Telkom has hit on a neat solution for its cash-burning mobile arm, but its pending deal to outsource its towers and radio access network to MTN SA could face hurdles if it involves spectrum, as leasing frequency is currently illegal.
If the companies succeed in finalising the deal, it is expected to set a precedent when it comes to spectrum leasing, as well as take some burden off the regulator when it finally allocates more frequency, as there will be one less company with its hand out.
The solution would see MTN SA take over financial and operational responsibility for the rollout and operation of Telkom Mobile's radio access network (RAN), allowing cross-roaming. The arrangement will allow Telkom to keep its mobile play, while saving it from investing vast sums into its mobile arm.
In addition, it will provide both parties with more capacity. However, the exact details of the deal and how spectrum will be managed have yet to be worked out.
Trimming spending
Friday's announcement to the market, which sent Telkom shares 2.11% higher, coincided with a statement to the group's staff. In the internal e-mail, group CEO Sipho Maseko says Telkom is working with MTN to conclude a deal that essentially extends the current roaming deal.
Maseko writes that this is part of Telkom's "endeavours" to turn the company around. He first hinted at talks with a third party in a bid to de-risk - and limit capital spending at - the cash-burning unit last November.
Telkom Mobile has had a challenging time since if first launched in October 2010 and has been battling to gain traction in a saturated market. However, it is vital to Telkom's future plans of being a converged player.
In the six months to September 2013, the unit grew turnover year-on-year to R926 million, from R596 million. However, its loss widened to R773 million, from R716 million. It has around 1.6 million monthly active users.
Maseko wrote that the heads of agreement Telkom has signed with MTN will, when wrapped up, allow it to "expand our mobile coverage and reduce our operating costs and capital expenditure significantly". At launch, Telkom said it had set aside R6 billion to fund the network for five years, and it was only expected to become cash-generative in 2015.
Telkom Mobile will be able to provide subscribers with "effective access to state-of-the-art national voice, 2G, 3G and LTE [long-term evolution] networks without having to incur the significant capital expenditure ordinarily required to achieve such national coverage," said Maseko.
"This is not a mobile virtual network operator (MVNO), service provider or reseller relationship; it is a ground-breaking means to outsource the operation of our RAN for scale and efficiency, while retaining and enhancing our competitive differentiation and flexibility."
Spectrum issues
Maseko added both entities will have access to "increased voice and data capacity, improved voice quality, and faster data speed; at a lower cost than would have otherwise applied". However, the company has yet to indicate when the deal may be wrapped up, and what the next stage in the process is.
In a cautionary announcement issued on Friday, it notes the proposed deal is subject to signing of "various binding commercial agreements", as well as regulatory approvals.
Analysts say this would include sanction for the companies to share spectrum which, while mooted in the broadband policy, is not yet legal. BMI-TechKnowledge MD Denis Smit says the deal may face legal challenges, because spectrum leasing is illegal, although this is expected to change.
IDC analyst Spiwe Chireka adds while the move would be "tantamount to spectrum sharing", she is sure the Independent Communications Authority of SA (ICASA) will not mind as this would trim the number of companies seeking access to frequencies in the high-demand 800MHz and 2.6GHz ranges.
Chireka adds the companies may seek to go around this outdated regulation by forming a joint venture that would own the infrastructure. MTN SA and Telkom will continue to keep their brands and function independently in the market.
Should the deal be approved, it would be a test case for other similar arrangements, says Chireka.
Neat solution
Smit says the move is a win-win deal as it gives Telkom an immediate cash boost as it will share its access network and should help the company out. However, he says, this will depend on whether it is allowed to proceed.
The move would solve capacity problems for MTN and give Telkom rural coverage, Smit adds. He says it was the obvious move to make, short of Telkom divesting of its mobile arm.
Chireka says the move is not surprising as consolidation is expected in the saturated market, which is under pressure as voice revenue continues to decline. "The market needs it."
Absa Investments analyst Chris Gilmour points out that Telkom does not have the resources to go it alone. The mobile arm spent R815 million on its network in the first half of the year, compared with MTN's R5.8 billion for 2013.
ICASA did not respond to a request for comment.
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