JSE-listed Vodacom needs to expand in Africa to boost growth rates, and is actively on the hunt for a deal, with plans to make two or three acquisitions in the next two to three years.
Although it needs to acquire in order to grow revenue, the question is whether it will be able to secure a new unit at a reasonable price. The company yesterday said service revenue had only grown 2.9% at constant currency rates and it is operating in an increasingly challenging environment.
Conditions in SA, its largest operation, are tough and it is "competing hard" to keep and grow market share in a market that has reached saturation in mobile voice penetration. Although it has turned its African units around, this was not enough to offset the 0.4% growth in service revenue in SA.
Must do
CEO Shameel Joosub says Vodacom must make a move in Africa, as it needs to diversify its revenue stream. He adds that Africa should contribute between 25% and 30% of group revenue in the next three years. Vodacom turned over R70 million in the year to March and its international operations accounted for 19% of group revenue.
Its international operations have reached "a turning point in terms of profitability", as earnings before interest, tax, depreciation and amortisation leapt 87.5%, as it benefits from better scale and keeps a lid on costs.
Joosub adds that it would not help to move Vodafone's African operations into the Vodacom stable, as this would not increase the footprint. Vodafone has operations in Ghana, Kenya and Egypt.
Vodacom is actively looking for operations in countries where there is a low penetration rate, a population of more than 10 million, good economic growth, and a stable political environment, says Joosub. He adds that it will not buy an operation that is aligned with a large group.
Joosub points out that the company is under-geared and can afford to take on debt. He says, however, this will depend on the level of investment required and the number of opportunities available.
Vodacom has net debt of R8 billion, giving it a low gearing level of 0.3. It generated R25.3 billion in cash from its operations, and ended the year with cash and cash equivalents of R6.5 billion.
Its African operating model is currently working and all stakeholders are more confident in looking to Africa for more growth, says Joosub. Africa - Tanzania, Mozambique, the Democratic Republic of Congo (DRC) and Lesotho - currently accounts for about 40% of its subscriber base. "It's the right time to look."
Joosub cannot talk about when a deal may be inked, but says the group wants to sign two or three deals in the next two to three years. He says there are opportunities, as some of the larger players have "too much on their plates".
Other entities are increasingly disposing of units, says Joosub. Prices are also more reasonable than they were two to three years ago, after Airtel Bharti bought Zain in a $9 billion deal in 2010, he adds.
Joosub says Vodacom is looking for bolt-on deals, but they will not be huge and will not have drastic implications on either revenue or operating profit.
Growth dilemma
Irnest Kaplan, MD of Kaplan Equity Analysts, says most of Africa is reasonably under-penetrated and Vodacom is likely to look at buying either the number one or two operator in a country, or the third-largest if it is close enough to the second slot and can be grown.
Kaplan adds there could be as many as 50 operators for Vodacom to look at, although the question is how many are for sale. He says companies that run a single operation may want to sell out due to tough competition, as it would find equipment and handsets more expensive as it would lack economies of scale.
Geographic proximity to Vodacom's other operations is not a bad starting point, as this would aid in synergies, he notes.
Kaplan says if Vodacom does not make African acquisitions, its growth will either slow or go backwards. Yesterday, the company guided that service revenue will grow in low single digits in the medium-term.
Even if Vodacom made three or four smaller purchases, the bar would not be moved, but this would keep up growth over the next few years, adds Kaplan. He says growth could gain a few percentage points on the back of a few deals.
Kaplan notes, however, that while Vodacom needs to buy to aid growth, the caveat is the cost. He adds that pricing is more reasonable, and while global operators may also be looking at the continent, Africa has its own peculiarities, which may make it difficult for companies with developed market experience to enter the continent. "They've got to do it at the right price."
Little choice
However, Ovum analyst Richard Hurst says there are "slim pickings" in Africa as he does not see opportunities for Vodacom in North Africa, which is closer to Europe and where Vodafone already has operations. "The problem is, there's a sort of father-son relationship almost."
Sub-Saharan Africa is where Vodacom is mostly likely to shop, says Hurst, but Kenya - where Vodafone is - and Nigeria - where rival MTN has an operation - are out, says Hurst. He says Vodacom should rather entrench itself in the DRC and do the best it can with what it has.
Hurst adds that Vodacom will have to pick its battles if it goes into Africa as many countries, such as the Central African Republic, are too risky. Hurst says countries such as Madagascar, Angola, Niger and Zimbabwe are possibilities, with Angola the most likely if it opens up to more competition.
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