High-level talks between Naspers and Dimension Data, which could lead to the merger of the groups’ MWeb and Internet Solutions (IS) businesses, are probably being driven by a need by IS to become more of a full-service telecommunications operator.

That’s the view of Arthur Goldstuck, MD of research firm World Wide Worx, who says a merger of the businesses makes “complete sense” and will create a powerful company more capable of taking on the country’s big telecoms operators. It would also put MWeb on a stronger footing — rather than being a simple reseller of bigger players’ networks, it could begin deploying infrastructure of its own.

On Wednesday, TechCentral revealed exclusively, based on information from a well-placed source with knowledge of the situation, that discussions are taking place between Naspers and Dimension Data about a potential deal. TechCentral has now established, from further sources, that high-level talks are indeed taking place between the two parties.

Neither side is saying much, and little detail is available — possibly because negotiations are not yet at an advanced stage — but the discussions are understood to centre on some sort of merger between IS and MWeb. A source says it appears that Dimension Data could end up holding 80% of the equity in a merged business and Naspers the remaining 20%. It’s unlikely, however, that a deal will be concluded before next year.

A combination of IS and MWeb, and backed by Dimension Data and its parent, Japan’s giant Nippon Telegraph and Telephone Corp, will create the basis for a “serious future telecoms operator” in South Africa, says Goldstuck. “It makes complete sense. IS has a strong business customer base, but it’s not strong in the consumer environment. For it to become a serious telecoms player, it would need to play in that consumer space as well.”

However, IS MD Saki Missaikos has dismissed suggestions that his company wants to play in the retail consumer space.

Goldstuck says that given that the Independent Communications Authority of South Africa appears determined to forge ahead with local-loop unbundling — in terms of which rival operators and Internet service providers will be given some sort of access to Telkom’s “last mile” copper network into homes and businesses — the deal could give IS and MWeb a “strong landline business in one fell swoop”.

Last year’s decision by retail consumer-focused Internet service provider Afrihost to move its business away from IS to MTN Business could also be a factor in the talks with MWeb, but Goldstuck doesn’t believe it’s a deciding one. “Afrihost may have been the biggest of the small players, but it certainly isn’t a significant enough player to have been a major blow to a company like IS.”

Naspers has tried to sell MWeb, which now sits under its pay-television business MultiChoice, at least twice in recent years. Five years ago, it put the service provider up for auction. Although there were interested bidders, no deal was concluded. It’s understood it later had unsuccessful discussions with MTN about a deal.

Dimension Data, led by IS, has demonstrated an appetite for corporate deal making after buying East Africa’s AccessKenya Group earlier this year in a deal valued at R328m.

Also this year, Dimension Data was linked — as were Vodacom and MTN – to a potential offer to buy Neotel. Vodacom has since entered into exclusive negotiations with Neotel about a sale.

Goldstuck says there are “tremendous synergies” between IS and MWeb, but a merger could be challenged at the Competition Commission. “I guarantee other operators or Internet service providers will object strongly to the creation of such a formidable player, as in the case of the objection to Telkom’s proposed acquisition of Business Connexion, not so much because it reduces competition but because it creates a more formidable player.”

If a deal does happen, Goldstuck expects it will trigger further consolidation among Internet service providers. “It will send a signal to other broadband ADSL players that they can’t really survive on their own,” he says. “If MWeb can’t, then what about the rest?” — (c) 2013 NewsCentral Media