Infraco, Telkom merger 'ruinous'

A possible merger between state connectivity provider Broadband Infraco and fixed-line operator Telkom could result in ruinous legal action for all involved, says an analyst.

Broadband Infraco is still in discussions to possibly merge with state signal distributor Sentech, and fixed-line operator Telkom as well.

Speaking at the state-owned entity's (SOE's) post-annual general meeting media briefing on Friday, public enterprises minister Malusi Gigaba said discussions with the Department of Communications (DOC) around the merger are ongoing.

This is in an effort to align government's ICT assets and bring down communications costs. “We are looking to optimise government's capacity in the broadband space.”

Gigaba explained that the current fragmentation in the state's ICT assets limits its capabilities. He added that the DOC should lead the way in the consolidation of these assets.

However, World Wide Worx MD Arthur Goldstuck says caution must be taken.

retail and wholesale, or consumer and business services. Patching more services onto it will simply turn it into a patchwork of unwieldy services.”

He adds that Sentech has one core role that it performs well, which is signal distribution. “Sentech's issues arise when greater complexity is added to that role, which not only distracts from its core focus, but assumes competencies for which the organisation is not prepared.”

For this reason, Goldstuck says shoving it into another organisation that has a completely different role will merely replicate that strategic flaw, and probably magnify it.

“Broadband Infraco could feasibly be incorporated into Telkom's infrastructure, since both enjoy a fibre presence that spans the country. However, Infraco's network was paid for with taxpayer money, and it would be wildly anti-competitive to, in effect, hand it over to Telkom. Such a move begs legal action that would be ruinous for all involved.”

Director of Insights & Vertical Industries at IDC Middle East, Africa and Turkey, Mark Walker, says the move would be an interesting one, since the integration would give the SOEs a lot of critical mass.

He adds that if Telkom is the managing partner, and the integration phase can be quickly reached, then speed to market advantages in access and provision of value-added services plus economies of scale are a net positive result.

Key factors for the success of such integration are management, speed of execution and how quickly the parties are able to integrate and get through the political processes.

Walker also says job cuts are inevitable and the political implications must be considered. “If integration is poor and Telkom is dragged into the quagmire that is typical of management at state-owned entities, then expect failure.”

Strategy Worx MD Steven Ambrose last year said the only viable future for the embattled Infraco lies in its privatisation.

“Government will finally have to fold Infraco into Telkom or Sentech, both of which hardly have stellar records, in order to curb losses and make the best of the infrastructure the taxpayer has paid well over market-related amounts for.”

However, Gigaba said privatisation of the company will not happen.

Gigaba emphasised that the consolidation with Telkom is, for now, just an idea that is being explored. There has been no decision on the matter as yet.

“Overall, the goal is to enhance access to broadband and ICT. If we consolidate, we're going to create a new state-owned company, but these options will be explored at the right time.”

The minister first introduced the idea of a merger between Broadband Infraco and Sentech in June last year.

The SOE achieved an unqualified audit for the period ended 31 March 2012 and has seen its revenue improve. Revenue climbed to R393.6 million, up from R297.6 million in the previous year.

It adds that its customer base has grown from contracts with Neotel, Liquid Telecommunications and MTN in the previous year. It now also includes short-term lease contracts worth R100 million with the SA Large Telescope via Neotel, Seacom, Vodacom, Internet Technologies (Namibia) and Business Connexion.

Its net loss for the year in 2011 was R206 million and it managed to reduce this by 67% in 2012 to R95 million.

“Much work has been done to bring stability to the entity and to gear it towards market readiness and effectiveness, and Broadband Infraco is now strategically positioned to play the enabler role, initially envisaged by the shareholder, in the company's inception,” said Gigaba.

Infraco was established in 2007 with the aim of providing broadband infrastructure at a wholesale rate to other operators, with the intention of ultimately reducing the cost of broadband access to consumers. In addition, Infraco had to provide broadband infrastructure to under-serviced and remote, rural areas of the country.