Cash injection for Neotel

By Nicola Mawson for Neotel

Johannesburg, 26 Jan 2007

Neotel's black economic empowerment partner Nexus Connexion has raised R484 million as part of its equity share for bankrolling the second national operator.

The funding, provided by the Development Bank of Southern Africa (DBSA), forms part of Nexus' obligations as a 19% shareholder, says Neotel. Nexus chairman Kennedy Memani is reported to have said the loan would be repaid partly from dividends when Neotel becomes profitable.

Around R11 billion will be required by the second national operator over 10 years, of which R8.5 billion will be spent in the first five years. Capital will be raised through debt, equity and income from operations as the company reaches profitability.

Over 40% of the R11 billion to be spent by Neotel, which is expected to be profitable in the next four to five years, will go into access infrastructure, says a spokesperson.

"In the initial years, the larger proportion of this capital expenditure will be used for the transmission and the core elements of the network. In later years, with these elements having stabilised and their upgrade and scaling costs being relatively controlled, access equipment will take up a greater proportion of the capex."

On track

Neotel, which plans to roll-out international and national private leased circuits to large enterprises from February, has already secured R6 billion in funding. The first stage of the funding, R2 billion in bridge financing, was signed in December last year.

The debt, which will be refinanced by the end of the year, was sought to enable Neotel to start rolling out its network. Investec, Nedbank and the DBSA were appointed as lead arrangers to finance the longer-term project finance of R4 billion.

The bridge funding - provided by a consortium of bankers comprising Investec, Nedbank, the DBSA and the Industrial Development Corporation - is an important landmark, says MD Ajay Pandey.

Neotel's fund-raising will be supplemented by over R2 billion in equity funding to be contributed by its shareholders. "Shareholders are in the process of securing their funding, as noted with the acquiring of the Nexus funding yesterday," says the spokesperson.

Eskom Holdings and Transtel each have a shareholding of 15%, black empowerment firm Nexus Connexions has a 19% stake, while the Strategic Equity Partner Company consortium holds the balance. The consortium comprises the Tata Group of India (through VSNL and Tata Africa Holdings) and two private consortia - Communitel and Two Consortium.

Leapfrog

Telkom, the incumbent operator, last year said it would spend R30 billion as it rolls out a next-generation network (NGN) to compete against Neotel. Analysts expect Neotel to garner as much as 15% of Telkom's fixed-line revenue.

However, an analyst - who asked not to be named - points out that only 40% of Telkom's budgeted R5.9 billion fixed-line spend in 2007 will be spent on the NGN. The rest, he says, will go to IP systems, legacy systems and the last mile upgrade, among other aspects.

Neotel will leapfrog straight into an NGN, which will be complemented by a wireless component. The operator has already applied to the Independent Communications Authority of SA for access to the 800MHz band.

Its residential offering, which is expected to become available in the second quarter of next year, will be a combination of fixed and wireless connectivity. Some of the funding it has raised will go towards providing fixed-lines to homes, says Pandey.

The company's access network is initially expected to be in geographic areas where there is a concentration of large enterprises.