Telkom is one step closer to completing its takeover of Business Connexion (BCX) with news that the competition tribunal has set aside 30 July to 7 August for its hearing on the matter.
Telkom has already received the Competition Commission’s approval and now only needs the tribunal’s authority and a nod from communications regulator Icasa to go ahead with its R2,7bn buyout.
This is not the first time Telkom and BCX have proposed a merger. In 2007 they made their first attempt but back then it was shot down by the competition authorities because industry players feared that this merged entity would unfairly use its muscle to compete against them.
This time the signs are more positive. The landing of a number of undersea cables and the setting up of rival metro and long-distance fibre networks have reduced rival operators dependance on Telkom.
It also helps that when Telkom was found guilty of anticompetitive behaviour in 2013, apart from paying a R200m fine it also had to agree to a price monitoring programme that has its wholesale division charge its retail division the same prices it charges its rivals.
The commission approved the deal with BCX on condition that it continues with its monitoring programme past the initial scheduled end on 18 July 2018, and onto 31 December 2020. The number of jobs lost from the companies merging was capped at 60, which sees 20 people being laid off every year over three years.
If the takeover goes ahead it will be a much-needed boost to the troubled group. Telkom saw its fixed-line voice revenue drop 13,5% to R7,9bn for the year to March and it recently announced that it planned to cut 7 800 jobs.
This was after it made what many saw as a questionable move into mobile and wrote off billions in an ill-fated venture in Nigeria.
Its leadership problems and state shareholding have not helped. It has had six CEOs in 10 years and had government shoot down a R3,3bn offer by Korea’s KT Corp for a 20% holding in the group.
Though the BCX deal will beef up the country’s dominant telecommunications operator in the enterprise market, it comes at a time when the sector’s voice revenues are coming under heavy pressure and players are increasingly looking to mergers to drive growth.
Dobek Pater, director and analyst at Africa Analysis, says the takeover could be a boon to Telkom because BCX comes with a skill set (the provision of enterprise services) it does not really have.
Though Telkom has extensive infrastructure, Pater points out that Telkom might not know how to get the best out of it when it comes to offering some kind of enterprise services. “BCX has skills in managing cloud products, which is growing in importance in the sector.”
Looking at the numbers coming out of BCX’s service division — which includes cloud operations – Pater has a point. Revenue grew by 6,4% to R2,3bn and its operating profit margin rose from 7,3% to 8,8% for the year to August.
Telkom is not alone in making this shift. The pressure on voice revenues is forcing operators to go up the value chain into Internet- and data-related services. The thinking is that as voice becomes more of a commodity, these other services will alleviate the pressure because they have better margins.
The Telkom/BCX deal is not the only proposed takeover in the sector, as Vodacom has made a R7bn offer for Neotel. If Vodacom succeeds in taking over Neotel, it will have control of a national fibre network that will leave it less dependent on Telkom’s network — the bulk of long-distance calls made over cellphones are carried by Telkom.
Government’s need to generate funds to support ailing power utility Eskom is also having an impact on the telecoms sector. The department of telecommunications & postal services recently told MPs it was considering selling off fibre-optic infrastructure provider Broadband Infraco.
Government has also sold its 13,9% stake in Vodacom to the Public Investment Corporation, to fund Eskom.
Finding money to keep Eskom going is not the only thing driving government’s thinking on the sector. Pater says there is a very good chance government will drive talks to create a wholesale telecoms provider that will provide high-speed broadband for any company that needs connectivity.
The thinking is that by creating a state entity that can provide a wholesale service at a reasonable rates, it can bring affordable broadband to the wider population. If the creation of such a wholesaler goes ahead, it will be spun out of Telkom’s infrastructure.
Telkom’s takeover of BCX might be heading for its final chapter, but the story of what it will eventually look like is very far from over.
- This article was first published on Moneyweb and is republished here with permission