Antitrust in the Digital Economy: Fighting Inequality?

AAT the big picture

HOW CAN COMPETITION LAW ENFORCEMENT IN THE DIGITAL ECONOMY HELP IN THE FIGHT AGAINST POVERTY?

By DWA co-founder and visiting AAT author, Amine Mansour* (re-published courtesy of Developing World Antitrust’s editors)

When talking about competition law and poverty alleviation, we may intuitively think about markets involving essential needs. The rise of new sectors may however prompt competition authorities to turn their attention away from these markets. One of those emerging sectors is the digital economy sector. This triggers the question of whether the latter should be a top priority in competition authorities’ agenda. The answer remains unclear and depends mainly on the potential value added to consumers in general and the poor in particular[1].

Should competition authorities in developing countries focus on digital markets?

Obviously, access to computer and technology is not a source of poverty stricto sensu. In the absence of basic needs, strategies focusing on digital sectors may prove meaningless. In practice, the last thing people living in extreme poverty will think about is gaining digital skills. Their immediate needs are embodied in markets offering goods and services which are basic necessities. The approach put forward by several Competition authorities in developing countries corroborates this view. For instance, in South Africa, digital markets are not seen as a top priority. Instead, the South African competition authority focuses on food and agro-processing, infrastructure and construction, banking and intermediate industrial products.

There are however compelling arguments to be made against such position. Most importantly, although access to technology and computers is not a source of poverty, such an access can be a solution to the poverty problem. In fact, closing the digital gap by providing digital skills and making access to technology and Internet easier can help the low income population when acting either as entrepreneurs or consumers. In both cases competition law can play a decisive role.

The low income population acting as consumers

First, when acting as consumers, people with low income can enjoy the benefits of new technology-based entrant. Thanks to lower costs of operation, lower barriers to entry and (almost) infinite buyers, these new operators have changed the competitive landscape by aggressively competing against traditional companies. These features have helped them not only extending existing products and services to low-income consumers but also making new ones available for them. Better yet, in some cases increased competition coming from technology-based companies motivates traditional business forms to adapt their offer to low-income consumers so as to face this new competition and remedy shrinking revenues. Perhaps, the most noteworthy aspect of all these evolutions, is that these new entrants have, in some instances, been able to challenge incumbents’ position by driving prices downward to levels unattainable by traditional companies without scarifying their profitability.

A shining example of all this dynamic is the possibility for low-income consumers to engage, thanks to some mobile companies, in financial transaction without the need to pass through the traditional stationary banking infrastructure. For instance, in Kenya, M-PESA a mobile money transfer service that has over 22 million subscribers[2] and around 40,000 agents (around 2600 Commercial bank branches)[3] changed the life of million of citizens. The service enables clients to deposit cash into their M-PESA accounts, send or transfer money to any other mobile phone user, withdraw cash and complete other financial transactions. A farmer in a remote area in Kenya can send or receive money by simply using his mobile phone. In this way, M-PESA can act as a substitute to personal bank accounts. This experience shows how the digital economy helps overcoming the prohibitive costs of reaching low-income customers and thus raising living standards.

On that basis, we can easily imagine the counter-argument incumbent companies might put forward. In this regard, unfair competition and the need for regulation to preserve policy objectives are often in the forefront. However, there is a great risk that these arguments are simply used to restrict market entry and impede competition from those new players.

In fact, this kind of arguments do not always reflect market reality. For example, in some remote geographic areas, traditional companies and the new ones based on the digital/internet space do not even compete directly against each other. Accordingly, regulation intended to protect policy goals has no role to play given that the affected consumers are out of the reach of the traditional business. In the M-PESA example, it may be possible to argue that any operator engaging in financial transactions should observe the regulatory restrictions that apply to the banking sector in order to ensure that policy objectives such as the stability of the banking system or the protection of consumer savings are preserved. However, applying such a reasoning will leave a large part of consumers with no alternative given the absence of a banking infrastructure in remote areas. The unfair competition and regulation arguments may only hold in cases where consumers are offered alternatives capable of providing an equivalent service.

This shows the need to proceed cautiously by favoring an evidence-based approach to the ex-post use of the regulation argument by incumbent operators. This is however only one of different facets of the interaction between the competitive impact of companies based on the internet-space, the regulatory framework and the repercussions for people with low income[4].

The low income population acting as entrepreneurs

Second, the focus on digital markets as way to alleviate poverty is further justified when low-income people act as entrepreneurs. In fact, digital markets are distinguished from basic good markets in that they may act as an empowering instrument that encourages entrepreneurship.

More precisely, the digitalization of the economy results in an improved access to market information which in turn may benefit entrepreneurs especially the poor whether they intervene in the same market or in a different one. Practice is replete with cases where, for instance, a downstream firm heavily relies for its production/operation on services or products offered by an upstream company operating in a digital market. Similarly, in a traditional and somewhat caricatural way, a small-scale farmer may use VOIP calls to obtain market information or directly contact buyers suppressing the need for a middleman.

However, we can well imagine the disastrous consequences for these small-scale farmers or the downstream firm if mobile operators decide to block access to internet telephony services such as Skype or WhatsApp based on cheap phone calls using VOIP (this is what actually happened in Morocco). In such a case, the digitalization of the economy has clearly contributed to greatly lowering the costs of communication and distribution. However, low income entrepreneurs are prevented from benefiting of these low costs, which are a key input to be able to compete in the market.

The major difficulty here lies in the fact that, when low income people act as entrepreneurs, it is likely that they organize their activities in small structures. This result in relationships and structures favorable to the emergence of exploitative abuses. Keeping digital markets clear from obstructing anticompetitive practices is thus indispensable to ensure that small existing or potential competitors are not prevented from competing. This might not be easily achieved given that competition authorities’ focus is sometimes more on high profile cases.

*Co-editor, Developing World Antitrust

[1] Intervention may also be justified by the institutional significance argument. This significance lies in the fact that those markets are growing ones and challenging the common ways of both doing business and applying competition rules which in turn make it crucial for authorities to intervene by drawing the lines that ensure the right conditions for those market to grow and develop.

[2] http://www.safaricom.co.ke/about-us/about-safaricom

[3] http://www.safaricom.co.ke/personal/m-pesa/get-started-with-m-pesa/m-pesa-agents

[4] For instance, it possible to think of the same problem from an ex-ante point of view highlighting incumbent firms’ efforts to block any re-examination of the regulatory standards that apply to the concerned sector (no relaxation of the quantitative and qualitative restrictions). This aspect has more to do with the advocacy function of competition authorities.

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Tech antitrust news: disrupting M-Pesa mobile payment monopoly? cashless NFC mandatory? Dominance of 3 tech cos

Disruption & entry — mandatory cashlessness — and collective dominance

Perhaps they don’t realise it themselves, but the journalists at ITWeb Africa have written antitrust/competition law strories in three of their recent reports, covering the rapidly growing and lucrative tech world in Africa: their stories range (in antitrust terms) from collective dominance in Africa’s tech sphere, to a challenger’s new entry in mobile payments, to a mandatory government-backed mobile NFC system for Kenyan transit commuters that allegedly causes more consumer harm than benefit by going cashless and giving the spoils all to one monopolist.

We take each in turn.

Disruption to M-Pesa’s mobile payment crown?

It looks as though the M-Pesa crown of dominance may be taken through the competitive process (and without active intervention by the competition authority) after all:

Equity Bank is about to join Airtel’s challenge to the dominant position of Safaricom Limited’s M-Pesa service (on which AAT has written extensively before).  The magazine reports that an ultra-thin SIM card technology and the Kenyan bank have reached a pact that will allow them to compete with M-Pesa’s service, on top of existing user SIM cards.

Equity Bank is “determined to challenge” Safaricom’s M-Pesa mobile money service withe help of Taiwanese headquartered Taisys, which claims that the Communications Authority of Kenya “last month tentatively gave Equity Bank the go-ahead to use thin SIMs for one year.”  Equity is reported to be the “largest bank in East Africa with almost 9 million bank accounts.”

The new technology of a “stick-on” slim-SIM card allows the user “to execute mobile banking transactions, releasing the bank from the limitations of a telco-issued banking SIM.”  Safaricom had previously complained to the authority, arguing that PIN theft and denial of service are real risks that counsel against use of new SIMs.

In other related news, second M-Pesa challenger Airtel has secured a contract with the Kenyan Revenue Service that allows Kenyan citizens to pay their taxes using Airtel’s mobile money service.
The cashless economy: is the imminent Kenyan My1963 NFC payment system anti-competitive?

In this story about Nairobi’s public transport system’s much-derided effort to go entirely cashless – dubbed “My1963” -, the magazine reports that the Consumer Federation of Kenya (Cofek) claims that the digital payment system benefits “all except the consumer”.  In Cofek’s statement (“7 reasons why Cofek will fight to stop the #My1963 PSV’s cashless payment fraud“), the federation makes seven distinct arguments against the legality of the scheme.  Two relevant criticisms from the competition-law perspective are the following:

  1. no competitive bidding process: the body alleges that, due to politicians’ ties to banking and other interests, the correct process for entertaining competitive bids was not followed in accordance with proper public procurement rules.
  2. supra-competitive (monopolistic) pricing: an “exorbitant” 3% commission is being charged by the service provider of the system, as agreed between the Kenyan National Transport Safety Authority and the banks.

Cofek also urges the Competition Authority of Kenya (CAK) to “investigate the #My1963 and entire cashless payment system with a view to finding it uncompetitive, predatory and anti-consumer and market interest” [sic].

Viber, WhatsApp, YouTube: dominant in Africa?

In its report on alleged dominance by three tech companies, the paper begins by pointing out the (some more and some less) startling statistics:

WhatsApp is the leading third-party messaging application, Viber has overtaken Skype as the leading VoIP service on several networks and YouTube is the top video streaming app. … on Africa’s mobile networks WhatsApp accounts for 7% of total traffic, while Viber has overtaken Skype as a VoIP service. Streaming video accounts for just over 6% of downstream traffic – significantly lower than North America and Europe where it accounts for more than 30%.

WAP Browsing has seen a significant decline in traffic share thanks to increased adoption of smartphones throughout the region [–Ed.: on the latter point, the journal also has an interesting separate piece, discussing the new era of WiFi connectivity in Africa].

Being called “dominant” may be a badge of honor to the sales staff, but it is a dangerous moniker when viewed by the competition-law enforcers through their monopolisation lens.  WhatsApp, Viber and YouTube (whose parent is, of course, the already dominant Google) may therefore have to begin thinking about treading more lightly in terms of their dealings with competitors on the African continent, lest they wish to prompt governmental scrutiny from the likes of the South African Competition Commission, the Kenyan Competition Authority, or COMESA’s CCC.

Airtel Kenya requests probe of Safaricom for abuse of dominance in mobile money transfer market

kenya

Mobile payment wars heating up in Kenya

Airtel Networks Kenya Limited (“Airtel”) has joined forces with Kenya-based Equity Bank to launch a similar mobile banking product, M-KESHO in July 2014 to the established product provided by Safaricom Limited (“Safaricom”).

Safaricom offers a product named “M-Pesa” to its customers in Kenya and Tanzania.  M-Pesa is a mobile-phone based money transfer and micro-financing service, launched in 2007 for Safaricom and Vodacom, the two largest mobile network operators in Kenya and Tanzania. The service enables its users to deposit and withdraw money, transfer money to other users and non-users, pay bills, purchase airtime and transfer money between the service and, in Kenya, a bank account.  Users of M-Pesa are charged a service fee for sending and withdrawing money.

By 2010, M-Pesa became the most successful mobile-phone-based financial service in the developing world.

In light of the imminent launch of the Airtel product, Airtel has lodged a complaint with the Competition Authority of Kenya on the basis that Safaricom currently holds 78% of the voice market in Kenya, 96% of the short message service market and 74% of the mobile data market.  In addition, Airtel is of the view that these market shares make it impossible for Kenyan consumers to have a choice in operators. By 2012, 17 million M-Pesa accounts were registered in Kenya alone, which has a population of over 40 million.

There are a total of approximately 31 million mobile-phone subscriptions in Kenya in 2013, of which Safaricom accounted for 68%, Airtel 17%, Essar Group’s “yuMobile” 9% and Telkom Kenya Limited 7%.

However, Safaricom has indicated that cash transfers still account for 98% of the total transactions in Kenya and therefore it is impossible for any mobile-money entity to be a dominant player in the payments market.

The Competition Authority of Kenya has identified telecommunications as one of several markets being scrutinised by the Competition Authority for possible abuses of dominance.  This probe is expected to reach completion by July 2014.

In terms of Kenyan law, if a company controls at least half of the provision of trade of services or goods, the company will be considered to be dominant.  In Kenya, a conviction of abuse of dominance can lead to a five-year prison term and a USD 115 000 penalty

Kenya is quite clearly pushing on in relation to significant cases in sectors which affect the majority of the population, as discussed in the overview of maturing African competition regimes published last week.  However, it is noteworthy that in April 2014, Kenya’s telecommunications regulator granted approval for Safaricom and Airtel to buy Essar Group’s “yuMobile” and it is considering awarding licenses for at least three more telecommunications companies.  Orange SA has indicated that its operations may exit the Kenyan market, where it owns 70 percent of Telkom Kenya (which in turn accounts for 7% of the mobile phone subscriptions in Kenya).

Philips & innovation in Africa: Driving worldwide growth

Philips’ CEO Frans van Houten recognizes untapped potential, invests in Africa

new multi-part series

In February, AAT launched its multi-part series on innovation & antitrust as a thematic collection focusing on the concept of innovation markets and how competition and IP laws are able to address the, by definition, novel issues that arise.  Recently, and timely so, Philips has joined this debate.

Philips & the future of African innovation: From “things” to “ideas”

For one, Frans van Houten, its President and CEO, has been quoted as saying: “Innovation is our lifeblood and will be the main driver of profitable growth going forward. … I intend to drive innovation with more intensity to help us win new customers.”

Notably, Philips changed its official company slogan from “We make things better” to “We create better ideas.

Mr. van Houten (source: Philips)

Even more pertinent, Mr. van Houten not only recognizes the crucial forward-looking importance of innovation.  Unlike many Western corporate leaders, he positively links it with the economic growth prospects of Africa.  In an insightful piece entitled “How Africa’s innovation will change the world” (published on the Davos World Economic Forum blog), Mr. van Houten discusses the promises, challenges, and realities of African innovation and resulting economic growth.

The article highlights the intuitive, yet elusive, insight that challenges become opportunities when looked at with an inventive spirit.  It also addresses the importance of multi-disciplinary approaches (such as the one at the foundation of our #AntitrustInnovation series, combining law, economics, and business innovation) and that of partnerships:

Seven years ago, millions of Kenyans were struggling to access basic financial services such as a bank account; they were unable to transfer money or receive microcredit. Then, a locally developed mobile payment system called M-Pesa [see AAT coverage here; — Ed.] radically changed everything. Today, more than two-thirds of Kenya’s population uses M-Pesa to make and receive payments and an estimated 43% of the country’s GDP flows through the system. This is transforming life in the country, increasing income in rural households and spawning a range of start-ups.

This speedy adoption of mobile payments captures the enterprising spirit of African innovation. It reflects the resourcefulness with which people in Africa find local solutions to local issues. It also shows how Africa’s challenges are opportunities in disguise and how the continent can bypass development stages without paying for their replacement. Mobile phones, for example, were rapidly adopted in Africa because of the lack of fixed telecom infrastructure. And solar panels are being adopted faster than in other parts of the world, because kerosene is so expensive that the payback time for investments in solar power is months rather than years.

Healthcare is another exciting area. According to a report from the World Economic Forum, Africa faces 28% of the global disease burden with only 3% of the world’s healthcare workforce. In response, Africa is adopting new operating models and technologies. By training health extension workers to focus on education, family planning and sanitation, Ethiopia achieved a 32% drop in child mortality and 38% drop in maternal mortality. In Kenya, e-learning has taught 12,000 nurses how to treat major diseases such as HIV and malaria, compared to the 100 nurses a year that can be taught in a classroom.

Africa is also embracing new business models that tap into the vitality of the country’s communities. Philips, for example, teamed up with Inyenyeri, a Rwandan NGO, to give families access to an innovative cookstove. Crucially, the cookstove is given away for free and families pay for the stove by harvesting twigs, leaves and grass. This biomass is compressed into fuel pellets, half of which are returned to the family for personal use and half of which are sold by the NGO. The cookstove is produced in Africa, highly energy efficient and, because it is smoke free, significantly healthier.

This example also shows the power of partnerships, without which many African innovations would not come to fruition. Solar-powered light centres, for example, increase the social activity and productivity of communities by generating light after sundown. These communities, however, are often unable to invest in a light centre, so this technology is rolled out through NGOs and governments. Sometimes these light centres are used to power medical equipment such as an ultrasound, or refrigerators that store vaccines. This type of cooperation ensures that innovation generates both financial and social value.

The complexity of Africa’s challenges also requires a multidisciplinary approach to innovation. Kenya, for example, is investing in systems that encourage open innovation. This sees local universities and small and medium enterprises join forces with NGOs, governmental organizations and foreign multinationals such as IBM and Philips, which have set up regional research and innovation centres in Nairobi. Nairobi is also home to iHub, a booming community of local entrepreneurs, investors and some of the world’s leading technology firms.

For innovation to really succeed in Africa, other factors need to be addressed, too. There is a lack of prototyping equipment and workshops, so local innovators depend on Europe or China, making the process costly and cumbersome. And while there are good patent laws in place, there are still too many counterfeit versions of successful products. Also, international firms should source locally and work with local distributors, whenever possible. And governments should focus their development money on stimulating entrepreneurship and innovation.

While in Africa millions of people still live on less than $2.50 a day, the continent looks set to have a brighter future thanks to local solutions for finance, healthcare and energy that could become globally relevant. M-Pesa, for example, has already been rolled out in other African countries, India, Afghanistan and Eastern Europe. Perhaps sooner than we think, African innovations will help the rest of the world create lasting social and economic value.

[Frans van Houten, President and CEO, Royal Philips, emphasis and links added, How Africa’s innovation will change the world” published on Davos World Economic Forum blog.]

Investment: done

More than just writing op-ed pieces, Philips’ leadership has put its money where it matters: On March 20, 2014, the company (with 23-plus billion Euros in annual revenue) announced that it was establishing a “Research & Innovation Hub” in Nairobi, Kenya.  The full Philips statement says:

  • The Philips Africa Innovation Hub in Kenya will be the center for developing innovations “in Africa-for Africa” in the areas of healthcare, lighting and healthy living

  • Hub underlines Philips’ commitment to invest in Africa and provide Africa-relevant innovations to address key challenges facing the continent

 Nairobi, KenyaRoyal Philips (NYSE: PHG, AEX: PHIA) today announced the establishment of its Africa Innovation Hub in Nairobi, Kenya, which underlines the company’s commitment to invest in Africa. The Philips Africa Innovation Hub will work both on the creation of new inventions, as well as bringing these inventions to the market.

The Philips Africa Innovation Hub will do application-focused scientific and user studies to address key challenges like improving access to lighting and affordable healthcare as well as developing innovations to meet the aspirational needs of the rising middle class in Africa.

The Philips Africa Innovation Hub will be located at the Philips East African Headquarters in Nairobi, where African talents and international researchers will operate on the concept of “open innovation” and will work in close collaboration with the R&D ecosystem of Kenya and Africa. Philips is in discussions with local organizations and Universities on R&D collaborations to co-create meaningful solutions for Africa.

“We welcome the establishment of Philips’ Innovation Hub in Kenya; Philips is a globally recognized innovation powerhouse and their selection of Nairobi as the site to establish their African Innovation hub is a testament to the Kenyan government’s commitment to nurture the drive for research and innovation in the region”, says, Hon’ble Adan Mohammed, Cabinet Secretary for Industrialization. “We lend our full support to the investment being made by Philips and look forward to the outcomes of their Africa-specific research and projects that can contribute to transforming society, business and government across the continent”.

JJ van Dongen, Senior Vice President & CEO Philips Africa states: “Philips is passionate to invent, apply technology and partner to help people succeed. Our ambition is to create impactful innovations that matter to people and address the key challenges that confront society. With Kenya as a leader in the continent in science and entrepreneurship as well as a hub of collaboration on technology and innovation, Nairobi, is the ideal location to establish Philips’ African research presence. We want to tap into the city’s vibrant R&D eco-system and contribute to the process of co-creating new solutions, new business models and meaningful partnerships to provide innovations that make an impact.”
Enhancing people’s lives in Africa though meaningful innovations
Some innovations that Philips was already working on have now become part of the Innovation Hub, hence, the Philips Africa Innovation Hub will kick-off with ventures that are under development as well as in the pilot phase; these include:

Respiratory rate Monitor to support pneumonia diagnosis: Pneumonia is the leading cause of death among children under the age of five, resulting in 1.1 million deaths worldwide annually¹. Of these, 99% of deaths occur in developing countries in low-resource settings, which typically entail rural areas with very limited or poor healthcare facilities or with low-skilled health workers. The current diagnostic tools in such settings are not easy to use, can easily distract the workers from an accurate conclusion, and thus lead to a poor diagnosis.

The Innovation hub is working on the development and clinical testing of a robust and affordable Automated Respiratory Rate Monitor that aims to support the diagnosis of pneumonia among infants and children, using smart sensing technology on the body which is intended to be more accurate and reliable compared to manual processes being currently observed. This device will be specially designed for use by community health workers and nurses in rural areas. In Kenya, discussions are on with the Kenya Medical Research Institute (KEMRI) to further develop this project and co-create an effective solution tailored to circumstances in rural Africa.

Community care services: The development and testing of a work-flow innovation designed to reduce the number of avoidable maternal and child deaths. The purpose of the workflow is to enable remote area health centers to diagnose, triage, treat, stabilize and (prepare for) transport expectant mothers that come in for a check-up and treatment.

Smokeless cook stove: Philips has designed and is manufacturing this innovative stove to improve the lives of those who rely on wood or biomass for their daily cooking. These specially designed stoves are extremely efficient and significantly reduce the use of wood as fuel. The cook stove can reduce smoke and carbon monoxide emissions by more than 90% compared to an open fire² thus reducing the health risks of indoor cooking. The contribution of the innovation hub is to create new go-to-market models for these stoves.

Consumer solar solutions: Today an estimated 560 million Africans live without electricity; Philips is committed to improving access to lighting in Africa, for the majority of the population that lives in off-grid communities. The Innovation hub is designing and developing new consumer products using the combination of solar power and energy efficient LED technology. New go-to-market models are also being established to ensure these solutions become accessible to people that would not be able to afford them otherwise.

The Philips Africa Innovation Hub while headquartered in Kenya, will be responsible for pan-African research and projects and will have operations across Africa, linked to the Philips regional offices across the continent; the hub will be headed by Dr. Maarten van Herpen and will work in close collaboration with the Philips research labs in Bangalore, Shanghai and Eindhoven.

¹ Source : Unicef  www.unicef.org/media/media_70890.html
² Reference source:  Water boiling test version 4.2.2 done at accredited stove laboratory, Aprovecho Research Center, Oregon, USA.

 

Internet & mobile operators at war: merge, acquire, complain

Deals and accusations rock ZA’s Vodacom

The South African mobile operator landscape can be described as a microcosmic reflection of the larger African experience: Mobile technology is exponentially more developed than what an outside observer would otherwise predict, based on distinct economic predictors.  One of the key reasons for this highly-developed sub-Saharan mobile world is the concomitant lack of hard-wired infrastructure, necessitating that mobile make up for the copper-wire slack.  Other reasons include the hot topic of mobile banking (again: lack of brick-and-mortar banks necessitates mobile banking alternatives, such as M-Pesa’s services, on which AAT has reported extensively).

South Africa, as the continent’s largest (or second-largest, depending on whether you trust the revised Nigerian GDP numbers) economy, is of course at the forefront of the African mobile/internet frontier.

Now, the large South African operator Vodacom has rejoined the antitrust headlines simultaneously in two ways:

First, Vodacom ZA plans to acquire Neotel, a large S.A. internet provider, for 7 billion Rand (circa $650m).  This transaction will, of course, be subject to merger review by the South African Competition Commission (“SACC”).

Second, Vodacom has confirmed the prior reports of its competitor Cell-C’s October 2013 complaint, accusing Vodacom of discriminatory pricing, which is now being taken rather seriously by the SACC, according to TechCentral’s reporting.  On that front, Vodacom’s spokesman Richard Boorman is quoted as using classic competition-law argumentation as a clever shield:

“Cell C is apparently arguing for an increase in the price that Vodacom customers pay to call other Vodacom customers. It’s hard to argue that increasing prices would be a benefit to consumers.”

Vodacom’s official press statement on the Neotel deal follows below:

Vodacom reaches agreement to acquire Neotel

Monday, 19 May 2014

Further to the SENS announcement on 30 September 2013, Vodacom has reached an agreement with the shareholders of Neotel Proprietary Limited (“Neotel” or the “Company”) to acquire 100% of the issued share capital in, and shareholder loans against, Neotel for a total cash consideration equivalent to an enterprise value of R7.0bn.

Principal benefits of the transaction

Leading fixed telecommunications network

Neotel, which started operations in 2007, is the second largest provider of fixed telecommunications services for both businesses (commonly referred to as enterprise services) and consumers in South Africa. The company has access to over 15,000 km of fibre-optic cable, including 8,000 km of metro fibre in Johannesburg, Cape Town and Durban. Neotel also has access to 2 x 12 MHz of 1800 MHz spectrum, 2 x 5 MHz of 800 MHz spectrum and 2 x 28 MHz of 3.5 GHz spectrum.

Acceleration of Vodacom’s unified communications strategy

Neotel will become a subsidiary of Vodacom South Africa and the combination with Vodacom’s South African fixed enterprise business will create a national service provider with annual revenues of more than R5bn.

Vodacom sees a significant opportunity to accelerate growth in unified communications products and services by integrating its extensive distribution and marketing capabilities with Neotel’s fixed network and product capabilities. The combined entity will be able to offer an expanded and enhanced range of converged services (e.g. hosted PBX, OneNet) to enterprise customers. Vodacom estimates revenue synergies with a total net present value of approximately R0.9bn after integration costs.

Enhancement of next generation network capabilities in South Africa

The combination of Neotel’s and Vodacom’s networks will improve overall network availability and reduce the cost to serve customers. The combined business will also be ideally positioned to accelerate broadband connectivity in line with the South African Government’s broadband targets, enabling Vodacom to take a leading position in the fibre to the home and fibre to the enterprise segments of the market.

The combined entity will also be able to use the radio spectrum currently assigned to Neotel more effectively. This spectrum will enable Vodacom to accelerate the roll-out of LTE (commonly referred to as 4G) services, providing high speed, high quality wireless connectivity to a greater proportion of the South African population.

In-market consolidation with substantial cost and capex savings

Vodacom expects to achieve substantial cost and capex synergies with an annual run-rate of approximately R300m before integration costs in the full fifth year post completion, equivalent to a net present value of approximately R1.5bn after integration costs. These savings will primarily be derived from the joint utilisation of Neotel’s extensive fibre network and the elimination of overlapping elements, joint procurement and the combination of overlapping administrative functions. The transaction values Neotel at a multiple of 8.8x annualised 1H2014 OpFCF, adjusted for cost and capex synergies.

Neotel management and employees

Vodacom looks forward to welcoming Neotel’s employees. Their fixed and enterprise skills will enable the combined entity to deliver enhanced and extended service offers.

Additional information on the transaction

Vodacom will fund the acquisition through available cash resources and existing credit facilities.

The transaction remains subject to the fulfilment of a number of conditions precedent including applicable regulatory approvals and is expected to close before the end of the financial year.

Speaking about the transaction, Vodacom Group CEO Shameel Joosub said:

“Through the combination of these two businesses, the provision of a wider range of business services and much needed consumer services like fibre-to-the-business and fibre-to-the-home becomes a concrete reality – it will be good for the consumer, good for business and good for the country.  And for our investors, the transaction fits perfectly within the priorities of Vodacom’s growth strategy focused on continuing our investment in data and our Enterprise business.”

 

Financial Times: Africa “most exciting”; FT hosts inaugural investment summit

First-ever FT African Investment Summit to be held in London

In October, the Financial Times will be hosting a timely “FT-Live” London symposium on investment in Africa.  The Oct. 6th FT Africa Summit (agenda) is expected to draw a global audience from various industry sectors, limited to 150 attendees.

Whether or not the conference will spark a wave of M&A activity (and hence antitrust scrutiny) on the continent remains to be seen.  For now, the paper’s event PR proclaims optimistically:

The continent’s economic growth is the second fastest in the world, underpinned by a virtuous cycle of improved governance, Chinese-led investments in infrastructure, high commodities prices, and the growth of a nascent, even if fragile, middle class. Yet, risks abound, from rising inequality to the potential of setbacks in governance.

The inaugural FT Africa Summit will provide a global platform to hear and discuss the views of finance ministers, investors and businesses leaders from around the region. Altogether the first Summit and the special report will be a unique opportunity to gain insights into one of the world’s most exciting markets.

Today’s edition also reports, fittingly, that large-scale investors (such as Atlas Mara’s head and  former Barclays CEO Bob Diamond) are looking increasingly to the African continent for high-growth financial investment opportunities.  Diamond is reported to have raised $1/3 billion for his “African war chest” of Atlas Mara to invest in African bank acquisitions, and is said to plan another $400m round of fund-raising later this year.

Bob Diamond

As the FT points out, the growth potential for financial services in sub-Saharan Africa is theoretically immense, as the majority of the region’s 1-billion-plus population does not yet have bank accounts.  However — and the FT omits this crucial fact — as we reported elsewhere, the dearth of access to brick-and-mortar banks in Africa has led to the pioneering use of GSM mobile technology, such as M-Pesa, for retail financial transactions at a record-setting adoption rate in Africa; see our M-Pesa reporting and other stories.