Vodacom's operating profit was hammered by its Gateway acquisition, after the cellular operator had to impair its purchase by R3.2 billion.
Vodacom bought Gateway last year for $700 million, or R7.4 billion, at an exchange rate of R10.48 when the deal was finalised in December.
At the time, Vodacom said it would take control of Gateway's carrier services and business network solutions divisions. “As mobile phone penetration levels increase in SA, we are actively repositioning Vodacom as a total communications provider with new avenues for growth,” said Vodacom CEO Pieter Uys.
However, the company's acquisition has left it less than satisfied, with Gateway knocking the group's profits. Operating profit dropped 45%, to R3.54 billion, because of the impairment charge of R3.2 billion and a 16.8% increase in depreciation and amortisation.
The once-off charges also hit earnings per share, which dropped to 4c. Headline earnings per share, which strip out this cost, declined 12.4%, to 219c.
Working on it
The deal was intended to be a key part of the company's portfolio expansion, giving it a larger African presence, especially in Nigeria. Vodacom's Tanzanian and Democratic Republic of Congo businesses were hardest hit, although Nigeria did not fare as badly.
Uys says the company will now restructure Gateway to make the company more sustainable. “We are taking the necessary steps to improve Gateway's performance.”
In the meantime, Vodacom has pulled Gateway's business division into its own service provider operations, Vodacom Business. Uys says the Gateway division will now be handled by group management.
Not all bad news
Frost & Sullivan ICT industry analyst Spiwe Chireka says overall spend by telecoms providers in Africa has reduced during the economic crisis, and companies such as Gateway, which play in the wholesale segment, have felt the brunt of this.
“Those that are smiling all the way to the bank now are companies that are offering services and applications to mobile operators, as there is a scramble to find ways to manage operating costs and to provide applications that may drive up consumer spend. This is an area in which Gateway currently does not operate.”
The group says total revenue rose 9.9%, to R28.7 billion, mostly due to the inclusion of revenue from Gateway, which added 5.3% to group revenue, a 16.5% growth in mobile customers to 41.6 million and a 30.1% increase in mobile data revenue to R2 billion.
Local revenue grew 6.8%, to R24.4 billion, offsetting an 11% decline in international revenue, which dropped to R2.97 billion. Group operating costs increased 11.1%, to R19.4 billion, mostly due to Gateway. Excluding the acquisition, operating costs increased 3.2%.
However, headline earnings per share include a reversal of a R551 million tax asset due to the group's reduced profitability in the Democratic Republic of Congo, and revaluation of loans granted worth R232 million. Stripping out these two items, headline earnings per share would have been 271c, an increase of 8.4%.
The group's operating margin moved down from 33.2% to 32.6% on the back of challenging international operations - and lower margins at the Gateway operation.
Despite the Gateway shortfall, Vodacom declared an interim dividend of 110c a share.
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