Vodacom-Neotel deal may spark copycats

Johannesburg, 01 Jul 2015
The long-awaited decision on Vodacom's proposed R7 billion buyout of Neotel is in its penultimate stage.
The long-awaited decision on Vodacom's proposed R7 billion buyout of Neotel is in its penultimate stage.

The R7 billion buyout of Neotel by Vodacom - a process now over a year in the making - is likely to go ahead soon and could give rise to legal challenges, as well as further consolidation in the market in the long-run.

This is according to industry analysts and comes in response to the Competition Commission's recommendation to the Competition Tribunal yesterday that Vodacom's proposal to buy 100% of Neotel be approved - with certain conditions.

The primary conditions are around Neotel's spectrum - one of the most valuable assets to Vodacom and rivals' biggest concern around the deal - and investment in infrastructure, which was on Vodacom's agenda anyway.

Analysts say, considering the synergy between the commission and the tribunal, the deal will, in all likelihood, be given the ultimate green light. The tribunal is now expected to set the matter down for hearing, and make a decision in a matter of weeks.

BMI-TechKnowledge director Brian Neilson points out that, while this process is likely to be done and dusted soon, the question of legal challenges - especially from the deal's most outspoken opponent Cell C - could throw a spanner in the clockworks.

Ovum analyst Richard Hurst points out that, if the deal goes ahead as recommended, it would represent - and spur - the market consolidation trend the South African telecoms sector is experiencing.

"[The purchase could also] see other players begin to position themselves with a view to either entering into similar deals or perhaps partnerships to meet the new competitive threats."

Conditional context

To address the concerns arising from the proposed merger, the Competition Commission has recommended structural and public interest conditions, to which it says Vodacom and Neotel have agreed.

Firstly, Vodacom will not use Neotel's spectrum - either directly or indirectly - for a period of two years from the approval date or 31 December 2017, whichever comes first.

"The two-year deferment period is intended to give an opportunity to policy-makers to address the spectrum challenges in the industry. It is the commission's view that such a process may be concluded within two years as there are indications from the relevant government departments that plans are under way to introduce and implement relevant policy," says the Competition Commission.

In Competition Commission commissioner Tembinkosi Bonakele's words:

"This merger will change the South African mobile network and fixed-line industry significantly. We've taken due care in our analysis and recommendation to protect competition now and in the future, but the success of these conditions is predicated on the relevant government departments and ICASA promulgating necessary policies and allocating spectrum for the benefit of the whole country. The conditions also contain unprecedented investment commitments that will go a long way in improving telecommunications services in SA."

Secondly, Vodacom has to commit R10 billion investment in fixed network, data and connectivity infrastructure within five years of the approval date. This will include all capital investments and long-term commitments, additions and upgrades in transmission, national long distance fibre, backhaul, connectivity and in the development of value-added services.

This second condition, says Neilson, is an easy pill to for Vodacom to swallow, since there is no indication these need to be open access infrastructure investments, nor specifically investment in underserviced areas.

World Wide Worx MD Arthur Goldstuck says the R10 billion investment condition is "simply rubber-stamping what [Vodacom was] investing anyway".

Other conditions, on the public interest side, are that Vodacom will, within a period of two years following the approval date, ensure the value of shares in its share capital held by black economic empowerment shareholders increase by R1.4 billion.

Vodacom is also not permitted to retrench any of Neotel's employees as a result of the merger. This is another easy pill, notes Neilson, given the mobile operator is looking to grow the business.

Competition quandary

The commission also unequivocally stated the deal would have significant impact on competition in the market - a basis for opponents' legal challenges, should they decide to go that route, says Neilson.

Goldstuck says, while the near nod may not make other operators happy, it does address some of their main concerns.

Although some reports have indicated Cell C intends pursuing legal intervention, the operator has declined to comment for now, saying it is reviewing the announcement.

Cell C maintains a Vodacom-Neotel tie-up would further entrench the already uneven telecoms playing field, which has - for over 20 years - been dominated by mobile giants Vodacom and MTN.

MTN has also objected to the deal, with the question of spectrum transfer being its primary argument. The operator previously argued spectrum transfer was not allowed in SA, and therefore Neotel's spectrum should not be allocated to Vodacom, but returned to the Independent Communications Authority of SA (ICASA) for reallocation.

MTN has asked the Competition Commission to share its full recommendation with the operator, so it can analyse it before "applying its mind and publicly commenting".

In reviewing Vodacom's proposed purchase, the commission found the transaction is "likely to substantially lessen or prevent competition in the mobile services market".

The body says Vodacom is the market leader in mobile services markets and the additional spectrum from Neotel will result in spectrum concentration effects that will likely consolidate Vodacom's dominant position. "The acquisition will confer first mover advantages to Vodacom relating to network speed, capacity and mobile offerings.

"Vodacom will not be constrained by other competitors as they are unlikely to match its offering. These factors taken together will likely lead to reduced choice and higher prices to end-customers in the absence of effective constraints on Vodacom.

"The merger is also likely to have a significant impact on the structure of the South African mobile markets and future competitive dynamics. This is also a negative effect of the merger on the structure of the mobile market in SA."

The commission believes the conditions imposed will address these concerns.

Vodacom has welcomed the commission's recommendation and says it will work with the applicable regulatory bodies towards a speedy outcome. "[Final approval of the deal] will ultimately result in increased investment in communications infrastructure and the accelerated rollout of broadband connectivity in SA."