2019 South Africa M&A in the ICT Sector

Summary

2019 SA ICT Mergers and Acquisitions (M&A) deal flow was defined by the acquisition of Vumatel at an estimated R8 billion. The top three deals by deal value were about the sale of telecoms and data centre infrastructure. Six of the eight infrastructure deals involved fibre network operators being acquired.

2019 saw the end of the strong and aggressive M&A strategy used by Blue Label Telecoms, EOH and HeroTel. In 2019, Blue Label Telecoms and EOH sold assets to raise capital to offset long term debt, whereas HeroTel simply ran out of attractive assets to buy.

In 2020, the M&A deals will be defined by companies seeking to add strategic assets to their existing portfolio. Potential deal flow includes the sale of Cell C, the likely sale of the tower portfolios of either MTN or Vodacom or both, and the ongoing select acquisition of fibre network operators and retail service providers by their larger competitors.

2019 M&A Deal Count

Over the past three years, the number of reported ICT M&A deals has dropped from 41 (2017) to 35 (2019). Deal classification system:

  • Networks & Infrastructure category covers deals that involve the acquisition of companies who own network and/or infrastructure (e.g., data centres, fibre networks).
  • Customers & Channels category covers the acquisition of companies that have large customer bases or channels and distribution assets.
  • Capabilities & Skills category covers deals that typically involve IT Services.

This decline has resulted from the slowdown by companies which previously drove M&A activity.

  • From 2016 to 2018, HeroTel was a major driver of M&A through its aggressive acquisition of regional wireless internet service providers (WISPs). In 2019, HeroTel only concluded one transaction. The large decline in network deals resulted from HeroTel’s winding down of its acquisition spree.
  • After many years of driving M&A, EOH in 2018 began the process of selling subsidiaries and equity it held in companies. The selloff gained momentum in 2019.

Interestingly, six of the eight network infrastructure deals involved fibre network operators. There is no single large investor or network operator who has been buying up fibre network assets. Instead, the market has seen selective buying of fibre network assets.

The higher volume, but generally lower priced deals, involving the buying of IT companies, continued in 2019. The number of reported deals has risen from 18 in 2017 to 22 in 2019. It is rare to see IT deals that surpass R1 billion in deal value. Thus, the R1 billion price tag paid by Vodacom Group for its 51% equity in IoT.NXT stands out. It is difficult to unpack this deal’s valuation drivers but it does seem that Vodacom Group may have paid a premium for the equity. There is still some hype around IoT which may have influenced the price tag.

In terms of media deals, the purchase of media assets by Lebashe Investment Group from Tiso Blackstar Group for R800 million is another standout deal. There are very few media deals undertaken in South Africa. This is a reflection of the local media market concentration.

2019 Deals not Concluded

There were two deals that were not concluded: the sale of WebAfrica (an ISP) and Vox (a fibre network operator and a service provider).

The asking price for WebAfrica was not met and thus the sale was aborted. The reported asking price was R300 million while bidders submitted bids in the R170 to R220 million range.

A similar situation arose with Vox where it was reported that an equity sale was imminent, but no deal was concluded. Subsequently, a Vox shareholder, Investec, sold its shareholding to the existing shareholders and a new management shareholding scheme was put in place.

Towards the end of 2019, Telkom Group offered to buy Cell C, but the shareholders of Cell C rejected the Telkom approach. Had a deal been concluded, then this deal would have been the largest deal reported for the year.

2019 Top Three Deals

The top ten deals accounted for an estimated M&A transaction value of R18 billion, while the top three deals accounted for R16.6 billion. The top three deals in 2019 are:

  1. The largest deal is estimated to have been the CIVH acquisition of Vumatel at an estimated value of R8 billion . We included both the first and second transactions in this estimate.
  2. This was followed by Berkshire Partners estimated R5.6 billion purchase of 51% equity in Terraco from Permira. The estimated deal value is broadly based on limited information published about the deal.
  3. The most surprising valuation is the R1.028 billion paid by Vodacom Group for 51% equity in a young four-year old IoT solutions company IoT.NXT. The surprise element is based on the fact that the value of projects undertaken by IoT.NXT to date does not support this valuation. The purchase price must have been based to a degree on anticipated future revenue flow, given IoT market expectations.

The unconfirmed sale of the Standard Bank data centre to Liquid Telecoms is a significant deal. However, there is no published information that indicates that this deal has been concluded.

2020 M&A Outlook

We expect to see the following deal flow in 2020:

  • TowerCo deal with MTN/Vodacom towers: Both operator groups have disposed of tower portfolios in some of their other country markets of operations. SA remains a significant market where both operators own their towers. Over the years there have been rumours about the sale of the respective tower portfolios. We expect that an international towerco with a strong local BEE partner will likely acquire the tower portfolio of either MTN or Vodacom or both in SA.
  • Fibre network operator M&A: There will be continued M&A activity with the smaller fibre network operators being purchased by the larger network operators. A likely M&A target remains Octotel, given its strong position in the Western Cape.
  • IT Service Providers M&A: This will continue through 2020. The focus will see innovative and strong market position players being targeted in a M&A drive.
  • CIVH acquisitions: CIVH has indicated interest in expanding their infrastructure business. This may lead to CIVH buying into a data centre business and/or into a wireless network operator.
  • Blue Label Telecoms and EOH: Both companies will likely continue to seek to sell assets as they strive to raise capital to improve their balance sheet.

We will not see single companies drive aggressive M&A strategies. Rather the M&A deals will be defined by companies seeking to added strategic assets or skills to their existing portfolio.

Contact Andre Wills (andre@africaanalysis.co.za) for further information on this topic.

2019 East Africa Com

The East Africa Com conference took place in Nairobi, Kenya during the days 14 and 15 May 2019. The overarching theme of the conference was new technologies enabling the emerging digital world and digital transformation. The specific focus of the conference was also on how these developments will unfold in East Africa and the impact they are likely to have across economic, social and government environments in the region.

The eco-system was well-represented at the conference, with organisations from the ICT industry, financial institutions, parastatal utilities, government entities and academia inter alia. Theoretical discussions were supported by ample examples of current uses cases for new technologies in East Africa.

The topics at the conference dealt with a wide range of subjects, tackling issues such as:

  • Quality broadband connectivity and “affordable” access to ensure maximum socio-economic inclusivity in Africa (this continues to be a pertinent topic despite years of private sector and government initiatives);
  • Adoption and application of new technologies (such as Blockchain, Artificial Intelligence, Machine Learning) in various vertical industries and government agencies to deliver new and improved services to customers;
  • Democratisation of data to make it more readily available for analysis to solve socio-economic problems through development of correct policies, yet remaining mindful of the requirement for data anonymity;
  • Digital transformation among organisations in East Africa to become more efficient and globally competitive, and positioning for the 4th Industrial Revolution;
  • Mobile money and financial inclusion; and
  • Growing women leaders in ICT and business in general.

On the last point, the East Africa Com conference has developed a partnership with ITC SheTrades, an initiative of the International Trade Centre, a joint agency of the World Trade Organisation and the United Nations. The SheTrades initiative aims to connect three million women to market by 2021, facilitating opportunities for women entrepreneurs, supported by a web and mobile digital platform. At the conference, the emphasis was placed on bringing women into the tech sector and using technology to enable women to participate in economic activities to a greater extent. This would unlock a lot of additional value and grow the global economy, especially in developing markets.

Connecting ICT stakeholders

The AHUB again proved to be a very useful medium of connecting local technology start-ups with investors, operators and large corporates to foment collaboration on new projects and (hopefully) mutually beneficial partnerships. The discussion panel on “Realising synergies between MNOs and African tech start-ups” illustrated initiatives already in place aimed at creating an environment conducive to start-up development and success, although still only 1 in 10 start-ups achieve some form of success (including survival beyond the short term). Revenue splits from commercial products (such as apps) continue to be skewed in favour of large mobile operators who claim they provider greater inputs into the partnership. This can stymie the growth of start-ups into sustainable companies.

Building a successful digital economy

To build a successful digital economy in East Africa a number of more basic building blocks still need to be put in place. For instance, liberalisation of immigration laws to attract foreign skills and direct investment, or creation of incentive schemes to experiment with new technologies through pilots (“sand boxes”) free from bureaucratic constraints. Availability of requisite spectrum for new access technologies (such as 5G) timeously is also critical.

Regulating new technology

One of the recurring discussion points at the conference revolved around regulating the new technologies and services in the digital world. One first needs to understand what it is that one tries to regulate, which is what the governments and regulatory authorities in many markets are currently trying to achieve. Unfortunately, the consensus was that we are likely to see more rather than less regulation, which is also bound to become more complex with increasing complexity of the digital environment around us. This is at a time when most stakeholders hope to see less, not more, regulation to allow for freer development of the digital future. It is critical for governments and regulatory authorities to embrace new technologies, rather than stifle them with over-regulation, lest we miss out on opportunities the new technologies offer.

4th Industrial Revolution

In a sense, Africa is already well suited to the 4th Industrial Revolution. Out of necessity, and limited formal jobs, the gig economy is alive and well. New technologies such as AI, ML and mixed reality innovation will drive these opportunities and create more formal job. An example is the recent launch of the Africa Development Centre by Microsoft in Nairobi, Kenya and Lago, Nigeria which will bring USD100 million of investment and 500 engineering jobs over the next five years. Africa can take advantage of its young population to drive this growth but it first needs to create capacity.

This report was compiled by Dobek Pater who attended and participated in the 2019  East Africa Com.

FTTH and FTTB in Africa

Fibre broadband connectivity has been much talked about in many markets in Africa over the past few years. It is touted as required infrastructure for the next generation of services both in the business and residential markets – from operating out of the cloud by small and medium sized businesses (SMEs) to eGovernment services to future household entertainment (streaming content).

Factors limiting fibre growth

Yet, with the exception of a few countries, the growth of fibre access networks has been very limited in across most of the African continent. This can be ascribed to a number of factors, including:

  • Cost of fibre infrastructure deployment – This remains quite high in many markets and makes for a difficult business case, given the service adoption rates (although aerial fibre deployment is less expensive). It is less expensive to build wireless networks.
  • Cost of infrastructure maintenance – Once a fibre network has been built, the cost of maintenance and repairs can also be quite high if the fibre cable keeps being damaged due to other infrastructure development in the same area.
  • Small target market – Socio-economic development is often still slow, with slow middle class growth, and correspondingly low affordability levels. This is coupled with comparatively high prices of fibre connectivity, paying a premium for a superior service. In the business market, and in particular small businesses, the level of maturity (and often also affordability) limits the adoption of fibre broadband.

Fibre Access Infrastructure Market

The fibre access infrastructure provider environment tends to be quite fragmented in many markets, with a number of smaller fibre network operators (FNOs) operational. It is difficult for small operators to maintain a sustainable operation with a small footprint. Hence, in most markets in Africa, operators follow a multi-technology strategy, where possible, for the provision of connectivity services. Fibre is one of the technologies used but most of the connections may be provided wirelessly. Only in a limited number of cases have we seen the evolution of a pure fibre access infrastructure provider. This is most pronounced in South Africa, where around 50 FNOs are operational. Many of them very small and unsustainable. This leads to growing consolidation in this market.

As at mid-2018, there were 136 commercial FTTH / FTTB networks operational in Africa in 40 countries (including territories) and another ten networks either planned or in deployment. The presence of fibre broadband infrastructure on the African continent and growth over the past few years are presented below. The year-on-year growth of connected premises from mid-2017 to mid-2018 was 75%.

Concentrated Market

Fibre broadband uptake is concentrated in a handful of country markets, with almost 97% of total fibre connections on the continent (top five account for 85% of total). Even at that, household penetration is very low in these countries. The notable exceptions are Mauritius (where fibre deployment is being pursued as a national strategy) and La Réunion – both small islands with small populations in the Indian Ocean. This concentration of fibre broadband in several market on the continent is illustrated in the following graphic.

Some of the key market trends observed in the fibre broadband market are:

  • Access infrastructure has been expanding and improving, underpinned by improving national long-haul and metro backhaul infrastructure.
  • Pricing of fibre-based products has seen some reduction, making the products more affordable. This is combined with increasing disposable income levels (at least in growing economies).
  • Economic improvements (not in all markets) have led to improved business climate and demand for fibre-based services.
  • Government policy direction moving towards national fibre roll-out, digital agenda, etc.
  • Access to relevant content has been improving.

Market Opportunities

The present FTTH / FTTB market landscape in Africa provides for a number of opportunities going forward. These include:

  • Lack of legacy fixed infrastructure in many markets presents an opportunity to address this shortage with fibre. However, this can also be a challenge due to, for instance, lack of duct infrastructure which could be reused to lower the cost of deployment or lack of fixed line product / service culture and understanding of such products / services within the target user base.
  • Middle class migration to gated communities / complexes and increasing concentration of businesses in office parks means that the potential users can be reached more easily at a lower cost. New residential and business developments also provide an opportunity for greenfields fibre infrastructure deployment in such premises.
  • Once the first wave of FTTH deployment and uptake is past its peak (this may take a number of years in most markets in Africa), the cost of deployment and provision of services may be suitable for a second wave to address the lower socio-economic segments.
  • The fragmented fibre infrastructure provider environment presents M&A opportunities for (typically) larger operators or non-telecoms investors.
    Future evolution of the FTTH / FTTB markets in Africa will be driven by a combination of socio-economic development and government policies.

Market Outlook

However, given the diversity of markets in Africa in terms of ICT and socio-economic development, the pace of fibre broadband deployment and adoption will also differ significantly from country to country over the next five years. The expected market evolution trends are highlighted below.

Home Market

  • Greater focus on back selling of fibre services to achieve higher connectivity rate of homes passed.
  • Geographic expansion of the FTTH footprint (although limited to main cities in most countries).
  • Introduction of new products (including smaller bundled offers) to address households with lower disposable income levels (than the top end).
  • Introduction of converged products combining fixed and mobile services.
  • Increase in relevant content (requiring fast and reliable internet access) will drive uptake.
  • Continued downward trend in retail prices of fibre products, resulting in greater affordability.

Business Market

  • Geographic expansion of the FTTB footprint (although limited to main cities).
  • Introduction of converged products combining fixed and mobile services.
  • Move towards IoT (and IoE) over time, requiring greater good quality connectivity.
  • Government policy direction aimed at expansion of broadband (including fibre) infrastructure and services to drive socio-economic development.
  • Growth in maturity of the business community, realising the benefits of IP and cloud services. Fibre will be used for delivery of these services.

2018 Broadband Trends in Africa

Broadband is being increasingly considered as a necessity for future socio-economic development, with some parties viewing it as a basic human right. Essentially, without broadband connectivity, the digital divide in the social and business spheres (between businesses / households / individuals who have access to broadband vs. those that do not) will continue to widen to the point where the have nots will be left out of mainstream development altogether.

This presents a significant problem in many countries in Africa which have limited financial resources for telecommunications infrastructure builds on the one hand and continue to experience relatively low levels of socio-economic development on the other hand. Private sector telecoms infrastructure operators tend to build where they can generate a reasonable return on their investment (ROI) while large segments of the population and many small / micro businesses struggle cannot afford proper broadband connectivity or sufficient quantity of broadband services.

Implementation of Polices and Programmes

To remedy this situation, a number of national governments have been developing and implementing policies and programmes to build out broadband infrastructure as widely as possible and to decrease the prices of broadband services to a point where ultimately can afford them in sufficient quantity. To achieve this, they need to involve private sector operators while remaining mindful of the fact that private entities need to remain profitable to maintain sustainable operations.

While most countries in Africa now have access to good quality and adequate bandwidth on international, national long-haul and metro infrastructure (albeit in some markets still expensive), the constraint is now focused on broadband access infrastructure. In some regions of the continent inland backbone networks also need to be improved, although a number of projects are underway to address this.

Although broadband penetration has shown steady growth over the past several years, penetration levels of fixed broadband remain very low at approximately 7% of households on the continent, while mobile broadband has demonstrated a notable decline in growth and plateauing of the penetration rate. These trends are illustrated below.

Note: For the purposes of this analysis mobile 3G is considered a broadband service, although in many instances speeds achieved on a 3G connection would not be reflective of a good quality broadband service.

The Challenge

The challenge to higher fixed broadband penetration is the speed of deployment of fixed broadband infrastructure, to a large degree dictated by sales opportunities. A barrier to entry into the mobile broadband market is often still the price of a 3G or 4G phone. Mobile operators typically pursue a strategy of making lower cost handsets available as much as possible to lower this barrier.

Additionally, mobile broadband coverage (even 3G) is still not available across parts of the continent, particularly in rural / remote areas. Build-out of 4G infrastructure in sub-1GHz spectrum holds promise of providing coverage in such areas but in many markets 4G is still at an early stage of deployment, focusing on the larger urban environment.

Broadband Access Technologies

A range of broadband access technologies is used by operators in Africa to provide services, although the vast majority of connections is wireless and most of the connections are mobile.

The map provides an indication of key broadband technologies deployed. Most of the markets have seen implementation of multiple technologies, with various fixed wireless access (FWA) present in all markets. However, the geographic footprint of these technologies, in particular fixed technologies, remains very limited in most of the markets.

The mix of technologies used for the delivery of broadband services is changing. Older FWA technologies such as pre-WiMAX and WiMAX are being replaced with fixed LTE / LTE-A, while historical copper lines (where they exist) are gradually giving way to fibre (FTTH and FTTB), although on a very limited scale at present, with the exception of a few countries.

In the mobile space, the focus will be on 4G infrastructure footprint build-out far more extensive than currently, with 5G hovering on the distant horizon.

Only South Africa has begun to pilot 5G technology, with first commercial services expected to be offered in the second half of 2019. However, wider 5G implementation is also a couple / few years away in that market.

Broadband Adoption will grow

As the use cases for true broadband connectivity grow, so will adoption of broadband across the consumer and business markets in Africa. This will be aided by decreasing prices of broadband connectivity (in time, all of the connectivity will become commoditised) and government-led initiatives aimed at wider broadband availability.

Broader socio-economic development, supported by good GDP growth in many countries in Africa, will also contribute to making broadband services more affordable and increasingly indispensable to sustain this development.
The opportunity for expansion of broadband penetration is there, as evidenced, for instance by the total mobile penetration rate (80% in mid-2018 for Africa) vs. mobile broadband penetration of 53% at the same time.

There is room for growth

Fixed broadband adoption will need to compete with mobile broadband, certainly in the consumer / residential market and in the micro / small company market.

However, certain drivers such as migration to cloud services and accessing online content in large quantities will create a demand for fixed broadband services.

It would also be sensible for operators in Africa to consider moving to a more open access network environment in the fixed wireline space, where wholesale infrastructure operators would host a number of retail service providers on their networks to stimulate service-based competition.

Rain Mobile Unveils SIM-only Data Plans

Rain Mobile launched commercial operations on 6 June 2018, after completing its Beta Programme (internal network trial).  They unveiled their initial data-centric offering, with the aim to compete aggressively against the existing four mobile operators.  At a launch price of R50 per GB, Rain Mobile is substantially cheaper than any competing offers from mobile operators. […]

The Rise of the New IT Service Provider Superstar

AYO Technology published pre-listing plans which show that it has strong ambitions to grow its revenue from R479 million to R7.7 billion over two years. The strategy it plans to adopt consists of a strong M&A element, combined with a novel approach to team up with a global IT Service Provider.

BT SA Alliance

AYO Technology has entered into a strategic agreement with BT SA.  This will see some of BT SA’s major clients transferred from BT SA to AYO Technology.

As a result of the addition of products and services from BT SA to their current portfolio, AYO believes that it can win more business from BT SA’s clients, while also tapping into the broader market.  Should this alliance be successful, then AYO Technology will have demonstrated a new strategy of how to partner with global IT Services Providers to the benefit of both parties.

Who is AYO Technology?

They are a B-BBEE ICT Group, offering numerous end-to-end solutions to a range of industries.

The Group was established in 1996 and has evolved over time through continually adapting to the local and international ICT landscape. The process of adaptation was enabled by acquiring new businesses, partnerships and sourcing innovative technology within its existing portfolio.

AYO Technology, through its divisions, subsidiaries and partners, provides solutions to both the public and private sector within South Africa and abroad. Its private sector client base comprises mostly of blue-chip multi-nationals.

The Group maintains strong relationships and holds key value added reseller or supplier agreements with principles such as Nokia Siemens Networks South Africa (Pty) Ltd (“Nokia Siemens”), Cisco Systems, IBM, InterSystems Corporation, Microsoft Corporation and Riverbed Technology Inc, which provides the group with continuous access to up-to-date technology.

AYO Technology Revenue Ambition

They plan to grow their revenue from R479 million (Aug 2017) to R4.4 billion (Aug 2018) and to R7.7 billion (Aug 2019).

They plan to do this through:

  • A strategy that consists of M&A;
  • Transferring revenue from BT SA to AYO Technology; and
  • Winning more business from existing BT SA customers.

AYO Technology believes that its empowerment credentials will be a significant competitive advantage that will enable it to win new business in the SA market.

AYO Technology Revenue May 2018

The chart shows the dramatic rise in revenue forecast by AYO Technology for 2018 and 2019.

What is AYO Technology’s Revenue Strategy?

Two pillars underpin AYO Technology’s strategy:

Key to AYO’s strategy is the strategic agreement it concluded with BT SA in December 2017.  This will see BT SA transfer various clients from its operations to AYO Technology. AYO Technology will earn 21% and 18% of its 2018 and 2019 revenue transferred from BT SA to AYO Technology.

In addition, AYO Technology believes that it can grow the services purchased from their existing customers and earn R860 million and R1 325 million additional revenue or 19% and 17% of its 2018 and 2019 revenue.

AYO Technology plans to aggressively engage in M&A acquisitions over 2018 and 2019. They plan to earn R2 billion from new acquisitions in 2018, and R4.4 billion in 2019. These revenue streams represent 47% and 56% of the forecasted 2018 and 2019 revenue. AYO Technology will use part of the capital raised in its listing to fund the acquisition of new ICT companies.

Thus, AYO Technology plans to earn R2.9 billion and R5.7 billion in new revenue from additional revenue earned by using BT customers and through M&A.

The planned AYO Technology revenue growth within the customer base outstrips the revenue growth in the customers ICT budget. AYO Technology acknowledges this and believes that it will win business from other service providers who currently service these customers. They claim that their stronger BBBEE level and the range of products and services, will enable it to achieve its revenue targets.

BT SA Revenue Analysis

The information provided in the AYO Technology Pre-listing document shows that BT earned R1.48 billion in the year ending August 2017.

Analysis of the revenue source shows that BT SA earned 66% of its annual revenue from three customers.

BT SA earned R115 million from the provision of telecommunications services to other telecommunications service providers.

The following chart shows the revenue distribution.

BT SA Revenue May 2018

 

(Before the transfer of clients to AYO Technology)

The AYO Technology transaction valued BT SA at R3.3 billion.

What does this mean for the market?

AYO Technology plans to become one of the top ten IT Service Providers over the next two years. To achieve this, AYO Technolog needs to displace existing IT Service Providers along with winning a larger share of new business arising from market growth.

Should the AYO Technology strategy prove to be successful, then the rest of the IT Services Providers will experience revenue and market share loss.

In response to this new competitive threat, IT Service Providers will need to review their respective empowerment credentials to close the gap between a strongly empowered IT Service Provider, such as AYO Technology, and themselves. This is in addition to assessing how their service profile compares against that of a global IT Service Provider competing in the domestic market.

3G vs 4G vs 5G – Analysis of Vodacom SA

Summary

Since the deployment of the first 3G base stations, Vodacom has led the market in expanding network coverage. An analysis of the network deployment and uptake of 3G and 4G services, shows the following interesting points:

Reviewing the Technology Investment:

Vodacom has aggressively accelerated the deployment of 4G coverage, reaching 80% population coverage after only 5 years.

By comparison, the 3G network reached 80% population coverage after 8 years.

However, the analysis of 3G and 4G adoption by their customers, shows significantly different technology adoption profiles.  After 5 years, 4G adoption is less than half of the 3G adoption.

What does this mean?

Vodacom has invested strongly in driving 4G coverage.

However, the 4G device adoption has not kept pace with network coverage expansion. The slower adoption has not hindered Vodacom in driving 4G network coverage.

Looking Ahead to 5G

The strategic capability of Vodacom to invest in 5G without a strong link to 5G customer adoption, will underpin and solidify its market leadership position.

Only MTN has the capability to match the above strategy. Cell C and Telkom Group will not be able to match such an investment strategy easily.

Vodacom Strives for Technology Leadership

Vodacom has striven to lead the market when it comes to new technology deployment.

They launched 3G services in December 2004 and 4G services in October 2012. By comparison, MTN SA launched 3G services 6 months later, in June 2005. However, MTN launched 4G services (November 2012) within 1 month of Vodacom announcing their 4G service launch.

3G vs 4G Population Coverage – Vodacom

The following exhibit shows the respective 3G and 4G network population coverage since deployment.

3Gvs4GPopulation

The exhibit shows that Vodacom drove 3G population coverage quite strongly from 2004 to 2012. Interestingly, the sharp rise from 24% to 74% corresponds to the introduction and growth of Dark Fibre Africa (DFA). The launch of DFA was built on the uptake of dark fibre by Vodacom.

Vodacom has aggressively expanded their 4G population coverage, In comparison with the 3G population coverage.

3G vs 4G Population Coverage Comparison – Vodacom

By tracking network deployment in years, from initial service launch, it clearly shows how aggressive 4G deployment was compared to 3G deployment. The following exhibit presents this analysis.

Population Coverage Comparison

There are significant underlying factors that impact the deployment of 3G and 4G networks:

  • Vodacom needed to build out and/or wait for the provisioning of high capacity backhaul to their 3G base stations. Vodacom also needed to adopt a Fibre-to-the-Site (FTTS) backhaul strategy.
    • The advantage of this strategy is that the backhaul was scalable to accommodate the high capacity demand required by the 4G network. Thus, there is a significantly lower waiting time for the provisioning of high capacity 4G base stations.
  • Vodacom re-farms 3G spectrum to offer 4G services. Thus, the underlying infrastructure is in place for the deployment of 4G services.

In support of Vodacom’s 4G network deployment, is the roaming agreement it has entered into with RAIN.

The roaming agreement enables Vodacom to achieve two key network deployment strategies:

  • Capacity (densification): The rollout of 4G coverage by Rain using the Vodacom sites ensures that the Vodacom customers benefit from the network rollout.
  • Coverage: Using the Rain network frees Vodacom to focus on network coverage growth.

3G vs 4G Customer Technology Adoption – Vodacom

The proxy used for technology adoption is the ratio of technology SIMs to total SIM base. The handset base excludes M2M, dongles and tablets.

Device Adoption

By comparison to 3G, the adoption of 4G significant lags the adoption of 3G (device adoption).

This has not hindered Vodacom in driving 4G network coverage.

Quite likely, the 4G national roaming agreement with Rain has enabled Vodacom to focus on driving network coverage rather than focus on both network coverage and network capacity (densification). This behaviour illustrates the strategic value of the roaming agreement.

3G vs 4G Network Coverage Adoption – Vodacom

The following exhibit shows the relationship between network coverage (%population) and the adoption of technology (%SIMS).

Technology Adoption

Based on the exhibit, we can see that Vodacom has strongly driven 4G network coverage with little regard to the adoption of 4G devices. The ability to drive network coverage speaks to the strategic financial capability of Vodacom to invest in their 4G network, without linking this investment to 4G service uptake.

Vodacom has reported that its 3G and 4G customers show significantly different behavior. 4G customers consume more data and represents a higher ARPU customer. Vodacom reports around a 20% uplift in ARPU. Thus, while the 4G adoption has not matched the 3G adoption, the 4G customer has shown to be a more valuable customer (based on ARPU).

What Does this Mean for Vodacom’s 5G Strategy and the Market Competitors?

Based on the 4G behavior, we would expect Vodacom to adopt a similar 5G strategy – that of driving population coverage ahead of 5G service adoption. Vodacom can sustain this strategy while it has the strategic capability to generate cash from its operations to invest in network coverage.

The strategic challenge to the competitors, is that Vodacom can afford an investment strategy that does not directly link to customer adoption. MTN SA may be able to match such a strategy, but it is unlikely that Cell C and Telkom Group would be able to.

The implication of this strategy is that Vodacom can drive 5G network coverage and thus maintain / sustain their technology leadership. This will underpin their market leadership position.

Cell C 2017 Results Analysis

Cell C announced their FY2017 results on 21 February 2018. This note presents a summary of their results.

 

FY2017 Summary

The refinancing of Cell C has removed a significant financial burden and has freed up cash flow for investment into the business.

Cell C looks confident in the marketplace and has displayed a dedicated focus in the consumer market with an upward revenue growth. They have indicated that they are willing to invest and acquire in order to grow the business through potential fibre acquisitions, content growth and digitisation.  Their latest numbers reflect as follows:

  • 2 million subscribers: Cell C reaches a total subscriber base of 16.2 million, (14.8 million retail and 1.4 million MVNO subscribers)
  • Cell C earned more revenue from data servicesthan it did from voice services
  • The normalised EBITDA margin increasedfrom 20% (FY2016) to 23% (FY2017)
  • The refinancing deal has cut debt from R17.7 billion to around R6.8 billion

In response to the new board structure, several new posts were created which includes Wholesale, Head of Content, and Digital Transformation.

Operational Performance

Cell C Subscriber Numbers

  • Cell C grew its retail subscriber base by 5% YoY growth.
  • Cell C’s data user subscriber base stagnated, showing only a 0.7% YoY growth. Data user growth has rapidly declined from 160% in FY2015, to 19% in FY2016, now to 0.7% in FY2017.
  • Similar to its slowdown in retail subscriber growth, Cell C’s MVNO subscribers showed an 5% YoY growth.
  • Cell C’s MVNO subscribers represent 8% of its total subscriber base.
  • The company has seen a strong uptake of its retail FTTH offering. FTTH subscribers grew by 678%in 2017.
    • Launched C-Fibre in 2016 with open access FNOs – FrogFoot, Mitsol and Vumatel
    • Launched C-Fibre in 2017 with open access FNOs – Metrofibre, Octotel and Openserve

Cell C refused to release any information on the performance of its content service Black.

Financial Analysis

On a blended basis, Cell C’s ARPU is the lowest in the market.

This suggests that they have a much higher proportion of Prepaid customers when compared to Telkom.  70% of Cell C’s service revenue is generated by its Prepaid segment.

Financial Commentary

In 2017, Cell C earned more revenue from data services than it did from voice services.

The normalised EBITDA margin, based on service revenue, increased from 26% (FY2016) to 28% (FY2017). Note that this differs from the reported EBITDA margin of 50% as Cell C incurred a significant Once-Off revenue item of R4 billion.

Capex reduced significantly from R2.3 billion to R1.2 billion, a reduction of 47%. This resulted from the delay in concluding the refinancing deal.

Strategy

Cell C have defined four strategic pillars:

(1) Mobile Prepaid and (2) Mobile Postpaid

  • 70% of Cell C’s service revenue is generated by its Prepaid segment.
  • A key focus area is the growth of data services. In 2017, data revenue surpassed voice revenue.
  • Cell C continues to seek out innovative offers to win subscriber market share and raise the Postpaid ARPU.

(3) MVNO Wholesale

  • Cell C reported that it will continue to drive growth in its MVNO business.
  • MVNO revenue grew from R315 million (FY2016) to R717 million (FY2017), however its MVNO subscriber base only grew from 1.3 to 1.4 million over the same period.
  • Cell C has seen strong growth in revenue, driven by the increased consumption of data services.

(4) Broadband

  • Cell C has defined its broadband strategy along two dimensions: (1) mobile broadband and (2) fixed broadband (fibre).
  • The operator plans on growing its LTE coverage and intends investing upwards of R3 billion to expand LTE coverage.
  • In Q2 2018, Cell C will launch a triple play offer that will include mobile, fibre and entertainment through the Black platform.
  • The operator indicated that it has acquired two fibre players (no names mentioned). The first is a retail ISP, while the 2nd acquisition is a network operator who has deployed FTTH access fibre.

Cell C plans to invest R3 billion in 2018, and R3.5 billion in 2019 respectively into their network (Capex).  Cell C has indicated that it will invest R1 billion in its LTE network in 2018.  Overall, Capex will increase steadily over the next coming years.

2018 Microsoft Tech Summit Review

Cloud Key Take-Outs

The tipping point has arrived for cloud services in Africa. The barriers to adoption have been eroded and delivery models for IT have changed forever.

  1. Companies will adopt cloud services at a faster rate. Through the use of local data centres, barriers to cloud adoption such as data protection, reliability and latency are being addressed.
  2. Pivotal to the development of Microsoft’s cloud strategy is Microsoft’s commitment to the African continent. Microsoft has taken great strides in improving the quality of service for companies in South Africa and on the continent, by building two of their own data centres in SA and forging relationships with Internet Solutions, Liquid Telecom and Teraco.
  3. Any company – vendor or end-user – that does not have a commitment to the cloud will be left behind.

Demand for Cloud Services

A recent study, presented at the Microsoft Event, found that 93% of South African companies are developing a cloud strategy.

The major drivers of this trend are: (1) economic imperatives, (2) technological advancement and (3) societal changes.

On the societal side, key research findings by Microsoft include:

  • New generations have new expectations: +50% of the workforce will be millennials by 2020. They have new expectations in terms of how and where they want to work.
  • Employees increasingly want the flexibility to work from anywhere. It is estimated that +42% of the global workforce will be mobile by 2022.
  • Employees demand to be “untethered” by routine tasks and to be free to tap into their own creativity, as they believe it fuels success.
  • Cyberthreats are at an all-time high. 74% of businesses expect to be hacked in the next year, therefore security needs to be built into every touchpoint.

Driving Cloud Adoption

To drive cloud adoption in the region, Microsoft is establishing an Azure cloud region in South Africa to offer locally hosted cloud services to South African businesses. This entails providing technical skills and deploying infrastructure in co-located data centres in Johannesburg and Cape Town.

In terms of global scale, Microsoft operates twice as many hyperscale cloud data centres than the combined count of its global competitors. South Africa, through Microsoft’s distributive data centre deployment model, will become part of this global network.

Africa Reach

Microsoft Azure’s hyperscale data centres (Johannesburg and Cape Town) are due to launch in 2018. With this launch, Microsoft will increase the number of globally announced Azure regions to 42.

The new SA data centre facilities will provide highly available, scalable and secure cloud services, with the option of data residency in SA, to companies operating across the African continent. The cloud services include Microsoft Azure, Office 365 and Dynamics 365.

This is a strategic development that will boost cloud adoption. Currently many companies in Africa rely on cloud services delivered from outside the continent – either via locations from within the European Union or elsewhere.

About the Event

Microsoft held its second South African Tech Summit in Cape Town on 13 and 14 February. Approximately 3 000 people – ranging from end users of Microsoft products to developers and partners – attended the event. The summit included an exhibition floor “the Hub”, multiple breakout rooms and labs, and keynote speeches presented by prominent Microsoft executives.

  • Microsoft speakers outlined the company’s vision for Microsoft 365 and Azure.
  • Partners showcased their latest offerings in the Microsoft enterprise and cloud-based services space. Partners included: Axiz, Britehouse, Checkpoint, Citrix, EOH, Liquid Telecom, StorTech and Veeam.

Look out for more information on the event in the coming weeks.