More than a year after Vodacom made an all-cash, R7bn offer to buy Neotel, the Competition Commission has recommended that the deal be approved — but has also imposed a number of stringent conditions, including a two-year prohibition on the use of Neotel’s spectrum and requiring a commitment by Vodacom that it will invest billions in fixed-line infrastructure.

The commission found that the proposed transaction is likely to substantially lessen or prevent competition in the mobile services market, but has decided to green-light it anyway.

“Vodacom is the market leader in mobile services markets and the additional spectrum from Neotel will result in spectrum concentration effects that will likely consolidate Vodacom’s dominant position,” the commission said.

“The acquisition will confer first-mover advantages to Vodacom relating to network speed, capacity and mobile offerings,” it added.

“Vodacom will not be constrained by other competitors as they are unlikely to match its offering. These factors taken together will likely lead to reduced choice and higher prices to end customers in the absence of effective constraints on Vodacom.”

It said, too, that the merger is likely to have a significant impact on the structure of the South African mobile market and future competitive dynamics.

“To address the concerns arising from the proposed merger, the commission recommended that some structural and public interest conditions be imposed, to which the merging parties have agreed to.”

The first agreement is that Vodacom will not directly or indirectly use Neotel’s spectrum for offering wholesale or retail mobile services to any of its customers for a period of two years from the approval date or 31 December 2017, whichever is earlier.

“The two-year deferment period is intended to give an opportunity to policy makers to address the spectrum challenges in the industry,” the commission said.

“It is the commission’s view that such a process may be concluded within two years as there are indications from the relevant government departments that plans are underway to introduce and implement relevant policy.”

In addition, Vodacom has agreed to invest R10bn in fixed-line infrastructure over the next five years.

“Within Vodacom’s five financial years following the approval date of the merger by the Competition Tribunal, Vodacom shall commit to R10bn investment in fixed network, data and connectivity infrastructure, which will include all capital investments and long-term commitments, additions and upgrades in transmission, national long-distance fibre, backhaul, connectivity and in the development of value-adding services,” the commission said.

“At least 50% of the committed investment amount will specifically comprise investments in all fixed network elements required to enhance services to homes and enterprises in South Africa, including the development of value-adding services.”

Furthermore, Vodacom will, within a period of 24 months following the approval date, ensure that the value of shares in its share capital held by black economic empowerment shareholders will increase by an amount of R1,4bn, being the value attributable to Neotel in terms of the merger multiplied by 19% (being the current empowerment shareholders’ direct shareholding in Neotel).

“Should the value of the BEE obligations imposed by Icasa in terms of the Electronic Communications Act exceed the value set out above, then the obligations imposed by [communications regulator] Icasa will apply.”

Vodacom must also not retrench any of Neotel’s employees as a result of the merger.

“This merger will change the South African mobile network and fixed line industry significantly. We’ve taken due care in our analysis and recommendation to protect competition now and in the future, but the success of these conditions is predicated on the relevant government departments and Icasa promulgating necessary policies and allocating spectrum for the benefit of the whole country. The conditions also contain unprecedented investment commitments that will go a long way in improving telecommunications services in South Africa”, said commissioner Tembinkosi Bonakele.

Vodacom has welcomed the commission’s recommendation, saying in a statement that the deal will “ultimately result in increased investment in communications infrastructure and the accelerated roll-out of broadband connectivity in South Africa”. — © 2015 NewsCentral Media