A wave of merger and acquisition activity is heading to the local market, as telcos seek to gain scale and enhance their IT service offerings in a world rapidly shifting towards convergence.
The global move has already started in SA, with last week's announcement that Vodacom will pay R7 billion for Neotel, while Telkom is bidding R2.67 billion for Business Connexion (BCX). The industry sees these two deals as the start of a shift in the landscape that will accelerate over the next two years.
Companies cited by analysts as being among those that will be involved - either as targets or victims - in the convergence rush include Cell C, Vodacom, MTN, BT, Orange, Vox, Huge, TeleMasters and Internet service providers (ISPs).
Has to happen
Neotel MD and CEO Sunil Joshi says consolidation is "really starting to take shape", because of the challenging time in the sector. He notes there will be more deals done over the next 18 to 24 months as these are necessary for the evolution of the industry.
Ovum analyst Richard Hurst says "we can expect to see further market consolation", because of the pressure of increased competition in the sector.
Independent analyst Paul Booth says last week's announcements are "just the start of a consolidation run". Boosting digital inclusion, increasing capacity and coverage, while dropping prices, means players have no choice but to add scale by buying out other entities, he says.
In addition, says Booth, with the growing trend towards the Internet of things, telcos will need much more capacity, which will drive the buyout race. By 2017, current conventional terminals - such as laptops, smartphones and tablets - will only make up 40% of all connected devices, he says.
Operators are also moving more into IT services, which is the rationale behind Telkom's bid for BCX. The IDC has already predicted this year will see the line between telecoms and IT becoming even more blurred.
Telecoms companies will increase investment in IT capabilities and enhance their capacity to primarily support the enterprise segment, says IDC. It adds those already pursuing IT strategies are expected to increase capital expenditure towards building on their technological capabilities.
On target?
SA cannot afford more than three players, which is another consolidation driver, says Booth. Once consolidation is over, he anticipates the local arena to comprise of Vodacom, MTN and Telkom.
With Vodacom and Telkom's moves, Cell C "must do something", because it cannot continue on its own, so must be bought or merged, says Booth. He notes its situation is becoming urgent and this is probably the closest deal. "BT and Orange are key predators also, and may choose this time to try and enter the market in a big way."
Both MTN and Vodacom could buy out an IT company to add to their capabilities, says Booth. He sees a deal happening that will affect either Gijima or Datacentrix, but also notes smaller non-listed IT services companies may well be targeted, such as when BCX bought Integr8.
Hurst expects some consolidation in the ISP space, with candidates such as Vox rumoured to be up for sale. Other players such as Altech and parent company Altron will also probably seek to further strengthen their positions in both the IT and telecoms space.
Booth questions whether Vox, Huge and TeleMasters could "offer something useful to the big boys".
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