The Competition Tribunal’s decision to block a merger between Vodacom and fibre operator Maziv will likely derail a push by South African telecommunications firms to use big M&A deals as a shortcut to digital infrastructure expansion, analysts said.
The ruling, which blocked South Africa’s biggest mobile operator from taking a 30% stake in major fibre operator Maziv, could force companies to build their own networks or pursue smaller, less controversial tie-ups, delaying much-needed investment by years.
For Andrew Bahlmann of M&A advisory firm Deal Leaders International, it is a setback for the entire industry.
“For telcos and fibre network operators contemplating future mergers, this prohibition of a merger for which the business case was clearly positive indicates that the path to consolidation is fraught with challenges,” he said.
The communications sector needs significant capital injections to ramp up infrastructure development, particularly if connectivity is to be improved in low-income and rural areas.
Dominant companies like Vodacom and MTN say mergers would allow them to leverage existing networks as a springboard to extending and improving coverage. And some smaller firms, including fibre operators, say tie-ups would provide the funding they need to grow.
But regulators fear that consolidation could lead to higher prices, less choice and lower quality for consumers.
The tribunal has yet to detail the grounds for last Tuesday’s ruling, and Vodacom, which is majority owned by Britain’s Vodafone Group, said it was considering an appeal.
Stagnation
The Competition Commission, which testified before the tribunal that the deal would open the door to further consolidation and harm consumers, welcomed the decision.
But Old Mutual Wealth Private Client research analyst Tasneem Samodien said it would likely lead to stagnation.
“What it does is delay investment by current market participants until they determine a commercially viable path to scale,” Samodien said.
Read: Competition Tribunal blocks Vodacom-Maziv deal
“For consumers, particularly those in outlying areas where network connection is relatively poor, the roll-out of infrastructure could be delayed.”
Both Vodacom and MTN have been aggressively rolling out fixed-wireless networks that use 4G and 5G, while also investing in their small fibre businesses. But as they do this, they require more access to fibre links that carry mobile traffic from base stations back to the core network.
South Africa’s existing installed fibre capacity is owned by a number of operators of varying sizes. Tying up with them could give the mobile operators access to fibre networks while providing fibre companies capital to expand to new areas.
MTN has called consolidation in the sector “inevitable and even desirable”. But even before last week’s ruling, mergers were facing challenges, mainly over regulatory concerns.
In 2022, MTN’s talks to buy out smaller rival Telkom fell through. And last year, Rain’s push to be bought by Telkom ended without a deal.
Vodacom had pledged that much of the between R6-billion and R9-billion in cash it was offering as part of the Maziv bid would go to infrastructure investment. It said a further R10-billion rand over five years would target investment in mainly low-income areas.
But that was not enough to win over the tribunal. That now leaves the company, and the sector more broadly, with slow and costly expansion options.
“Vodacom can continue with its own fibre network roll-out and consider merging with several other small regional fibre operators,” said Peter Takaendesa, head of equities at Mergence Investment Managers.
Vodacom declined to comment.
Less attractive
But analysts say that the Competition Tribunal’s decision will make M&A deals in South Africa’s telecoms sector much less attractive to capital.
And even with financing, factors including environmental approval timelines and fibre equipment supply chains mean the big mobile operators have a long road ahead if they are to make up ground on existing fibre networks. “My guess is five to 10 years,” Takaendesa said. — (c) 2024 Reuters
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