Having launched with pomp, ceremony and the promise of a new telecommunications landscape in SA seven years ago, SA's "Telkom alternative" Neotel may be out of the water before it has even learned to swim.
This comes as Vodacom yesterday announced it is in exclusive talks to buy 100% of the company's shares, confirming what the industry had in any case long suspected, and means the country will go back to being a one-man show, with Telkom playing the lead.
However, analysts note Neotel has failed to live up to the expectations and promises accompanying its launch - a move spurred by an amendment to the Telecommunications Act in 2001.
At its unveiling, on 31 August 2006, Neotel said its entry would "change the telecommunications landscape in SA by introducing high-quality telecommunications services at reasonable prices in accordance with the aims of the Electronic Communications Act".
Now the same entity that was meant to stand up and compete with one of SA's telecoms giants is likely to be swallowed by another - the country's first and largest mobile operator.
Turn of events
Vodacom is in turn eyeing Neotel so that it can add it to its business offering to create an entity with scale that can compete head-on with Telkom in the enterprise segment.
If it succeeds in buying out its smaller counterpart, Vodacom will also gain access to valued spectrum in the 800MHz range - an acquisition that will enable the operator to roll out long-term evolution at a time that the rest of the market waits for spectrum allocation.
But Vodacom's appetite for more is unlikely to be satisfied in the near future. The deal still has to go through the regulatory processes and is likely to be closely examined by the Competition Commission, and the Independent Communications Authority of SA.
Although no numbers have been made public, the deal should be worth more than the R5 billion Bloomberg has stated, citing a source. ITWeb understands Neotel is R5 billion in debt, and Tata - its current majority shareholder - has so far pumped R11 billion into infrastructure.
Even if Neotel has a resultant R16 billion price tag, Vodacom can afford it. The cellular operator ended the year to March with bank and cash balances of R6.5 billion, while free cash flow was R12 billion. Last year, it spent R7 billion alone on its local network.
Vodacom's market capitalisation is R185 billion, and even at R16 billion, the buyout would be less than 10% of what its stock is worth on the JSE.
Two years ago, Neotel said it had invested around R3.5 billion in infrastructure in the first four years of its existence. It was pumping in about R500 million a year. ITWeb understands the investment is now at about the R11 billion mark, and Neotel is in debt for about R5 billion.
Competition issues
Ovum analyst Richard Hurst notes that news of a Vodacom/Neotel deal was far from unexpected. A few months ago, MTN confirmed there was a Neotel sales "process" on the go.
Hurst says the fact that Vodacom will gain a fibre network to add to its backhaul, and an enterprise consumer base, as well as its spectrum in 800MHz, will provide it with a go-around to negate all the licensing delays. "Now an 800-pound gorilla can get their hands on that spectrum."
He notes, however, that the bid raises competition concerns as Neotel will no longer be a standalone competitor to Telkom. Pointing out that one of Neotel's major clients is Cell C, which uses it for backhaul, he says "there will be some unfair advantages created".
The Competition Commission will therefore have something to say about the bid, says Hurst.
IDC analyst Spiwe Chireka echoes industry sentiment, saying Neotel has not lived up to its promise of being a second national operator. She says the company's mistake was taking Telkom on in the enterprise space, in which the incumbent dominates and is successful, while it ignored the consumer arena.
Neotel has almost nine million customers at the end of its 2013 financial year. Its core base - enterprise - gained 29% year-on-year. Vodacom has almost 30 million South African subscribers.
In the last financial year, Neotel grew revenue 12% and turned positive on an earnings before interest and tax basis for the first time. Its NeoInternet and NeoBroadband products have also been showing growth, it said.
Vodacom CEO Shameel Joosub, in an e-mail to the Vodacom team, wrote: "The intention is that we'd put significant investment into Neotel, and both companies would be able to grow faster than each one could individually."
Neotel CEO Sunil Joshi, in an e-mail to "Neotel-ers and colleagues", states the deal will give Neotel additional investment to enable more expansion and growth.
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