Vodacom goes on Safari

Vodacom CEO Shameel Joosub. (Pic: Gallo Images)
Vodacom CEO Shameel Joosub. (Pic: Gallo Images)

Vodacom CEO Shameel Joosub is calm and collected. He doesn’t give the impression of a person who acts on impulse. You suspect that every decision is carefully considered.

The morning finweek sat down with Joosub, Vodacom had just announced its financial results. Group service revenue up by 2.3%, group ebitda (earnings before interest, tax, depreciation and amortisation) up by 2.9%, group data revenue up by 16.4%. Headline earnings per share increased by 4.5%. A total dividend of R8.30 per share for the year.

In the South African market service revenue is up by 5.6%. This has been attributed to growing the customer base by 3m, to a total of 37.1m. Vodacom also points to increased investment in growing its data market, with revenue in the segment up 19.7% in the year to end March, now representing 39.7% of service revenue in SA.

Enterprise services in SA have grown by 12.7%, now representing 24.3% of service revenue.

A negative effect was the slowdown in handset sales, with the weakening rand an influencing factor.

But the big news on the day was Vodacom’s announcement that it planned to purchase 35% of Kenyan mobile player Safaricom for R34.6bn through a share swap.

The telecoms operator plans to purchase the 35% stake from parent company Vodafone, which will retain a 5% holding in the company. The rest of Safaricom’s shareholding is held by the Kenyan government (35%) and private investors (25%).

The transaction, which is expected to be finalised in the third quarter of 2017, will see Vodacom issue Vodafone with 226.8m new ordinary shares, taking Vodafone’s stake in Vodacom from 65% to 70%. Joosub says the transaction will make East Africa a much stronger hub for Vodacom.

Mobile banking play

Not only is Vodacom buying a mobile player that has a large chunk of the Kenyan market sewn up, it is also buying into a leading player in the mobile banking space through its M-Pesa product.

Joosub says M-Pesa take-up is growing “significantly” and now represents 14% of Vodacom’s internal group revenue. The Vodafone group services 29m M-Pesa customers across 10 countries in Africa, Asia, and Europe. Customers can use the service to pay bills, access loans and send and receive money.

M-Pesa has become a cash cow since its launch in Kenya in 2007. In the past financial year M-Pesa revenue in Kenya grew by 32.7% to 55bn Kenyan shillings (around $567m) with a further 3m Kenyans signing up in the past 12 months. 

In Kenya there are currently 15m M-Pesa customers serviced by Safaricom, which will fall under Vodacom after the acquisition.

Through parent Vodafone, countries like Albania, Egypt, Ghana, India and Romania are serviced, while through Vodacom countries like Tanzania, Lesotho, Mozambique and the DRC are serviced.

In Tanzania, 63% of Vodacom’s 12.6m customers have signed up for the banking service. Vodacom believes the take-up of M-Pesa in Tanzania is a “blueprint” to be replicated elsewhere on the continent.

According to Joosub, the most used M-Pesa service in Tanzania is the one that allows customers to use the app to pay their bills. In Lesotho, 27% of Vodacom’s 1.5m customers are using M-Pesa, while in the DRC 20.1% of its 10.4m customers are signed up. In Mozambique, the number of M-Pesa users more than doubled to 2.5m customers in a year.

News reports have suggested that up until now, the Vodafone group, which didn’t want to see it competing in markets with Vodacom, has barred Safaricom from venturing outside Kenya. It is understood that the new deal will free up Safaricom to enter African markets where Vodacom is not present, with Ethiopia being a big priority. 

Joosub says that Vodacom will look to launch more financial services in South Africa. It already offers life and funeral insurance policies. He insists the telco has learnt its lessons from a previous failed attempt to roll out M-Pesa in the country. He says that the banking infrastructure in SA is well-developed compared to that of Kenya and that the regulatory environment is also a different beast.

Vodacom will use a “cherry-picked” approach for SA, not a full M-Pesa play, according to Joosub.

Consolidation and acquisitions Telcos, says Joosub, are about capital investment and this is why there have been greater levels of consolidation in the sector. In the past financial year Vodacom invested just short if R11.3bn on expansion of data and IT services. A large chunk of this was spent widening 3G coverage and significantly improving 4G coverage from 58.2% to 75.8% of the population.

Vodacom has entered into an agreement with WBS to roam on their 4G and 4G+ networks. The company also courted Neotel for a while, chasing after some valuable spectrum that the acquisition target held. However, the deal fell apart under regulatory scrutiny and Neotel was recently snapped up by Liquid Telecoms. 

According to Joosub, consolidation in the market is not yet complete. “There will still be more mergers and acquisitions.”

 When asked if Vodacom was still on the acquisition trail in Africa, he explains that the company would look at every investment opportunity on a case-by-case basis. Prices for African assets are better than they were two to three years ago, he claims.“It’s all price dependent. We will keep a watchful eye on other African markets.”

He is also clear on the fact that Vodacom was not just looking at Vodafone’s other African assets, but all potential assets on the continent. When asked by one analyst during the results presentation whether Vodacom had plans for Nigeria, Joosub is firm in his response: “We don’t have any ambitions to go into Nigeria at this stage,” he says, before adding the kicker, “I would rather have a Safaricom every day of the week.”

It’s clear from his response that the setbacks MTN, Vodacom’s biggest South African rival, has faced in Nigeria have made investors think twice.

In October 2015, MTN’s world was turned upside down with the announcement by the Nigerian Communication Commission (NCC) that it was slapping the mobile giant with a 1.04tr naira ($5.2bn) fine for failing to meet a deadline to disconnect 5.1m unregistered SIM cards in Nigeria.

This was equivalent to more than two years of MTN’s Nigerian profits.The fine was eventually reduced to 330bn naira ($1.1bn) in June last year, but even the reduced fine has had a significant impact on MTN’s profitability. A few weeks ago MTN made headlines again when the Rwandan telecom industry regulator fined MTN Rwanda 7bn francs (about R180m) for running its IT services outside the country in breach of its licence. MTN Rwanda is accused of hosting its IT services hub in Uganda.

It’s clear that SA mobile players are going to need to make sure they maintain healthy relationships with governments, regulators, consumers and competitors in the African markets they choose to play in.

Spectrum allocation SA’s ICT Policy White Paper, driven by the ministry of telecommunications and postal services, has also been a bone of contention for Vodacom. The issue of allocation of valuable spectrum, which will be freed up by the migration to digital television in the country, has become an undeniable pressure point in the sector, one that has already faced various court challenges.

The spectrum involved is in the 700MHz, 800MHz and 2 600MHz bands. The Independent Communications Authority of SA (Icasa) had planned to auction off the spectrum to the highest bidders, a decision it announced in July last year, before the White Paper was published. Icasa stipulated a reserve price of R3bn per lot.

However, the White Paper called for the use of the spectrum in creating a wholesale open access network. So telecoms and postal services minister Siyabonga Cwele took the regulator to court, seeking and receiving an interdict against the auction process.

The High Court ruled that the auction process should be subjected to a full review in the High Court and interdicted Icasa from continuing with the process. Many vocal critics have dismissed the government’s plan to failure, insisting the investment case was not there for the operators if they don’t own the spectrum.

Joosub was one of those critics. Since then, he says, the big mobile players have got around a table and tried to come up with a solution. These mobile players, through Deloitte, submitted a proposal to Cwele that the industry adopt a hybrid model.

 This would see established ICT players awarded spectrum and some allocated to a wholesale open access network, he says. The commitment that has been given by the mobile players is that they will take up 30% of the wholesale network’s available capacity.

According to Joosub, talks are ongoing between government, the industry and the regulator to find a solution. “There are areas to cooperate and areas to compete,” he says, and points to Vodacom partnering with MTN and Neotel in building a national long-distance fibre optic network.

The network covers a distance of 5 000km, connecting the major centres across South Africa. A second project connecting coastal towns and cities in SA is being considered too, he says.

In the fibre-to-the-home market, Vodacom has passed 21 000 homes and businesses and through wholesale partnership agreements had additional access to a further 175 000 end points.

Joosub thinks there is an opportunity in fibre, maintaining that the fixed-line sector was seeing a resurgence due to demand for high-speed fibre connections. Vodacom is currently looking for a partnership to play in this space more, he says. 

This is a shortened version of an article that originally appeared in the 1 June edition of finweek. Buy and download the magazine here.

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