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Vodacom looks to snap Neotel up for $500m

Vodafone’s South African unit is looking to buy Neotel in a push into the country’s fixed-line and data markets.
Written by Lance Harris, Contributor

Vodacom, the South African mobile operator in which Vodafone owns a 65 percent stake, has confirmed long-running speculation that it is looking to acquire the country's second fixed-line operator, Neotel.

The operator hopes that the deal will give it a boost in the business communications and fixed-mobile convergence markets in South Africa.

The company said in a statement on Monday that Vodacom South Africa has entered into "exclusive discussions" that could see it acquire 100 percent of Neotel from its existing shareholders. The deal could be worth more than $500m, according to Bloomberg.

Other bidders that reportedly looked into buying Neotel before dropping out of the bidding race included Dimension Data, a subsidiary of NTT, and South Africa's MTN group.

Shareholders in Neotel include India's Tata Communications, South African investment vehicle Nexus Connexion, and CommuniTel, a consortium made up of Telecom Namiba and MKhonto We Sizwe military veterans. Neotel was created in 2006 after a protracted bidding process to provide competition for South Africa's incumbent operator Telkom.

Neotel and Vodacom said in a joint statement that the deal, if concluded, would stimulate competition in South Africa's fixed-line and broadband data services markets.

"If the deal is implemented, Vodacom intends to put significant investment into the combined entity to provide high-speed fixed connectivity to many more businesses and consumers," Vodacom group CEO Shameel Joosub said in a statement.

"By further building on the capabilities within Neotel, we would also aim to develop entirely new services such as fibre to the home and business. Neotel has access to over 15,000km of fibre optic cable, including 8000km of metro fibre in Johannesburg, Cape Town and Durban."

If merged, Neotel and Vodacom could also make more efficient use of limited frequency spectrum to keep pace with South Africa's rapidly growing demand for mobile data, Joosub said.

Neotel CEO Sunil Joshi said: "This transaction, if concluded, would further enable Neotel to extend its footprint in South Africa and add the mobile capability that our customers require… in a new world of converged communications."

Neotel has long struggled to make inroads in South Africa's fixed-line market in the face of Telkom's dominance. In its annual report for 2012-2013, Tata Communications reported a consolidated net loss of $45m from its holding in Neotel. "While [Neotel] has already turned profitable at the operating level, it will require support for a while longer before it becomes fully profitable," Tata Communications said in the report.

Neotel has steadily improved its Ebitda over the past two years through a programme of cost cutting and a focus on building recurring revenues.  In its most recent set of annual results, Neotel reported that it had achieved its first full Ebitda positive year. 

Even if Vodacom concludes a deal with Neotel's existing shareholders, the transaction faces significant hurdles in gaining approval from the telecoms regulator Icasa as well as from South Africa's competition authorities.

Vodacom is South Africa's largest mobile operator with around 30 million active subscribers. The company also has operations in Lesotho, Tanzania, Mozambique, and the Democratic Republic of Congo.

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