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Vodacom assures competition will be stronger post Neotel buyout

Vodacom assures competition will be stronger post Neotel buyout

Photo by Duane Daws

15th January 2015

By: Natasha Odendaal

Creamer Media Senior Deputy Editor

  

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The potential stifling of competition in the telecommunications sector has South Africa’s mobile operators up in arms as they move to block Vodacom’s R7-billion bid for converged communications network operator Neotel.

Rival telecommunication operators on Thursday argued that should JSE-listed Vodacom gain control of the assets of the India-based Tata Communications subsidiary, Vodacom would become a “super dominant” player.

Speaking on the first day of the two-day Independent Communications Authority of South Africa- (Icasa-) led public hearings on the proposed deal, Cell C chief legal officer Graham MacKinnon contended that the proposed merger would not be to the benefit of competition or the consumer.

Icasa was holding the hearings over Thursday and Friday to gather stakeholder input into Vodacom’s application for transfer of control of Neotel’s electronic communication network services and the electronic communication services licences, as well as the radio frequency spectrum licences, as part of the acquisition process.

Vodacom CEO Shameel Joosub countered that obstructing the deal would be detrimental to competition and hamper the growth of the financially constrained Neotel and spectrum-deficient Vodacom’s long-term evolution (LTE) ambitions.

It would also hurt consumers seeking affordable, accessible and reliable telecommunications services, stakeholders heard on Thursday.

However, MacKinnon argued that the deal was not in the public interest as it would further skew the playing field, eliminate a competitor, reduce Vodacom’s incentive to compete and inhibit Cell C’s ability to compete.

Vodacom had a 52% market share by revenue, while rivals MTN, Cell C and Telkom Mobile had market share by revenue of 35%, 11% and 2% respectively.

He stressed that this type of structure was not conducive to competition and, with the absorption of Neotel, Vodacom would further entrench its dominance and leave the market open to abuse.

Senior counsel for Vodacom Paul Kennedy averred that the transaction would incite rival mobile operators to invest more heavily and compete more aggressively in LTE deployment, while providing dominant fixed-line operator Telkom with a more effective, investment-backed competitor in Neotel.

The deal had also been heavily contested on the basis that Vodacom would ultimately have “de facto” ownership of the much sought after scarce, high-demand spectrum licences held by Neotel through an “unfair” deal that would enable a distinct competitive edge in the mobile sector.

MacKinnon argued that the transaction was "a veil" that avoided the Electronic Communications Act (ECA) restrictions surrounding licences, suggesting that the high-demand spectrum should be equitably reallocated.

Neotel had been assigned spectrum of 2 X 12 MHz of 1800 MHz, 2 X 5 MHz of 800 MHz and 2 X 28 MHz of 3.5 GHz, which Neotel needed extensive funds to leverage further.

Kennedy commented that Vodacom was only applying for a transfer of control of the licences as part of the merger and was not eyeing the transfer of the actual licences.

Neotel would operate as a separate entity, albeit wholly owned and guided by Vodacom, while still holding control over how its spectrum would be used.

Vodacom would have to enter commercial agreements in line with the ECA to benefit from Neotel’s spectrum.

Vodacom was severely constrained by a lack of spectrum, with Joosub noting that Vodacom had fewer spectrum assignments than MTN or Telkom, but had a larger, faster-growing customer base to service, particularly as data demand rose 70% year-on-year.

“We have reached the limit of what is possible,“ he said, talking to the group’s stretching of its current assignment, and refarming spectrum from its second-generation network for LTE in efforts to ease pressure on the third-generation networks.

“We have to rob Peter to pay Paul,” he said, adding that this would soon lead to degradation in communication networks’ capacity.

“The transaction does not enable us to offer a fundamentally different level of LTE services but it does enable us to maintain a competitive offering,” he said during a presentation at the hearings.

The mobile operator would also gain access to Neotel’s fibre assets, which included over 15 000 km of fibre-optic cable nationwide, including 8 000 km of metropolitan fibre in Johannesburg, Cape Town and Durban.

The synergies of the parties would enable the provision of a wider range of business services and much-needed consumer services, such as fibre-to-the-business and fibre-to-the-home – a space in which Vodacom currently only had an estimated 2% market share, despite attempts to build a fixed-line business.

Further, with only 7% fixed broadband penetration, South Africa has “a lot of catching up to do”, and the transaction would enable Vodacom to progress its fixed-broadband aims through its fixed enterprise business.

Vodacom expected its acquisition of Neotel to play a major role in stimulating the “massive” investments required to scale fibre and mobile data networks to achieve the national broadband targets.

While Vodacom conceded that the deal could “make life tougher for our competitors” – particularly Telkom – it would not distort competition, Joosub stated, reiterating that it would be “good for the consumer, good for business and good for the country”.

“Without the deal, Neotel will remain financially constrained and incapable of investing to the level required to create a substantial fibre network, which is much needed. Vodacom’s ability to develop world-class mobile data services will also be constrained,” he added.

Neotel MD Sunil Joshi said significant capital injection from Vodacom would give it the scale and backing needed to effectively use its assets, including the high-demand spectrum and fibre, and would be critical to progress the converged operator’s mandate, while pursuing government’s ambitions of broadband for all.

Neotel needed to invest more aggressively than its current R500-million a year to expand its footprint and fibre reach and rise to a level where it could effectively compete and be more relevant to its clients.

Joshi explained that Vodacom’s scale to invest would be the shot in the arm Neotel needed, particularly as the cash-strapped entity required in excess of R2-billion in investment over the next two years to further leverage the gains made since its establishment in 2007.

“After the deal, Vodacom, together with Neotel, will become a more powerful competitor in the fixed space. Vodacom will plan for a level of investment several times higher than Neotel’s current level of investment in fibre. We will accelerate investment in fibre-to-the-home and fibre-to-the-business to create a wider footprint and better services,” Joosub explained.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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