SNO stakeholders question bids

Johannesburg, 29 Jul 2003

While the two bidders for the 51% equity stake in the second national operator (SNO) licence both appear confident that their bids are strong enough, questions have been raised by the groups holding the other 49% in regard to certain aspects of these documents.

The two bidders are CommuniTel, which includes Telecom Namibia, the Umkhonto We Sizwe Military Veterans Association (MKMVA), Gateway Communications, Premier Contracts Agency and is supported by British Telecom, Microsoft and Accenture, KPMG and Deutsche Telekom via T-Systems/Detecon; and Two Consortium, which includes Scandinavian operator Telenor, SwedTel and local company Blue Planet, and is supported by Dimension Data and MTN.

Nexus Connexion, holder of the 19% black economic empowerment component of the licence, is fiercely protective over its empowerment turf, while Transtel - which, together with Esi-Tel holds the remaining 30% - has raised issues regarding asset valuation and the level of funding the bidders have access to.

State-owned enterprises

The state-owned enterprises Transtel (Transnet`s telecoms arm) and Esi-Tel (Eskom`s telecoms unit) are concerned about the amount of funding the consortiums are bringing to the table.

According to the bid documents, total project funding over the first five years of the SNO is put at R856 million by Two Consortium and R5.4 billion by CommuniTel.

"Our feeling is that in terms of the investment required for a strong SNO, it will take at least R5 billion, possibly quite a bit more than that," says Paulo Froes, SNO programme director at Transtel.

"Although both bidders appear to have the requisite experience, only one bidder has come up with figures in that region. The other one`s investment level is substantially less, which is naturally a concern for us."

Another issue of concern for Transtel is that the organisation receives a fair price for its assets. These include a fibre optic fixed service network (FSN) infrastructure it put in place along with Esi-Tel and a private telecoms network (PTN), which includes Transnet`s client base.

Transtel values these assets at R1.6 billion and although CommuniTel has agreed to pay that valuation, Two Consortium believes that when depreciation of assets and exchange rate issues are taken into account, they are worth closer to R1.2 billion.

The consortium`s intention is also to pay a percentage of this initially, with the remaining balance to be paid in 2009 and 2010.

"We are not saying that this valuation is cast in stone, just that it needs to be discussed first. In our opinion, this is the best deal for the SNO as a whole, and since Transtel is part of the SNO, it should look at what is best for the overall picture," says SwedTel`s Mike Nahon.

Froes says that while they understand that Two Consortium may be having trouble putting a true value to Transtel`s assets, the company is of the opinion that its network will have immense and immediate value in terms of offering the SNO speed to market.

"Naturally, this means we are concerned about Two Consortium`s valuations and the payment plans they have suggested for these assets," he says.

"Another concern is this concept of 'cherry-picking` the assets of the PTN. Any transition into the SNO must protect Transnet`s client base and maintain a certain level of service, so we don`t want to see a piecemeal approach adopted; we want it taken lock, stock and barrel."

While much has been made of Two Consortium`s management contract approach, which would effectively see the other players get a smaller slice of the pie, Transtel does not seem unduly concerned by this.

"While we are not in favour of the management contract option, we are comforted by the fact that they have stated that any decision regarding such a contract would be voted for by the entire SNO board, at which point they would recuse themselves from the voting. In other words, it will be Transtel, Nexus and Esi-Tel`s decision," says Froes.

BEE and revenue projections

Another area of contention lies in the fact that both consortiums have strong black empowerment partners within their groups.

CommuniTel`s association with the MKMVA and Two Consortium`s alliance with Blue Planet - which incorporates Mvelaphanda, African Footprint and Dunrose Investments - has created some concern for Nexus Connexion.

At the recent SNO public hearings, Nexus chairman Kennedy Memane demanded guarantees that his company would be the sole appointer of black empowerment candidates within the SNO. "We don`t want black on black violence in the boardroom," was his concern.

Although CommuniTel was unwilling to provide such assurances, when pushed for a commitment, Two Consortium was quick to point out that, while Blue Planet is a black empowerment company, in this instance it has come on board purely as a business partner and will cede the empowerment side to Nexus.

Disparity exists between the consortiums` predicted year one revenue too, with CommuniTel predicting a conservative R397 million, while Two estimates that it will bring in revenue of around R1.2 billion.

When asked about this, CommuniTel director Mike van den Bergh said: "I cannot comment on the other consortium`s figures, but ours are deliberately conservative because it is the phase-in and build-up stage of the SNO, so we were prudent with our revenue projections."

Per-Olof Jansson, director of business development at SwedTel, says he feels Two Consortium can reach the projected revenues because the company has an arrangement with MTN to use its infrastructure to set up a fixed mobile network which will see it grow market share rapidly.

While it seems strange that a cellular provider would allow its network to be used for calls which would be charged at landline rates, not to mention how this might affect the interconnection rates, Jansson appears to believe that it will be good for everyone.

"Yes, MTN may experience some kind of loss initially in terms of GSM rates versus fixed-line rates, I believe that something like this will expand and grow the market, so no one will lose in the end."

Poker game

Andre Wills, an independent telecoms analyst, believes there are twists and turns still to come in the SNO process.

"I think that at this point, it is very much like a poker game - all the players are holding some cards close to their chest and no one has shown their full hand as of yet.

"There are two key problems up ahead, whoever wins the licence. The first is how quickly the various segments can integrate into a single SNO unit, because if this is not done successfully, it will weaken the SNO and thereby help Telkom."

He says the other issue is that the SNO must get its marketing, branding and advertising correct (in much the same way Cell C did before it launched), as it will only have one opportunity to do it right, after which it will have lost some of the public`s faith.

"Of course, one thing that few people are considering is the possibility that ICASA will reject both bids, as it did in the first process. Not only would this lead to potential court action by the bidders, but it would probably also see the holders of the remaining 49% stake pushing to go it alone," says Wills.

"This would also play into Telkom`s hands, as the chances are that the public would also begin to lose interest in the SNO process, as it has been dragging on far too long already."