Posts Tagged ‘south africa’

Vodafone steps up to the plate, backed up by Emerging Markets

vodafoneLast week Vodafone Group (NYSE:VOD) released an interim management statement that considering the current economic climate, I consider to be pretty upbeat. I have been a long term holder of Vodafone stock on the London Stock Exchange & have over the last year traded the NYSE traded ADR up & down on swings. However with the current market, I am now looking for some growth & value plays. Looking a little closer at the report & doing some quick analysis of some of the major themes contained, I am now quite bullish on VOD going forward & will be picking up some shares for my investment portfolio. As of writing Vodafone was trading at £121.00 in London & $19.64 in New York.

Comment from : Vittorio Colao, Chief Executive

“In the first quarter the service revenue trend in Europe was consistent with the previous quarter and we continued to see good growth in India and South Africa. Our total communications strategy is delivering well, with organic data revenue up 19% and organic fixed line revenue 7% ahead of the comparative period. Free cash flow generation was strong at £1.9 billion, up 21%. The Group has reaffirmed its guidance for the full year.”

Highlights from the report :

  • Group: Revenue £10,743 million, up 9.3%
  • Group data revenue of £888 million, up 19.4% on an organic basis
  • Free cash flow of £1,896 million, up 21.2%; net debt at 30 June 2009 of £31.2 billion
  • Cost reduction programme on track
  • Proportionate mobile customer base of 315.3 million; 8.0 million net additions during the quarter
  • Europe: Service revenue up 4.4% driven by FX benefits. Data revenue up 17.8%. Fixed line revenue up 5.7%
  • Africa & CEE: Service revenue up 26.3% including Vodacom acquisition,Vodacom organic growth of 5.2% offset by weakness in CEE
  • Asia Pacific and Middle East: Service revenue up 21.8%
  • India service revenue growth of 23.0%

Interesting to see Vodafone making a point of mobile data revenues & 19.4% grwoth is a pretty impressive statistic. Much of this being driven out of Europe, where one of the big booms in mobile data is the popularity of 3G wireless broadband dongles (USB sticks) on “Unlimited” packages, which all the major operators have adopted. Vittorio Collao announced a major cost cutting initiative last November 2008, targetting cost reductions of $1.45Bn by  the end of the 2011 financial year in order to offset the pressures from inflation and the competitive environment and to enable investment in revenue growth opportunities. Savings of more than 65% of this target are expected to be generated by the end of the current financial year.

Vodafone has been at the forefront of network sharing, originally this started in the UK with Orange, now the group has signed a pan-European deal with Telefonica-O2, which will see network sharing being implemented in Germany, Ireland, UK & Spain. Analysts see this as a huge positive, as the deal is set for a ten year term & should save each company in the region of $350 million per annum. The growth figure of 8 million subscribers runs in line with analysts global forecasts for 2009 of circa 13%, as Vodafone is one of the higher value operators in each of its markets, the fact that it is expanding subscribers in a high churn market is positive.

“Old” Europe is the only area where Vodafone operates both fixed & mobile services, predominantly in the UK, Ireland, Spain, Potugal & Germany, where it is the second largest provider of broadband via its Arcor business unit. Having already discussed the cost savings initiative with Telefonica, the main story here is on how Vodafone are manbaging to reduce churn & promote ARPU via new services. Vodafone is far & away the leader in all of these markets regards business services (excepting Germany, which is dominated by T-Mobile), with consumer playing a strong supporting role, crucially the majority of these accounts are postpaid, which is reflected in higher service revenues than is the norm in this sector.

Another area that Vodafone is finally catching onto is the machine-to-machine market, or M2M. The company has made some recent investments in this sector & is set to benefit as the market grows from $4.2Bn in 2008, forecast to rise to $12.5Bn by 2012. It’s not all good upbeat news though, as recent EU intervention in roaming charges has had a detrimental effect on voice service revenues aceross the board. Retail termination costs have hit this part of the business very hard, with only Netherlands showing minimal growth of 0.6% mainly due to MVNO operations, whilst at the other end of the scale, Greece voice revenues sank by 15%.

In “new” Europe (CEE) & Africa, the atypical Emerging Markets,  we are presented with a mixed bag, however the region saw service reveues grow by 26.5%, mainly due to Vodacom (of which more later). Vodafone has seen serious competition in Romania, where no less than 6 operators are competing for one of the lowest ARPU generating populations in Europe, the situation not being helped by the extremely poor performance of the Lei versus the Euro. Similarly, Turkey has not been the shining star that Vodafone had expected when it launched their in 2005. However, now that 3G services are finally being launched, Collao today announced that the company would be investing up to $675 million in network infrastructure over the next 12 months, as Turkey has very low fixed line connections, mobile broadband is set to be a revenue enegine. I also have a feeling that as & when Turkey accedes to the EU, plenty of “rural” grant funding will be made available for the three network operators to provide near 100% coverage. At time of writing, there are some rumours of Turkcel & Vodafone entering into limited network sharing on 2G (GPRS) services, but these remain unconfirmed.

Meanwhile, Africa has seen a real boost this year, with Vodafone finally acquiring a majority interest in Vodacom South Africa from Telkom, as we discussed earlier this year in Consolidation hits Rainbow Nations telecom sector; Vodacom is now the flagship Vodafone brand in sub-Saharan Africa & has recently listed on the Johannesburg Stock Exchange. Another hit in this region is Vodafone’s 40% majority holding in Kenya’s Safaricom. Jointly the two companies launched the mobile payment platform M-Pesa back in 2007 & it has gome through a number of modifications & upgrades since then, winning a United Nations award along the way. The service has 5.75 million users signed up in Kenya & now that it has been proved & tested, look to Vodafone to launch M-Pesa in a number of new regions in Africa, such as Nigeria, Ghana & South Africa. An interesting video on Safaricom & M-Pesa can be viewed here : Michael Joseph

Vodafone’s controversial investment in Essar , seems to be paying off handsomely, as the Indian carrier now operates in all 26 mobile circles across the sub-continet. Service revenues jumped by 23% with the subscriber base leaping 56%, or  by 77 million subscribers in the last year. Vodafone will also be launching M-Pesa in India this year & it is thought that up to 17% of the subscriber base will ustilese the m-payment system. Vodafone-Essar recently applied & was granted both a national Internet Service Provider & National Long Distance licences, from the Indian Government, as expectations run high on the “last mile” being finally opened. The NLD licence will have an immediate effect, as Vodafone will now be able to backhaul its own national STD voice traffic & not have to rely on local carriers, which will be a welcome development since mobile voice terminations have fallen by 5% in India in the last year.

In Asia Pacific, there is only one big story & that is the merging of Vodafone Australia & Hutchinson Whampoa’s 3 in order to create a realistic competitor to government owned Telstra. The new Vodafone-Hutchinson Australia is a 50-50 JV, which will carry the Vodafone brand & now has a combined cutomer base of just over 6 million users. Vodafone will be looking to leverage its Vodafone Live! content platform here & significant cost savings on network (roaming charges) can be expected, the combined networks now have 98% coverage of metropolitan areas across the country. Vodafone will also receive a deferred payment of AU$500 million from Hutchison-Whampoa, to reflect the difference in the joint business assets (network).

So all in all, a home run for Vodafone in its first quarter of the current financial year. Considering the global economic environment, I feel that this is a great performance (although possibly helped along by currency rates) & that if the management team can keep a firm grip on the operating companies, Vodafone should be one of the strongest performing telecoms companies for 2009-2010. Continued expansion in both India & Africa, along with the introduction of services such as M-Pesa will attract & hold valuable customers. I’m long on the ADR, having bought in last week at $18.68 & am looking for it to exceed $23.50 within three months.

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MTN-Bharti : a long winding road from India to South Africa

bharti-airtel-mtn-mergerIndia’s Bharti Airtel & South African operator MTN returned to the bargaining table this week, over a merger that could create a $20 billion mobile giant. The potential deal is attractive for both parties & if successful, would create a leading telecommunications service provider group aligning Bharti’s market leading Indian business with MTN’s market leading African and Middle Eastern operations. Combined operations would result in the group enjoying leading positions in three of the fastest growing wireless emerging markets ; India, Africa & the Middle East, with no overlapping footprint & subscriber base of circa 200 million.

Under the terms of the deal Bharti will acquire a 49% shareholding in MTN, in turn MTN and its shareholders would acquire a 36% percent economic interest in Bharti, of which 25% would be held by MTN, the remainder held directly by MTN shareholders, with the long term goal being a fully merger. The two companies have agreed to continue exlusive discussions until the end of July, at which time any issues will be resolved or other potential partners will be engaged.

Sunil Bharti Mittal, Chairman and Managing Director of Bharti, said “We are delighted at the prospect of developing a partnership with MTN to create an emerging market telecom powerhouse. Both companies would stand to gain significant benefits from sharing each other’s best practices in addition to savings emanating from enhanced scale. We see real power in the combination and we will work hard to unleash it for all our shareholders.”

“The rationale for this potential transaction between MTN and Bharti is highly compelling,” said Phuthuma Nhleko, CEO of MTN. “We are excited at the prospect of teaming up with Bharti, India’s number one wireless operator and one of the most strongly capitalised players amongst its emerging market peer group. This would create a highly visible commercial partnership between South Africa and India,”

Bharti & MTN have been here before, almost exactly a year ago. Previous talks were torpedoed by a lack of clear understanding on control between the two companies. At the last minute, MTN proposed a different structure where Bharti was to become a subsidiary of MTN. Bharti retreated from the deal on the basis that it felt MTNs position was a way of gaining indirect control of the combined entity, which would have compromised the minority shareholders of Bharti. This time round it has been made clear from the start that Bharti will be the primary vehicle for both Bharti and MTN to pursue further expansion in India and Asia while MTN would be the primary vehicle for both Bharti and MTN to pursue further expansion in Africa and the Middle East. Most importantly, Bharti would have substantial participatory and governance rights in MTN enabling it to fully consolidate the accounts of MTN.

When this was announced earlier this week, I decided to hold off on posting, as I wanted to see what would forthcoming once the dust had settled & also to get a better feel for some of the more convoluted relationships involved. One of the potential major hurdles to this deal from my perspective was the stance of Singapore Telecom (SingTel) which owns a 30% stake in Bharti Airtel. Bloomberg reported that SingTel would end up with a diluted position of 20% at the end of any full merger between the two. However it would seem that this could be offset by synergies across all of the combined networks of Bharti, MTN & SingTel. In addition to its strong domestic business, SingTel owns Australian carrier SingTel Optus & holds significant stakes in carriers in Bangladesh, Indonesia, Pakistan, Thailand, and the Philippines, commanding upwards of 290 million subscribers themselves. In the same Bloomberg report, SingTel spokesman Peter Heng states that “SingTel will remain a significant shareholder and strategic partner in Bharti post any successful transaction. We will continue to equity account for Bharti, in its enlarged form post the transaction if this is successful.”

Another potential challenge that was aired, is opposition by minority shareholders in MTN, however it has been reported today that the Mikati family which owns a 10% stake in MTN via the M1 Group, has said it will back the deal. The majority shareholder in MTN is South Africa’s state pension fund PIC, with a holding of 13.5%, to date there has been no statement from them. Other minority shareholders of MTN include Allan Gray, Polaris, Coronation and Stanlib, it would seem that these companies are not so bullish on the deal, at least not until further details come clear.

The South African press also gave some weight to the position of the highly politicised trade union federation COSATU (Congress of South African Trade Unions) which recently tried to scupper the full takeover of Telkom’s stake in Vodacom by Vodafone. However, COSATU spokesman, Mr Patrick Craven, has said the MTN deal was a different situation to that of the national carrier ;  “Telkom has always been 50% owned by the public & the move was part of our policy agenda against privatisation. MTN has always been a private company”

So it would seem that conditions are favourable to the potential transaction going forward, which would bring to fruition a long held ambition for Bharti to move into Africa, which remains the most underdeveloped of emerging markets regards telecoms. By leveraging across the combined networks of Bharti Airtel, MTN, SingTel & the Bridge Alliance (11 major operatots in Asia-Pac), the new Bharti-MTN will become a major powerhouse & definitely a very attractive investment for those involved in Global & Emerging Markets.

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Consolidation hits Rainbow Nations telecom sector

800px-flag_of_south_africasvg1Even though merger and acquisitions (M&A) in South Africa were down at least 50% in deal value last year compared with other emerging markets, the telecom sector has seen much activity in the last year, which has also spilled into 2009. A veritable wave of consolidation & a drive towards convergence seems to be the way forward for major players such as Vodacom, Telkom SA & MTN Group.

The largest deal in South Africa was Vodafones (NYSE – VOD) acquisition of a further 15% of Vodacom for R22,5bn ($2.3Bn), bringing control along with atotal holding of 65%, Telkom as part of the deal will divest the remaining 35% to shareholders. Analysts had feared that Vodafone had paid a premium for this stake, however value can be seen in the continued push for consolidation & a genuine effort to move towards converged services. In late December it was announced that the mobile carrier had acquired African network and satellite services firm Gateway Communications for $700 million. The Gateway transaction includes Gateway’s core carrier and business network units, which provide satellite, business and interconnect services to African and multinational companies in 40 countries, but not its broadcasting division.

“As mobile phone penetration levels increase in South Africa, we are actively repositioning Vodacom as a total communications provider with new avenues for growth,” Pieter Uys, Vodacom’s chief executive said in a statement.

Vodacom Group will be listed on the Johannesburg Stock Exchange in 2009, once the Vodafone deal to buy an additional stake is completed. As part of the deal, the Vodacom identity will remain visible on the African continent and it will be the exclusive investment vehicle through which Vodafone will make acquisitions in sub-Saharan Africa, excluding Ghana and Kenya where the group has existing presence via stakes in Ghana Telecom & Safaricom respectively.

Meanwhile, pan-African player MTN Group have not been caught napping, having recently snapped up Verizon’s African businesses, which it is buying to add muscle to its data division. MTN which is Africa’s biggest cell phone operator by subscribers, is buying a 69.38 percent stake in Verizon South Africa, a unit of U.S.-based Verizon Communciations, for an undisclosed amount to help it better compete with rivals such as Dimension Data & Internet Solutions in the corporate communications market.Verizon Business South Africa provides telecommunications to corporate customers in South Africa, Namibia, Botswana, Zambia and Kenya. Also, in response to Vodafone’s move on Vodacom, MTN has bolstered its SA operations by acquiring the remaining 59% of iTalk Cellular that it did not own, iTalk is an MTN exclusive distributor, with over 100 retail outlets across South Africa

“These acquisitions are in line with our strategic vision and will add value to our business,” said MTN SA MD, Tim Lowry. “Through these deals we are enhancing our value proposition, building capacity and broadening our reach to enhance our product and service offerings to customers and clients. The i-Talk Cellular acquisition will strengthen our distribution across South Africa,” Lowry said.

In a counterpose, fixed line operator Telkom (NYSE – TKG) has begun the roll out of a national  3G W-CDMA network. Telkom will initially focus on providing fixed voice and fixed-mobile data and, in the near future, nomadic voice services. This is in part a play to enter into competition with the two mobile players, but also is a side effect of the disastrous state of SA’s copper based telecoms infrastructure. Telkom has also swung into action by spending $63m to acquire MWeb Africa and 75% of MWeb Namibia to help it become a pan-African voice and data supplier.

 

“Our revenues have been under significant pressure from declining voice services due to competition and further impacted by the effects of copper cable theft. Three years ago, we announced we are investing in next generation network (NGN) based technologies to provide new generation customer services and products. It isn’t about a single network but using various NGN technologies, such as W-CDMA, to provide customer-focused services”, explains September.

Network upstart NeoTel has been making decisive inroads into Telkom’s fixed line business since its launch in 2006, Tata Communications backed NeoTel provides converged services in the fields of basic voice and data services, high-speed internet (as well as true broadband access), virtual private networks, network management and hosting services for both corporate & retail customers. One area where it has been very succesful is in providing alternative backbone services to Telkom via its wholly owned transit network. Recently it has announced an agreement with MTN to co-build a national fiber optic network, which will break the stranglehold that Telkom has had on the sector.

Last but not least, Kuwaiti based Zain (formerly MTC) is promising major pan-African expansion with a short-term goal of launching in at least three more countries this year. Since few countries are issuing fresh licences, that will mostly come by acquiring smaller players. Zain Africa’s CEO, Chris Gabriel, predicts that consolidation among Africa’s 100-plus cellular networks will be so intense that only three to five will survive. Smaller players will come under pressure to be absorbed by those behemoths if they offer telecoms or technology-related services.

With all this activity, the South African telco sector is contracting with regards to opportunity & growth, which will, in my opinion spur Vodaone/Vodacom, MTN, Telkom & Zain along with France Telecom/Orange, Orascom & Oger into a set piece which is remiscent of Thomas Pakenhams excellent book Scramble for Africa. Interesting times indeed.