Altech begins to show its hand

By Paul Vecchiatto, ITWeb Cape Town correspondent

Cape Town, 02 Apr 2009

Altech is beginning to show its intentions in the communications sector. It has bought 11% of The East African Marine System (Teams) undersea cable and purchased Internet service provider Lateral Technology Concepts.

These two deals made by the JSE-listed group total about R145 million, says CEO Craig Venter. About R100 million ($10 million) was paid for the Teams stake, the purchase of which was concluded in December. The remainder paid for the purchase of Lateral Technology Concepts.

Teams is being built by Altcatel-Lucent and is due to become operational in the first quarter of this year. Shareholders include Etisalat and a consortium led by the Kenyan government. The cable will stretch from Mombasa to Fujairah, in the United Arab Emirates.

Altech is expected to announce a string of further acquisitions in the near future, especially after the release of its annual results later this month. The group has a strong cash reserve and even once the deals have been completed, Venter says it will still have between R500 million and R1 billion in its war chest.

Silver lining

“One benefit of the global economic crisis is that company valuations have dropped quite considerably. For instance, Lateral Technology Concepts, which has a very strong balance sheet, is only on a multiple of five times,” he notes.

As a result of the changed regulatory landscape, moving into Internet service provision is a natural extension of Altech's existing business.
Craig Venter, CEO, Altech

Venter says Altech is also developing a warm relationship with East African undersea cable operator Seacom, whose cable is due to land in South African waters in June, but no deal has been signed between the two yet.

Altech threw a spanner into the works of government's managed telecommunications policy at the end of last year. It conducted a successful court challenge to allow it to be awarded an individual-electronic communications network service licence. The licence effectively gives it the same rights as Telkom or Neotel to build and operate telecommunications networks.

Venter, at the time, would not reveal Altech's intentions. However, yesterday's announcements indicate the group is serious about building up a network and capitalising on the expected growth in data and voice services.

He offers no explanation as to why the Teams deal was not announced earlier, but points out that Altech already has a strong East African presence.

ISP wanted

“We have been interested in purchasing an ISP for some time. As a result of the changed regulatory landscape, moving into Internet service provision is a natural extension of Altech's existing business,” Venter says.

Lateral Technology Concepts will be placed under the Altech Autopage Cellular operation, which has about a million subscribers and will introduce new Internet services to them.

“This acquisition by Altech enhances the ability of Altech Autopage Cellular to provide data services to its voice cellular subscribers, recognising the developing convergence of voice and data in the telecoms arena and the increasing demand for bundled services,” Venter says.

The Lateral Technology Concepts deal will see Altech utilising its cash reserves to fund the maximum purchase price of R45 million. An amount of R7.5 million will be paid initially. The remaining maximum R37.5 million will be released to Lateral Technology Concepts shareholders in terms of an earn-out mechanism over two years. This is based on after tax profit targets for the years ending February 2010 and 2011 being achieved. If all profit warranties are met, the effective profit after tax price/earnings multiple to be paid by Altech will be 5.23.

“About 64% of Technology Concepts' business is annuity-based and, although it is within a competitive market, is showing high profit growth. The acquisition thus ensures a regular and consistent income stream for Altech, which will positively affect our headline earnings per share,” Venter says.

Lateral Technology Concepts has built its own hosting infrastructure and has a client base of 270 customers, consisting mainly of SMEs and corporate customers.

In mid-morning trade, Altech's share price had risen 1.5%, to R50.75, in quiet trade with 4 500 shares changing hands.