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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.

Helios Towers – Entry into the South African Market

Helios Towers (HT) was founded in 2009 and concluded its first tower sales and lease back deal (S&LB) deal with Millicom in Ghana. Subsequently, HT has undertaken similar deals in Congo Brazzaville, DRC, and Tanzania. In 2018, Helios Towers entered the South African market.

Strategy

HT’s principal business lies in building, acquiring and operating telecommunications towers that are capable of accommodating and powering the needs of multiple tenants. These tenants are typically large MNOs and other telecommunications providers who in turn provide wireless voice and data services, primarily to end-consumers and businesses.

HT uses the sales and lease back method of buying towers from mobile network operators.

KPIs

By end 2018:

  • HT had acquired 82% and had built 18% of its total tower stock (total towers 6 745) since commencing operations in Africa. 
  • In 2018, there were 13 549 tenants that yielded an average tenancy across its towers of 2.01x.
  • In 2018, HT earned an average of USD4 435 per month per tower, or USD2 208 per customer per tower per month.

South Africa

In 2018 HT entered into a partnership with Vulatel (Pty) Ltd and formed Helios Towers SA (HTSA) with HT owning 66% and Vulatal 34%. Vulatel has been in operation since 2017. The company acquired Dimension Data’s fibre and wireless division (formerly Plessey South Africa).

Subsequently, Vulatel acquired Gio Construction, a provider of network deployment and maintenance services.

Contact Andre Wills by e-mail to discuss the profile or answer any queries you may have.

Microsoft Launches its Cloud Data Centres in South Africa

Microsoft launches two data centres located in Cape Town and Johannesburg.

The South African cloud data centre market has started gaining traction as demonstrated by the recent launch by Microsoft South Africa of two regional cloud data centres in Johannesburg and Cape Town. Companies have started realising the benefits of cloud adoption, which include reduced costs of managing and maintaitng IT systems as well as the scalability and agility of cloud services. Furthermore, various sporting bodies have also started adopting cloud services, notably the South Africa Rugby Union (SARU), to monitor and improve player performance. This is a demonstration that cloud solutions will not only have an impact in the work space, but across various sporting disciplines as well.

Market Overview

On 6 March 2019, Microsoft SA announced the official launch of its two regional Azure cloud data centres, located in Johannesburg and Cape Town. It is one of the first global cloud data centre providers to provide cloud services on the African continent. 

The newly appointed MD for Microsoft SA, Lillian Barnard, highlighted that these enterprise-grade data centres will support cloud, artificial intelligence and edge computing innovations across the continent. Further, key sectors of the economy that the company is looking at supporting through its cloud data centre infrastructure, include agriculture, financial services, healthcare, manufacturing, mining and the public sector. 

Microsoft’s cloud data centres are expected to enable skills development through the creation of a Cloud Centre of Excellence (CCoE) by companies migrating towards the cloud. The CCoE is a cross-functional team of executive support that leads other employees through cloud adoption, migration and operation. In addition, after cloud migration, employees will be required to upscale their skills to align them with the new cloud services.

Key Drivers and Inhibitors of Cloud Adoption in South Africa

Various drivers and inhibitors are currently influencing the uptake of cloud services in SA. Microsoft highlighted that some of the key drivers to cloud adoption include digital transformation and increased innovation by businesses.

The key drivers and inhibitors to the adoption of cloud services in SA are provided below.

Drivers

  • Reduced costs of managing and maintaining IT systems, i.e., lower total cost of ownership (TCO).
  • Scalability and agility of cloud services.
  • Business continuity in cases of natural disasters, power failures or infrastructure breakdown.
  • The need to develop local skills and transform existing capabilities, in accordance with emerging global trends.
  • Ubiquity of broadband connectivity and the availability of faster connectivity at lower prices.
  • Cost savings through the reduced costs of updating or replacing legacy software.
  • Mobility and the ability of employees to work remotely.
  • Business innovations that require new digital capabilities
  • Increased collaboration and efficiency through the cloud.

Inhibitors

  • Limited skills across most local organisations.
  • Data residency requirements within some organisations, particularly those that handle certain forms of personal information e.g., financial institutions, is limiting the uptake of cloud services.
  • Discomfort with the adoption of new technologies by end-users.
  • Concerns around potential security issues related to personal and company information being managed by a third party.
  • Latency associated with connectivity to data centres offshore and relatively slow connectivity speeds. (These constraints are being alleviated.)
  • Perception by smaller organisations that cloud services are meant for large corporates.

Microsoft’s Customer Experiences for Data Centre Migration

Microsoft SA highlighted various customer experiences influencing the current Azure cloud migration by businesses. These are:

  • Expiry of existing data centre contracts
  • End of support for existing software
  • Quickly integrating new IT infrastructure acquisitions
  • Software and hardware refreshment and upgrade
  • Urgent capacity upgrading
  • Cost optimisation
  • Business innovations requiring new digital capabilities
  • Unsupported legacy IT infrastructure
  • Security protection of business assets and customer data
  • Increased focus on core business operations

These drivers of cloud migration by Microsoft’s customers are closely related to the digital transformation currently being undertaken by these businesses in SA.

Key Vertical Sectors

While the cloud market in SA is currently in the growth stage, some verticals have emerged as early adopters of cloud solutions.
The public sector is a key sector demonstrating the biggest potential for cloud adoption in SA. This has been mainly due to the limited IT skills within most government departments. As such, most public entities are looking at outsourcing their IT infrastructure through cloud services.

Early adopters:

  • Banking/financial sector
  • Healthcare
  • Manufacturing
  • Mining
  • Public sector

Microsoft’s Partnership with the South African Rugby Union (SARU)

In February 2019, Microsoft SA formed a cloud partnership with the SARU. This partnership is aimed at transforming SA’s rugby through the use of cloud capabilities to unlock new opportunities.

To develop its new platform, SARU partnered with Accenture and incorporated various technologies.

Technology used by SARU uses GPS to track player performance during a match. This technology compiles performance statistics such as the number of shots and tackles achieved, as well as the distance covered during a match. Subsequently, SARU uses software, provided by Microsoft, to analyse player performance to identify areas of improvement.

This analysis helps SARU prepare for upcoming matches and helps identify weaknesses in the opposition players, allowing for development of strategies to improve their performance on the field.

Microsoft’s Partnership with Team Dimension Data

Since 2014, Microsoft has partnered with the professional cycling team Team Dimension Data for Qhubeka in the Tour de France, using the Office365 package as the collaboration platform for the cycling team.

This platform is used to manage its global team through a central repository to communicate, collaborate, share information and manage the team’s operations.

In addition, the Office365 package enables the team members to communicate with each other via Skype during racing events, as well as maintain communication with the administration bodies.

Further, they are also able to access emails with event updates and time changes, which is aligned to their events calendar. The OneDrive application allows them to save data and information which they can share with other team members.

Microsoft’s Partnership Network

Microsoft SA leverages a broad network of partners located both locally and internationally. This network is characterised by a vast network of independent software vendors (ISVs) and systems integrators (SIs).

In 2018, Microsoft SA had 6 000 registered partners, of which 1 200 were registered during the same year. Furthermore, 470 partners were classified as either gold or silver partners. The number of partners that attained gold or silver partner status increased by 31% in 2018.

During the same year, the number of data centre migration certified partners amounted to 24. These are the partners tasked with modernising and migrating Microsoft’s customers from the traditional legacy infrastructure to the modern Azure cloud infrastructure.

As such, partnerships have been key to Microsoft’s operations in ensuring smooth migration to the latest Azure cloud infrastructure.

Typical Cost-Savings through Azure Cloud Adoption

According to Microsoft, the adoption of Azure cloud has resulted in tangible benefits for businesses, with most companies reporting various cost savings from the migration to the cloud services.

Some of the benefits that could be realised through the adoption of the Azure cloud services include:

  • 15% reduction in total cost of ownership (TCO): the migration to cloud services could result in a 15% reduction in the total direct and indirect costs of acquiring and operating IT infrastructure by organisations.
  • 25% cost-reduction from reserved instances: Reserved instances (RIs) are reservations in resources and capacity within a particular region for future usage. RIs are generally cheaper than on-demand purchases, therefore resulting in significant cost savings.
  • 25% cost-reduction from exact IT requirements: By purchasing the exact IT infrastructure and avoiding excess capacity, some organisations have been able to achieve up to 25% cost savings on IT infrastructure.

Summary

During the recent launch of Microsoft’s Azure cloud data centres, key drivers were highlighted that influence cloud migration. Most businesses have started realising the cost benefits that result from cloud adoption, which include approximately 15% reduction in TCO and 25% cost reduction from reserved instances.

However, inhibitors remain in the market. These include limited skills availability across most organisations and data residency requirements in some sectors, such as the financial services and public sectors. Nonetheless, the landscape is shifting as more organisations in both government and financial services start embracing cloud data centre migration in accordance with their digital transformation initiatives.

Central to Microsoft’s cloud data centre migration has been the formation of partnerships with various players, including independent software vendors (ISVs) and systems integrators (SI). In 2018, Microsoft SA had approximately 6 000 registered partners, of which 470 were classified as either gold or silver partners. Twenty-four of these companies are data migration certified partners, who will play a critical role in migrating customers to the Azure cloud infrastructure.

Various sporting disciplines have partnered with Microsoft, including SARU and the Team Dimension Data for Qhubeka, allowing them to enhance their performance and achieve more efficient information sharing.

This is a demonstration that Microsoft’s cloud solutions will not only be critical in the work space, but also provides vital services to sporting disciplines.

More Information

Please contact Derrick Chikanga (derrick@africaanalysis.co.za) for further information about the data centre and cloud markets.

2017 South African VPN Market Landscape

In the VPN space, the South African market closely follows developments and technological evolution of the more developed telecommunications markets.

The SA market is characterised by escalating bandwidth volumes on the WAN and decreasing prices of products. This is driven by declining bandwidth prices, expansion of broadband infrastructure, and an increased consumption of bandwidth-hungry applications by businesses.

VPN technology mix evolution

VPN customers have been adopting hybrid solutions as they begin consuming many of their services from the cloud. Separate broadband links, rather than the private WAN, are often used for break-out into the internet. The mix of technologies used for WANs will change. MPLS and Internet VPN will show strong decline over the next five years. SD-WAN is expected to show strong growth, coming from migration of existing customers from MPLS and Internet VPN, and new greenfield customers.

The expected lifecycle evolution of these three technologies is presented in the graphic below. MPLS has reached maturity phase. Although widely used among corporates, it is expected to begin declining and see a significant reduction in its use over the next five years. IPSec continues to dominate the Internet VPN space, but it is expected to decline, as is Internet VPN in general, which will be replaced to a large degree by SD-WAN. The latter is currently at an early introduction stage in SA but expected to become mainstream within the next five years.

Source: Africa Analysis, 2017

Source: Africa Analysis, 2017

The MPLS VPN market, continues to be dominated by half-a-dozen service providers. The growth of the SD-WAN market will introduce new players into the VPN market, although the existing market participants will also move into this space. Service providers will either develop their own SD-WAN platforms (IS already launched its platform earlier in 2017) or will partner with global SD-WAN providers to offer their services locally. Some of the service providers will move to integration of all three VPN technologies to provide a hybrid mix to their customers.

VPN market growth

The VPN market is expected to continue growing at a healthy rate in terms of the number of new connections, although it will be impacted to an extent by migration to the cloud. With full migration of applications, storage, etc. into the cloud, there is no need for a company WAN. The total market is forecast to grow from 100 thousand VPN connections in 2016 to reach 276 thousand by 2022, showing a CAGR of 19% for the period 2017 to 2022.

Market growth is illustrated in the following graphic. However, the mix of technologies accounting for the future connections will differ significantly form the current market landscape. They key drivers of SD-WAN uptake are going to include: a) stronger move into the cloud environment, b) drive to reduce company network / WAN costs, and c) requirements for greater network flexibility.

Source: Africa Analysis, 2017

Source: Africa Analysis, 2017

A strong uptake of SD-WAN products is expected in the SME market, but large companies will also replace some of their MPLS links with SD-WAN. However, given their spending power, large companies will continue to account for over two-thirds of WAN revenues.

Ready for the future

To remain competitive in the evolving VPN market, service providers will need to also evolve their technology / product strategy and service approach, including:

  • Have the ability to offer a suite of VPN products for various market segments
  • Develop SD-WAN capabilities
  • Educate customers about new technologies becoming available and their benefits.

More Information

Please contact Dobek Pater (dobek@africaanalysis.co.za) for further information about the SA VPN Report.

South African IoT/M2M Market Opportunity for Network Operators

The global IoT/M2M installed base is expected to reach between 12.5 and 13.3 billion by 2020, and show a CAGR of over 20% over the period 2015 to 2020. In South Africa, we forecast that the IoT/M2M installed base will reach 35 million by 2020, showing a CAGR of 32% over the same period. While these numbers grab many headlines, network operators need to recognise that their revenue opportunity will come from managed connectivity, which accounts for roughly 20% of the IoT/M2M service revenue, and not the connectivity itself. Revenue earned from connectivity itself, only accounts for around 11% of the service revenue.

Global Outlook

Network operators (mobile, fixed and wholesale) have started to turn their attention to the rising Internet of Things (IoT) and machine-to-machine (M2M) opportunity. Global predictions vary, with some reports such as the IHS Markit showing that the number of IoT/M2M connections is expected to rise to 12 billion while IDC have reported that IoT/M2M connection will rise to 28 billion by 2020. This range illustrates the challenge in forecasting a rapidly growing market.

 

For example, the following chart shows a comparison of the various global forecasts of the installed base:

2017 Global IoT Installed Base Forecast

Forecasts made in 2016 and 2017 for the 2020 global installed IoT base, show that the installed base is expected to reach between 12.5 and 13.3 billion. Most forecasts show a CAGR of over 20% over the period 2015 to 2020.

The South African IoT Connectivity Development

In South Africa, as in the rest of the world we can expect to see the Low Power Wide Area Networks (LPWA) IoT battle lines drawn along technology. The LPWA platforms include Extended Coverage GSM for IoT (EC-GSM-IoT), Long Term Evolution Machine Type Communications Category M1 (LTE MTC Cat M1, also referred to as LTE-M) and Narrowband IoT (NB-IoT).  In the first camp the main protagonists will be the mobile network operators, such as MTN and Vodacom, both of which have announced IoT plans based on LTE narrow band technology, using licensed spectrum.  On the other side, will be the LPWA platforms such as Sigfox, backed by Dark Fibre Africa subsidiary SqwidNet, using unlicensed ISM bands.

The mobile network operators will position their services based on service quality as their ability to manage the spectrum will ensure a quality service for the enterprise. The mobility factor will see applications such as the “connected car” and vehicle tracking being among the major drivers of IoT/M2M uptake for the mobile operators. Providers using platforms such as Sigfox will opt to focus on volumes, low power and short transmission distances to offer services and solutions for more static applications such as smart metering and utility services.

Forecast of the South African IoT Installed Base

Africa Analysis forecast that the installed base of IoT/M2M connections will rise from 8.8 million in 2015 to 35 million by the end of 2020, showing a CAGR of 32%.

  • A large slice of the market will be found in the LPWA technology, rising from around 290 thousand in 2017 to over 19 million by the end of 2020.
  • Other technologies such as mobile cellular, Wi-Fi will retain a steady growth of 14% and 11% respectively over the forecast period. Mobile cellular will rise to 8.7 million connections and Wi-Fi will rise to 7.4 million.
  • Satellite services will retain some importance in the local IoT/M2M market but the applications will be restricted to a niche market such as aviation and rural areas.

Network Operators and the IoT Service Revenue Stack

The forecast of the large installed base of IoT/M2M connections sounds very attractive, and these big numbers grab a lot of attention. But the sad reality is that the connectivity revenue opportunity for just proving network connectivity is limited. In 2016, the connectivity portion of the IoT revenue stack accounted for around 11% of total revenues. The lower cost of connection and the associated downward pressure on data tariffs will continue to keep this contribution under pressure.

The attractive revenue for network operators is found in the stack of services associated with connectivity. For example, managed connectivity accounts for roughly 20% of the IoT/M2M revenue.

Given this, we expect that IoT deals will likely to be driven by volumes that will see network operators sacrificing some of their connectivity margin to secure contracts.  However, this basic element of the stack will see operators use connectivity as a foundation to offer managed connectivity services. This way, the MNOs will be able to take advantage of both the basic and the managed connectivity services, thus increasing the portion of total revenue they will be able to access in the IoT environment.

Those network operators with the necessary resources are able to push themselves further up the value chain and possibly offer more complex services such as integration, which accounts for around 47% of total revenues while application development will account for around 22% of total revenues.

Contact Richard Hurst, Africa Analysis, for more information on this topic.