JSE-listed cellular network operator Vodacom has defended its acquisition of pan-African communications company Gateway, despite warning on Tuesday that its profits would be hit by a R3,2bn impairment related to the deal.
This has prompted analysts to accuse Vodacom of overpaying for Gateway, which it acquired in December 2008. The group agreed to pay US$700m, or more than R5bn, for the company, which operates backhaul telecoms networks, including satellite services, across the continent.
Vodacom blames the impairment on “adverse changes in the economic environment, increased price competition and the resulting poorer trading trends”. The group expects basic earnings per share to fall by between 95% and 105% in the six months to September against the comparable period last year, largely as a result of this impairment.
But the group says Gateway remains a crucial part of its portfolio.
“Following the underperformance of Gateway so far this year, coupled with the changes in the macroeconomic environment, a review of its business was conducted which necessitated a revision of the five-year business plan,” Vodacom says in response to questions from TechCentral.
“The revised five-year forecasts and increased cost of capital have resulted in a substantially lower enterprise valuation of Gateway of $307m (equity valuation of $118m). This resulted in an impairment of approximately $400m.
“The main reasons for the poor performance and outlook are the significant pricing pressures in the carrier business due to Gateway’s carrier customers’ pressures on their businesses to reduce costs. Gateway has also experienced lower volumes coupled with the slow growth of products as a result of the global slowdown. The depreciation of local currencies in many of its African markets has negatively impacted purchasing power of businesses and consumers,” Vodacom says.
“Notwithstanding its economic and competitive challenges, Gateway remains important to Vodacom’s expansion strategy in Africa, both in delivering business services and in our investment in broadband infrastructure.
“The business services division of Gateway’s performance remains strong. We have recently strengthened this business by consolidating it into Vodacom Business. However, margins and volume expectations for the carrier services business at the time of acquisition were higher than the current business plan.
“We also underestimated the capital expenditure required to support the growth of business services. We will do what is necessary to restructure the carrier services business to ensure it can be sustainably profitable in an environment of reduced mobile tariffs on the continent.”
Gateway, meanwhile, has appointed Mike van den Bergh as CEO, replacing Peter Gbedemah in the role. Gbedemah has left the company. Van den Bergh, who was previously chief operating officer, could not immediately be reached for comment. — Duncan McLeod, TechCentral
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