Will Vodafone buy mean end of Vodacom brand?

Johannesburg, 04 Nov 2005

Analysts speculate that British telecoms group Vodafone`s offer to buy VenFin`s share in Vodacom could see the end of the Vodacom brand in SA.

Vodafone, which already owns a 35% stake in Vodacom, has offered to acquire JSE-listed investment holding firm VenFin`s 15% stake in Vodacom for R14 billion as part of a R21 billion deal taking over all of VenFin`s shareholdings.

If the deal goes through, Vodafone will share control of Vodacom with Telkom, which currently owns 50%.

Analyst Andre Wills of Africa Analysis says while it`s too early to say what impact such a deal would have on the market, "it could signal the beginning of the end for the Vodacom brand".

There has been speculation that Vodafone could seek to rebrand Vodacom as Vodafone Africa.

Wills notes that Vodacom`s introduction of 3G phones and BlackBerry devices under the Vodafone banner early this year was Vodacom`s first official step to launch the Vodafone name in SA.

An analyst, who does not want be named, says the deal is unlikely to have much impact on the local market, because Vodafone has long had an influence on Vodacom.

He says that while it is possible a rebranding could take place, it is not likely, because Vodacom has invested heavily in its current branding. He says it is more likely that the Vodafone brand would be introduced as that of Vodacom`s hi-tech partner.

A source close to Telkom, who wishes to remain anonymous, says: "Just how this deal will alter the working relationship with Telkom is difficult to say. Although Telkom owns 50% of Vodacom, it has always been the more silent of the shareholders. A dominant Vodafone may alter that relationship somewhat."

Breaking down the deal

Steve Minnaar, Old Mutual Asset Managers analyst, notes that of the R21 billion total deal, R6.9 billion represents VenFin`s assets excluding the 15% stake in Vodacom. These include a 25% stake in Alexander Forbes, a 33% stake in eTV and convertible bonds in Dimension Data.

Vodafone will buy the entire VenFin holding, keeping the Vodacom stake, and sell the remainder back to the Rupert Trust for R5 billion, an effective discount of R1.9 billion. He describes this as being "particularly smart, because it is tax-efficient and clears the way for Vodafone to get its shareholding right. It is the Rupert family at their very best."

"This is a particularly tax-efficient manner as it minimises the capital gains tax and the secondary tax on companies," he says.

Minnaar also says that for once the financial markets have a clearer indication of the true value of Vodacom within the Telkom share price.

He says this deal places the overall value of Vodacom at around R106 billion, representing about R99 of the Telkom share price, which is currently trading at around R140.

Piet Viljoen, MD of asset management firm Regarding:Capital Management, says an alternative way of looking at the deal would be to subtract the R5 billion that Vodafone will get for VenFin`s non-Vodacom shares, which would give the 15% stake a value of about R17 billion.

"The R106 billion value of Vodacom is probably a bit high because Vodafone would have had to buy the shares at a premium as VenFin and Telkom had pre-emptive rights and the high price was needed to exclude the possibility of Telkom bidding for them."

He says there is "a global race to buy cellular subscribers".

"Vodafone made several acquisitions recently. They are probably finding their top line growth in the established markets slowing and are looking for higher growth rates in emerging markets. The deal is extremely good for VenFin shareholders, but if I were a Vodafone shareholder, I may be a bit worried," says Viljoen.

Minnaar concludes that the deal shows cellular companies are expecting to continue to make profits in the near- and medium-term.

"It is a very positive sign for investment in the local cellular industry."