Consolidation in South Africa's telecoms sector is nothing new, but a possible Cell C-Telkom merger could see job losses on the horizon for both companies. However, analysts believe these will likely be minimal.
"There will be some overlap in places, but I think these will be very slight and we are unlikely to see any huge job losses springing from the acquisition," says Ovum senior analyst Richard Hurst.
Africa Analysis MD Dobek Pater agrees "there would certainly be some rationalisation of positions over time as many of the functions would be doubled up after operations and network integration".
Telkom this week confirmed what the market has suspected for months: that it's in talks to buy rival, Cell C. The telco said on Monday it was "in discussions regarding a potential transaction to acquire all of the shares of Cell C".
"People would be affected across all departments - marketing and sales probably first, then operations and network. This would include senior executive positions as well," Pater believes, if the deal does eventually go ahead.
Telkom is "performing due diligence on Cell C" and it is unclear how much it has offered to buy the company, or how it would go about the integration of the two businesses and workforces.
"I don't think Cell C suffers from an excessive staff complement and if anything has been focusing on cost optimisation and increasing efficiency," says Hurst.
Pater agrees, saying Cell C has expanded its subscriber base considerably over the past two years but has not increased its staff in tandem: "In fact, it went through a round of staff reductions about a year ago."
"I think that staff cut-backs are a reality in the industry but it's just a matter of where we are in the cycle of market development," adds Hurst.
Telkom already ran into trouble with unions when trying to retrench staff earlier this year as part of its ongoing turnaround strategy. Trade union Solidarity took Telkom to court in July and in the end the telecoms operator decided to call off its planned retrenchment of over 4 000 staff and opted to offer voluntary severance and retirement packages to staff instead. This ended up costing Telkom a whopping R1.5 billion to see 3 108 staff out the door.
"Telkom has maintained an open dialogue with the unions, and in relation to the acquisition is sure to engage with them should the need arise to begin reducing staff," according to Hurst.
Turning Telkom around
"The acquisition would give Telkom a greater footprint in the market and would serve to bolster its mobile strategy, as well as the focus on fixed and mobile convergence," says Hurst.
Telkom is still in the midst of a multi-year turnaround programme and Hurst says buying Cell C is "certainly is a step in the right direction".
"I think it's fair to say that in the current South African market environment, operators need a significant mobile play as part of their repertoire in competing in the market," he adds.
"From a Telkom Mobile sustainability perspective, it needs to expand and quickly; and acquisition is the only solution. However, the subscriber base Telkom would buy from Cell C is of lower quality than that of Vodacom and MTN, and Telkom would need to try to expand its mid to high-end customer base," according to Pater.
Money is also a concern for Telkom, which has already warned shareholders that its interim headline earnings per share are likely to be between 65%-85% lower than a year ago.
"Cell C is still not net profitable or at best on the verge, while Telkom also needs to improve its financial position, so funding an acquisition of this nature would be a considerable challenge, particularly given Telkom's other investment commitments - BCX, fibre network deployment, etc," adds Pater.
Hurst says that from a financial point of view, a high degree of leverage will probably be required to complete the acquisition "but the benefits and prospective returns from an entity such as Cell C being included in the Telkom stable would balance any downside or risks".
Complete control
Dubai-based Oger Telecom owns a 75% stake in Cell C and for months there has been speculation Oger is looking to sell. Telkom's announcement this week, however, made it clear it is looking to buy all of Cell C, and not just Oger's majority stake.
"I would expect that Telkom would want total control of Cell C, in order to integrate the operations and the network (as far as possible) into its own operations, and absorb the Cell C brand into the Telkom Mobile brand.
"It would want complete freedom of decision-making to achieve this, without having to contend with minority shareholder views," says Pater.
BMI-TechKnowledge research director Brian Neilson agrees, saying the two players have largely complementary assets.
"Telkom has great strength in LTE in the metro areas, but no rural presence of its own (which is instead achieved by national roaming on MTN's network). They would have more options for network sharing and extracting cost efficiencies. The two companies also have their own brand strengths in different customer bases - although ultimately the one brand is likely to be phased out."
Pater says a somewhat larger third mobile competitor in the market would be able to challenge Vodacom and MTN more effectively.
"However, probably more importantly, the larger subscriber base would allow Telkom to begin deploying its fixed-mobile convergence strategy, and leverage the economies of scale to implement new products and services at a lower cost base. This would begin to drive greater competition in the market. It would also allow Telkom to be more competitive against Vodacom once the Neotel acquisition has been finalised."
Watch out MTN, Vodacom
Analysts agree the merger of Cell C and Telkom would create a stronger third competitor in an industry largely dominated by Vodacom and Cell C.
"This is a logical move and positive development for both companies and the industry. The market is probably too small to support four infrastructure-based players, and it makes sense for the number three and number four to join forces," says Neilson.
He says MTN and Vodacom should be "a bit" worried.
"The market will move towards one of three strong players rather than two strong ones and two weak ones. 'Move towards' does not, however, mean it will be instant or perfect. Vodacom is likely to retain some competitive distance from the new, merged player for some time."
Even Vodacom CEO Shameel Joosub agrees the merge would create "a credible player" in the industry. Joosub told ITWeb this week that the prospect of Telkom buying out Cell C is "interesting from an industry perspective".
"I think competition is good generally, but I think consolidation is happening and will continue to happen and we need to accept that," says Joosub.
"The deal will probably echo the market consolidation signals that we continue to see, but perhaps for South African consumers and business it will streamline or simplify the telecoms sector," according to Hurst.
Pater says the new combined company could give other operators a slight headache. From a pure mobile market perspective, he sees MTN and Vodacom continuing to be considerably stronger but says the "market share split would change somewhat".
"However, from a combined fixed and mobile market perspective, and the ability to offer fixed/mobile product/service suites (bundled and converged) to both the business and consumer markets, the new Telkom entity would be in a strong position vis-`a-vis the mobile incumbents."
Hurst, however, doesn't think the other players should be too worried as "it will probably be more of a business as usual".
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