders, he explains.

Miemoukanda points out Orange has the financial backing to expand CCT's network, which is currently limited to selected urban areas.

To compete, Vodacom Congo will have to spend, but Vodacom is no longer financing the operation because of the shareholder dispute, Miemoukanda adds. “How could Vodacom Congo compete with such a rival if the dispute between its shareholders is not resolved?”

Orange is a market leader in most of the countries in which it operates, and has been successful in expanding into francophone countries on the continent, says Miemoukanda.

There are currently five licensed mobile operators in the DRC: Vodacom Congo, Airtel DRC, Tigo Congo, CCT and Supercell. “Growth opportunities are massive in the DRC as most large towns are not properly serviced yet.”

Miemoukanda says Orange's entrance could prove problematic for the troubled company, although Vodacom has been in the DRC for 10 years and has a “first mover advantage”.

Vodacom has no choice but to stay in the DRC, he comments. Exiting would be “suicidal” as it is one of the few countries in Africa with “massive” growth potential and is crucial to its success on the continent. “The DRC is in the heart of Africa.”

Richard Hurst, senior analyst of emerging markets at Ovum, says Vodacom hoped the DRC would become another Nigeria, which is rival MTN's largest operation, but instead has found it “heavy going”.

The DRC was meant to be Vodacom's “big ticket” as the resource-driven economy has a low mobile penetration rate, says Hurst. However, it has not panned out the way the company had hoped, he adds.

Hurst points out that Vodacom's African strategy is hamstrung as it is left with limited countries in which to expand. Vodacom needs to have a long-term view and “tough it out”, he states.

“If Vodacom pulls out of the DRC, it would be a serious blow to its African strategy.” Hurst notes that the local market is saturated, limiting growth opportunities.

Vodacom executive head of media relations Richard Boorman says the DRC is a part of its international strategy, but not the only component. He points out the country only accounted for 3% of Vodacom's annual income last year.

Boorman says the DRC has gained subscribers in the three months to June. It now has 4.2 million customers, a 24% gain year-on-year. However, average revenue per user dropped 8% in US dollar terms.

Maurice declined to comment on the possibility and effect of Orange entering the DRC.