Analysts believe a new round of suitors will soon be at Neotel's door after news broke that it will not be acquired by Vodacom for R7 billion.
"Neotel's business will continue but they have been a target for acquisition for some time and this is not the last time we will hear of a suitor looking to buy Neotel," according to IDC senior research manager for telecoms and media in Africa, George Kalebaila.
Vodacom yesterday announced its proposed acquisition of Neotel's assets related to its fixed-line business had been called off "due to regulatory complexities and certain conditions not being fulfilled".
The deal has been on the cards since May 2014, but came up against strong opposition from rival telco operators and other industry players, mostly because they believed Vodacom's acquisition of Neotel's much sought-after radio frequency spectrum would give it a competitive advantage.
In December, Vodacom decided to take the spectrum out of the deal, announcing a "modified transaction" to only acquire Neotel's assets related to its fixed-line business, customer base and staff. Neotel has now said both parties agreed "the right commercial and technical solution was not feasible within the current regulatory environment".
Kalebaila says it's a shame that even the modified deal was called off, as he believes it would have helped Neotel to better compete against Telkom in the fixed-line space.
"Over the years, Neotel has not been able to challenge the dominant position of Telkom, but a dominant player like Vodacom, with access to more investment, would have helped Neotel in the fixed infrastructure space."
BMI-TechKnowledge director Brian Neilson says Neotel is still in need of a capital injection to help it endure in the long-term.
"They will survive, but the Vodacom deal would have given them much-needed capital to expand their network and their business, and to defend their position in the market against other, much larger players in the longer term, noting that mobile operators are moving into the fixed-line space," says Neilson.
Africa Analysis MD Dobek Pater agrees Neotel needs another buyout offer or source of funding if it is to compete with the bigger players.
"Neotel spends around half a billion rand a year in investment in infrastructure, etc, but in contrast the larger players spend around 10 times that amount, so you have a situation where Neotel is always trailing behind the competition."
Tata's choice
Major shareholder Tata Communications has issued a statement to investors, saying it "remains committed to its investment in Neotel and its commitment to focus on customers, partners and employees in South Africa". However, Pater still believes it would make the most sense for Tata to divest.
Ovum senior analyst Richard Hurst says Tata's statement was expected as the company would need to reassure shareholders in the wake of the failure of the deal.
"The market is now aware of the collapse of the deal and other interested parties are probably engaging with the majority shareholder," says Hurst.
"I suspect they would still be looking for a new buyer," adds Neilson.
Director in charge Kennedy Memani says Neotel has the full support of its shareholders and together they will move forward to focus on growing the company.
"We will build on the successes we have achieved by continuing to invest in our network and infrastructure, and by growing our customer base, especially in high value and opportunity segments such as business-to-business," says Memani in a statement.
However, Kalebaila says Tata's level of investment has not matched its ambition in the South African market.
"Tata has not made enough of an investment in Neotel to let it be a strong enough challenger against Telkom."
Pater says going forward, it is going to be increasingly difficult for Neotel to compete in both the wholesale and enterprise markets.
"Neotel has become an increasingly niche player focusing on the wholesale market and wholesale is becoming an increasingly commodities-based game. Being a smaller player disadvantages you because you lack economies of scale that competitors can leverage on."
Vodacom's loss
"My view is that the deal would have been very beneficial to Vodacom and especially its enterprise market initiatives. The ability to offer more advanced and competitive services would probably have been welcomed by business in South Africa. I think businesses would have benefitted from the increased competition in this space, with a more positive knock-on effect in the consumer market," says Hurst.
Vodacom said it originally wanted to combine its assets and skills with Neotel "to accelerate the rollout of fibre-based services to customers and acquire, inter alia, Neotel's licences and spectrum".
"It is disappointing that we have reached this conclusion despite all our efforts to find a way to deal with the complexities of the restructured transaction," comments Vodacom CEO Shameel Joosub.
Pater says tying the knot with Neotel would have made Vodacom more competitive in the fixed-line space, especially against the likes of Telkom.
"We are heading that way where operators are expanding their operations from fixed to mobile or mobile to fixed. It would have been better for the market to have a stronger all-round player emerging, rather than Vodacom just being a strong mobile player," he adds.
Competitors like Cell C have come out saying the approval of the deal would have further enforced Vodacom's dominance in the mobile market and would have hurt consumers. Pater disagrees, saying the deal would not have been bad for consumers; it would only have been bad for Vodacom's competitors and their revenues.
"If Vodacom was able to get Neotel's spectrum it would have been good for consumers, because it would have given them better quality because of wider LTE services. If Vodacom wanted to abuse its strength on the basis of price, which is unlikely, it would be hard for it to charge much higher prices and still gain market share."
Pater says the Independent Communications Authority of SA's (ICASA's) fumble of the merger will have consequences for future deals.
"Next time this kind of transaction comes up and spectrum is involved, ICASA will need to be a lot more diligent in the analysis of the market for the decision they make," he notes.
Last week, Cell C, MTN, Telkom and Internet Solutions won a high court challenge against ICASA for its original decision to approve the transfer of spectrum and operating licences from Neotel to Vodacom.
It's all about spectrum
Kalebaila says Neotel remains well-positioned for acquisition by another player, but spectrum will remain an issue for whatever deal comes next.
He says ICASA needs to move faster in terms of regulation for spectrum allocation, specifically for LTE. Another issue is government moving forward with digital migration to help free up the spectrum tied to the migration process.
Pater agrees, saying: "The whole market is waiting for more spectrum to be released by government, and it should have been allocated by now."
"At the end of the day, this is about spectrum and as soon as that is made available, it stops being an impediment to further consolidation and investment in the market. Spectrum should not be a competitive advantage, it should be a resource available to everyone," says Kalebaila.
"We still need more consolidation in the sector for the existing players to remain profitable."
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