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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.

EOH, The Most Prolific M&A Company in the SA ICT Sector

EOH Holdings Limited (EOH) is the most prolific M&A company in the SA ICT sector. Analysis of the revenue streams over the period 2011 to 2016 shows that by FY2016, EOH had earned 63% of its revenues from the cumulative acquisitions it had made over this period. The EOH challenge, however, is how to continue to deliver such impressive revenue growth over the coming years.

The Competition Commission Announcements in November 2016

The Competition Commission recommended to the Competition Tribunal that two proposed transactions by EOH, be approved without conditions. These transaction are the acquisitions by EOH of PIA Solar South Africa (Pty) Ltd (PIA) and Scan RF Projects (Pty) Ltd (Scan RF).

These announcements caught our attention as they highlighted EOH’s ongoing and relentless M&A strategy, a strategy that has been part of the EOH “DNA” going back to the year 2000.  This commentary provides an assessment of the EOH M&A activity over the period 2011 to 2016.

EOH Revenue Analysis

EOH reported revenues of R12.76 billion for its financial year ending July 2016. The 2015/2016 annual revenue growth was 31%, while the five-year compound annual growth (CAGR) was 39%. The following graph shows the EOH revenue reported from 2000 to 2016.

EOH Revenue 22.11.2016

Source: EOH Annual Reports 2004 to 2016

Revenue earned from M&A

A cautionary note –  EOH does not provide a detailed revenue breakdown of its individual subsidiaries, therefore we needed to make some assumptions. The value of this analysis serves to illustrate the revenue impact of the M&A strategy, as compared to accurately accounting for the different revenue streams.

We set-up the following revenue model to estimate the acquisition revenue contribution over the period 2011 to 2016:

  • We modelled the 2011 organic revenue per year from 2011 to 2016, this is defined as the “Core Revenue”;
  • We modelled the 2011 acquisition revenue per year from 2011 to 2016 + incremental acquisition revenue per year, with each year projected to 2016, this is defined as the “Cumulative Acquisition Revenue”; and
  • For simplicity, we assumed all revenue streams grew at the same annual growth rate per year.

Using this modelling approach, we calculated that in 2016, EOH had earned 63% of its revenue from cumulative acquisitions made over this period. The balance of 37% was earned from the growth of the 2011 organic revenue.

The following graph shows the two revenue streams.

EOH Revenue Analysis 22.11.2016

Source: Africa Analysis modelling of revenue streams

The CAGRs over the period 2011 to 2016 are as follows:

  • 2011 organic revenue          19%
  • 2011 acquisition revenue   77%

As shown, EOH’s revenue has enormously benefitted from its M&A strategy.

Two Year EOH M&A Track Record

The following diagram shows the M&A activity over the past 24 months. The M&A activity is shown in the quarter that the transaction was completed (as compared to the date when the transaction was announced). The M&A activity underlines EOH’s position as the most prolific M&A-driven ICT company operating in the SA market.

EOH Two Year M&A 22.11.2016

Source: Africa Analysis assessment of the M&A reported by EOH (2015 and 2016)

Shown in the M&A timeline are the transactions undertaken outside of South Africa. International M&A is to be expected as it is unlikely that EOH can continue to grow revenue, through M&A undertaken in the South African IT sector, at the rate that it has grown its revenue. There are just not enough companies that EOH can buy to continue to demonstrate the impressive annual revenue growth that it has shown.

The following figure shows a high-level application of the Africa Analysis M&A diagnostic model. This model determines the strategic intent of the acquisition regarding scale, customers, revenue and markets.

EOH M&A Analysis 22.11.2016

Source: ©Africa Analysis M&A Diagnostic Analysis 2016

Overall, EOH has driven the growth in finding new customers either in existing markets or new markets. EOH has also driven the acquisition of new capabilities that can be used to serve new and existing customers. The analysis also shows the drive to expand into adjacent markets.

Diversification Strategy

These acquisitions demonstrate the ongoing EOH diversification strategy. A review of some of the acquisitions made over the past 24 months shows the scope of diversification:

  • SCAN RF                          : Wireless infrastructure
  • PIA Solar                          : Alternative energy
  • JOAT Group                   : Civil engineering – water infrastructure
  • Mehleketo                       : Rail infrastructure
  • Paterson Candy           : Civil engineering – water infrastructure
  • Grid Control                  : Energy management services

EOH is building capacity in infrastructure technology – water, electricity and transportation.

Can EOH Sustain such revenue growth?

The key question is whether EOH can sustain such aggressive revenue growth? First, let’s explore possible revenue growth and M&A scenarios:

Scenario 1: If we assume the same CAGR of 39% for the next five years, and FY2016 core revenue grows at 19% per annum, then:

  • By 2021, EOH would reach R67 billion, or 5.3x its FY2016 revenue.
  • EOH will need to buy companies that contribute R27 billion in new revenue over this period
  • On average, EOH will need to add the equivalent of 15% in new revenues through M&A each year. EOH has shown an average of 15% new revenue growth per year over the five -year period. However, in 2016, the new revenue contribution from M&A was 10%.

Scenario 2: If we assume the average 2016 revenue growth of 31% for the next five years, and FY2016 core revenue grows at 19% per annum, then:

  • By 2021, EOH would reach R49 billion, or 3.9x its FY2016 revenue.
  • EOH will need to buy companies that contribute R14 billion in new revenue over this five-year period.
  • On average, EOH will need to add the equivalent of 9% in new revenues through M&A each year. EOH has shown an average of 15% new revenue growth per year over the five -year period. However, in 2016, the new revenue contribution from M&A was 10%.

Scenario 3: If we assume the FY2016 revenue growth of 10% for the next five years, and FY2016 core revenue grows at 10% per annum, then:

  • By 2021, EOH would reach R35 billion, or 2.7x its FY2016 revenue.
  • EOH will need to buy companies that contribute R12 billion in new revenue over this five-year period.
  • The assumption is that EOH adds the equivalent of 10% in new revenues through M&A each year. EOH has shown an average of 15% new revenue growth per year over the five -year period. However, in 2016, the new revenue contribution from M&A was 10%.

These scenarios show the outcome of revenue and M&A activity assumptions. Based on the scenarios, EOH will need to maintain an aggressive M&A strategy over the next five years to deliver similar revenue growth as it has shown over the past five years. Depending on how aggressive EOH sees its growth, it will need to add new revenue derived from M&A of between R12 and R27 billion of the next five years.

This is quite a challenge, and we expect that EOH will need to either seek international M&A targets and/or diversify into adjacent markets in the SA market.

Conclusion

The revenue analysis shows that EOH has successfully grown its revenue through an M&A strategy. Indexing revenues to FY2011, shows that by FY2016, EOH had earned 63% of its revenues from the cumulative acquisitions it had made over this period.

The EOH challenge, however, is how to continue to deliver such impressive revenue growth over the coming years.