Vodacom, which has been eyeing expansion opportunities in Africa for some time, is spending R2.5 billion to increase its stake in its most successful international operation, Vodacom Tanzania.
SA's largest operator aims to boost income from its international operations to 25% of total revenue, within the next two years, up from the current 22%. Although it has been eyeing the African market for some time, it has yet to expand geographically.
Finding a new territory in which to expand will be difficult as the market is dominated by a handful of operators, with little up for grabs. Now Vodacom, which has operations in Tanzania, Mozambique, Lesotho and the Democratic Republic of Congo, is taking advantage of Tanzania's anticipated growth.
Increasing its holding in Tanzania, which has "great growth potential" makes perfect sense, says spokesman Richard Boorman. He says taking a bigger stake in its largest international operation was an "obvious" move.
Gaining pace
While Tanzania has a population of 48 million, slightly less than SA, its mobile penetration is only at 57%, compared to SA at 138%. Vodacom's other international operations, with the expectation of Lesotho at 67%, all report estimated penetration at under 40%.
Vodacom says its low penetration rate makes Tanzania "attractive". Churn is also relatively low, at 54.1%; compared with Lesotho, at 41.6%; Mozambique at 70.6%; and the Democratic Republic of Congo, at 88.2%. "This transaction will increase Vodacom's effective exposure to this high growth market."
The Tanzanian operation has 10 million customers and is its second-largest unit after SA, where it has 30 million subscribers. Internet penetration, according to research house McKinsey, is at 11%.
Although Tanzanian subscribers use more minutes a month than any of Vodacom's other operations, at 119, average revenue per user lags behind Mozambique (R59) and SA (R126), but is higher - at R45 - than the R35 spent a month in the Democratic Republic of Congo.
Chris Gilmour, Absa Investments analyst, says many African countries, including Tanzania, are growing rapidly. Tanzania's economy, currently gaining at 6.7%, is forecast to grow.
Ovum analyst Richard Hurst says Tanzania is part of Africa's growth story and, while not a shining light, is no dullard. He says Vodacom understands the country and the market, and has a "familiar" place in the market. "There's no reason not to invest in that neck of the woods."
Vodacom Tanzania, which has been around since 1999, is the largest mobile operator in Tanzania and is a key investment for the JSE-listed company, it explains. "Vodacom Tanzania has been Vodacom's most successful investment outside of SA to date."
Hurst says Tanzania is getting its economic story right and it makes sense for Vodacom to deepen its stake in a unit that is doing well.
Vodacom is increasing its stake from 65% to 82.2% by buying an addition 17.2% in the operation from country partner, Cavalry Holdings. Cavalry will retain 17.8% in the unit.
Move north
BMI-TechKnowedge MD Denis Smit says Vodacom has to look north for new revenue opportunities as the local market is saturated.
In the six months to September, Tanzania Vodacom's service revenue gained 19.1%, a far faster rate of growth than its overall numbers. In total, Vodacom's income from its network only grew 2%.
Vodacom has a few opportunities on the cards to extend its geographic presence on the continent, but nothing has come to fruition so far. CEO Shameel Joosub recently explained deals take time to get inked, and sometimes fall through.
Hurst says Vodacom will find geographic expansion challenging, as there are few options, and the price tags are high. He adds the continent is also dominated by large players, such as MTN and Bharti Airtel.
Smit says any deal in Africa will be "big" and involve one of the large operators.
Tanzania, which has also instituted lower termination rates and a compulsory SIM registration programme, will slightly increase Vodacom's earnings on a per share basis, but is subject to regulatory conditions.
Vodacom, which ended the interim period with cash and cash equivalents of R2.7 billion, will pay for the deal in cash, it says. The group generated R11 billion in cash in the first half of the year, but spent R5 billion on its network, and R6.3 billion went to shareholders in the form of dividends.
Its stock climbed 1.18%, or 145c, to close yesterday at R123.89, giving it a market capitalisation of R184.3 billion.
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